LANDS VALUATION APPEAL COURT, COURT OF SESSION
Lord Justice Clerk Lord Kingarth Lord Hodge	[2009] CSIH 90 XA82/09 OPINION OF THE LORD JUSTICE CLERK on the STATED CASE in the Appeal by THE ASSESSOR FOR HIGHLAND AND WESTERN ISLES Appellant; against MARKS & SPENCER plc Respondent: _______

For the Appellant Clarke, QC; Drummond Miller

For the Respondent: Johnston, QC Gerald Eve, Chartered Surveyors, Glasgow

4 December 2009

Introduction

[1] This is an appeal by the assessor against a decision of the Highland and Western Isles Valuation Appeal Committee dated 11 and 12 September 2008. It relates to the respondent's department store in the Eastgate Centre, Inverness. At the 2005 Revaluation the assessor entered the subjects in the Roll at a rateable value of £825,000. The Committee allowed the respondent's appeal against the valuation and substituted the respondent's proposed figure of £680,000.

[2] The appeal subjects are the anchor store for Phase 1 of the Centre. They have a gross internal area of 6,813 sm on two floors, with entrances from the Eastgate, from Academy Street, and from the lower and upper malls.

[3] The respondent is the tenant under a lease dated 12 March 2007 granted by Marks & Spencer Scottish Limited Partnership. It is the general partner in the limited partnership. The lease provides for a stepped rent starting at £730,000 pa and increasing annually by 2.5%.

[4] It is unfortunate that the Committee's rather inadequate findings do not fully set out the background to this transaction, although the Committee alludes to it in its statement of reasons. However, the evidence of the respondent's valuer on the point was not disputed and I see no reason not to take it into account. The rent resulted from a valuation carried out by CB Richard Ellis of the capital and rental values of about 50 of the respondent's properties as at 30 September 2006. This exercise was carried out for the purposes of sale and leaseback transactions on the properties to raise capital for the respondent's staff pension scheme. In each case CB Richard Ellis estimated the rental value of the property and capitalised it. The rental value assessed for the appeal subjects in this exercise was £102.25 psm or £730,000. The valuer was not called as a witness. His identity is not known. There was no evidence before the Committee as to how he arrived at that value, what assumptions he made or what comparative rental evidence he used. It may be significant that in the section of the report headed "valuation assumptions," the expression "rental values" is defined as follows:

"Rental values indicated in our report are those which have been adopted by us as appropriate in assessing the capital value and are not necessarily appropriate for other purposes, nor do they necessarily accord with the definition of Market Rent."

[5] Debenhams is the anchor store in Phase 2 of the Centre. It is the only other large department store in Inverness. It has a gross internal area of 9,312.9 sm on three floors, with entrances from the lower and upper malls of Phase 2. In the same Revaluation the assessor's valuation of Debenhams was based on an adjusted rent of £806,466 per annum, equivalent to a rate of £86 psm as at the tone date. Debenhams appealed against the valuation. Its appeal was heard along with the respondent's appeal and was refused.

The parties' valuations

The assessor

[6] The assessor relied on the valuation of Debenhams as his sole comparison. He took the rate per square metre of Debenhams as his starting point and adjusted it for certain factors that in his view justified a higher rate for the appeal subjects. He contended that the appeal subjects had the best city centre location of any store in Scotland. They were the main entrance to the Centre itself and had a substantial footfall. They were superior to Debenhams in terms of location and configuration. To reflect these advantages and to reflect their smaller floorspace, the assessor determined that the appropriate rate for the appeal subjects was £121 psm. He produced a copy of a letter dated 1 September 2008 that he sent to the respondent's agents listing some of the factors that he had taken into account in arriving at this rate. He took the floor area to be 6,807 sm. Applying to that his rate of £121 psm, he valued the subjects at a figure, rounded up, of £825,000.

[7] The assessor rejected the passing rent as a guide to value. He considered that it was not set at a true open market level. He produced an extract from a Marks & Spencer website from 2001 relating to a previous round of sale and leaseback transactions, in which it was said that the initial rent would be around 15% below market value. He submitted that this cast further doubt on the respondent's valuation.

The respondent

[8] The respondent's valuer relied on the initial rent of £730,000 pa. He considered that it should be treated as a reliable indicator of rental value. He cited rental evidence from Marks & Spencer stores elsewhere in Scotland which in his view supported it.

[9] To adjust the rent to 1 April 2003, the tone date for the Revaluation, he discounted it by 10% to reflect four years' rental growth at 2.5% pa. That produced a figure of £657,000, or a rate psm, rounded up, of £100 psm. Using that rate, he valued the subjects at a figure, rounded down, of £680,000.

The Committee's decision

[10] The Committee made the following decisive finding in fact:

"6. The Committee had not been presented with evidence as to how the assessor had taken account of these factors in adjusting the valuation on the Debenhams subjects to the appeal subjects. In response to a question from the Chair, the assessor explained hypothetically how one might make the necessary adjustments. He did not indicate whether or how he or his staff had actually carried out this exercise and he did not explain the provenance of the figures he used to illustrate this hypothetical exercise."

The Committee returned to the point in its statement of reasons. It referred to Drybrough & Co Ltd v Ass for Strathclyde (1982 SLT 426) as having decided that there was an onus on the assessor to justify a proposed valuation where, as here, the valuation was challenged and was significantly different from the alternative valuation proposed by the ratepayer. In the view of the Committee the assessor had not discharged the onus. It said that:

"He had not placed before the Committee sufficient evidence as to how the proposed value had been calculated. He had not, for example, given a starting figure and by applying particular adjustments for particular factors such as quantum, location and configuration etc shown how he arrived at his proposed value. In the absence of evidence as to a reasoned valuation calculation it was not sufficient in the view of the Committee for the assessor to say that he was comfortable with the figure arrived at."

The Committee concluded by saying:

"In all the circumstances and having regard to the guidance set out in Drybrough, the Committee considered that it was bound to uphold the appeal and substitute for the assessor's figure the ratepayers' alternative figure of £680,000."

Conclusions

[11] There are two questions in this appeal, namely (1) whether the Committee was entitled to hold that the assessor had failed to discharge the onus upon him to explain his valuation; and (2) whether the Committee, having so held, was bound to allow the appeal and substitute the respondent's valuation.

The nature of the onus on the Assessor

[12] The Committee took the view that the assessor had failed to produce a sufficiently detailed calculation of his proposed valuation, and in particular had failed (1) to give his starting figure and (2) to specify the exact amounts by which he adjusted it for each of the special factors to which I have referred. In my view, the Committee was wrong on both points.

[13] In coming to that view the Committee relied on the statements of Lord Avonside in this court in Drybrough & Co Ltd v Ass for Strathclyde (supra). In my view, the Committee misinterpreted that decision. The Drybrough case concerned the revaluation of two public houses. They were valued on behalf of the ratepayers in accordance with a turnover-based scheme of the Scottish Assessors Association. The assessor's valuations appeared to be based on a valuation rate per square metre derived from data relating to a number of other public houses. The values thus produced were 170% and 193% of the ratepayers' scheme-based values. Such a startling result obviously required to be explained. The assessor failed to give an understandable explanation. His basic error was that he failed to explain how his rate per square metre was derived from the other data. It was submitted on his behalf that it was sufficient for him to say that his valuation was based on skill, experience and the like. The court did not accept that proposition.

[14] Lord Avonside's comments in that case are relied on from time to time in this court in support of the extreme proposition that the assessor must explain his calculation down to every last detail, even when his methodology and his comparisons are well known to the ratepayer's valuer (eg Belhaven Brewery Group plc v Glasgow City Ass 2003 SC 395). That proposition imputes to the assessor a degree of onus and a standard of explanation that are, in my view, much too exacting. Lord Avonside's outspoken comments on the duty of the assessor have to be read in their context. They were perhaps influenced by the inastute position adopted in that case on the assessor's behalf.

[15] I have read the transcript of the assessor's evidence in this case. The assessor relied on one comparison only, namely Debenhams. Debenhams was the only other department store in Inverness, and it was in the same centre as the subjects. It was the obvious and only sensible comparison to which to look. The Debenhams valuation was based on a valuation rate per square metre of £86. The Committee was in no doubt about that. It upheld that rate in refusing the Debenhams appeal. I cannot follow why the Committee should have thought that the assessor had failed to show what his starting figure was.

[16] It was not disputed that the appeal subjects should be valued at a higher rate per square metre than Debenhams in view of their significantly smaller floor space and their advantages in terms of location and configuration. It was certainly incumbent on the assessor to explain the factors on account of which he adopted a higher rate. In my view he did that. He went into considerable detail in discussing these advantages, not the least of which was the fact that the principal entrance to the entire Centre is through the appeal subjects. He set the whole issue into context by reference to the descriptions and valuations of Marks & Spencer and Debenhams stores in other Scottish cities and towns. When he had taken all of this material into account, the final step in the calculation was to determine the amount by which the basic Debenhams rate should be increased to a rate appropriate to the appeal subjects. At that point, it became a matter of professional skill and judgment (cf Western Heritable Inv Co v Husband, 1983 SC (HL) 60, Lord Keith of Kinkel at p 75; B&Q plc v Ass for Dunbartonshire and Argyll and Bute Valuation Joint Board 2007 SC 135, at paras [15]-[16]). In my opinion, it was quite sufficient for the assessor, having identified the relevant valuation factors and their rental significance, to say that they should be reflected in a rate that, in his view, should be some £36 psm greater than Debenhams'. It did not call for some arithmetical exposition of the nicely calculated less or more.

[17] On this point, I conclude that the Committee's error was to place on the assessor an unreasonably and unnecessarily demanding onus. There is no justification for its finding in fact 6 (supra) or for the decision based upon it.

The Committee's approach to the respondent's valuation
[18] In my view the Committee also erred in its approach to the respondent's valuation. This was a case where there was a rent passing under a lease of the subjects entered into four years after the tone date. On the face of it, it was a straightforward matter to adjust that rent back to tone. But before that question arose, the Committee had to consider the evidential value of the rent itself. The Committee was entitled to be sceptical about it. The rent was not set in an open market

transaction. It was part of a sale and lease back arrangement between connected parties. The Committee heard no evidence from the person who made the valuation. There was no evidence as to the valuation assumptions and the comparative evidence on which that valuation was based; and there was reason to think that the rental value, as defined in the report itself, did not conform to the valuation hypothesis.

[19] In the circumstances the Committee was fully justified in its conclusion (supra) that the rent of the subjects had to be regarded with caution and was "of very limited value." In my view, that conclusion was correct.

[20] However, having thus dismissed the evidential value of the rent, the Committee concluded that it was "bound to uphold the appeal and substitute for the assessor's figure the respondents' alternative figure of £680,000". That was not the case. Even if the Committee had been entitled to reject the assessor's valuation, that did not oblige it to substitute an alternative valuation on which it was not prepared to rely (Belhaven Brewery Group plc v Glasgow City Ass, supra, at para [16]). This was a serious error on the part of the Committee.

Decision

[21] I propose to your Lordships that we should allow the appeal, recall the decision appealed against and remit the case to the Committee with a direction to it to have a further hearing and to make a fresh decision in the light of the matters that I have discussed. Parties were agreed that that course was appropriate if the appeal should succeed.

LANDS VALUATION APPEAL COURT, COURT OF SESSION
Lord Justice Clerk Lord Kingarth Lord Hodge	[2009] CSIH 90 XA82/09 OPINION OF LORD KINGARTH on the STATED CASE in the Appeal by THE ASSESSOR FOR HIGHLAND AND WESTERN ISLES Appellant; against MARKS & SPENCER plc Respondents: _______

For the Appellant: Clarke, QC; Drummond Miller

For the Respondents: Johnston, QC; Gerald Eve, Chartered Surveyors, Glasgow

4 December 2009

[22] I agree with your Lordship in the chair that the appeal should, for the reasons given, be allowed and that the case be remitted to the Committee as proposed.

LANDS VALUATION APPEAL COURT, COURT OF SESSION
Lord Justice Clerk Lord Kingarth Lord Hodge	[2009] CSIH 90 XA82/09 OPINION OF LORD HODGE on the STATED CASE in the Appeal by THE ASSESSOR FOR HIGHLAND AND WESTERN ISLES Appellant; against MARKS & SPENCER plc Respondents: _______

For the Appellant: Clarke, QC; Drummond Miller

For the Respondents: Johnston, QC; Gerald Eve, Chartered Surveyors, Glasgow

4 December 2009

[23] I agree.