Scottish Court of Session Decisions

 

 

LANDS VALUATION APPEAL COURT, COURT OF SESSION

[2014] CSIH 72

XA41/14

Lord President

Lord Menzies

Lady Dorrian

OPINION OF THE LORD PRESIDENT

in the Appeal by

 

W H SMITH PLC

Appellant;

against

 

THE ASSESSOR FOR THE LANARKSHIRE VALUATION

JOINT BOARD

Respondent:

 

For the appellant:  Haddow, QC; DWF Biggart Baillie

For the respondent:  Stuart, QC;  Simpson & Marwick

 

22 August 2014

Introduction

[1]        This is an appeal from a decision of the Valuation Appeal Committee at Hamilton dated 25 September 2013 by which it refused an appeal by the appellant against the entry in the Roll made at the 2010 Revaluation for its premises at 46 Regent Way, Hamilton.

[2]        The premises are a shop in the Regent Shopping Centre.  At the Revaluation the assessor valued all but the four largest units by the zoning method.  He valued the largest units and a department store near the entrance on the basis of an overall rate per square metre. 

[3]        The appellant’s shop is the largest of the units that were valued by zoning.  It has a gross internal area (GIA) of 1251.93 sm.  The assessor entered it in the Roll at a net annual value and rateable value (NAV/RV) of £300,000. 

[4]        The premises of Boots plc are the smallest of the units that were valued on an overall rate.  They have a GIA of 2151.54 sm.  They are entered in the Roll at £236,000 NAV/RV.

[5]        The result is that Boots, with about 70% greater floor space than the appeal subjects, has an NAV/RV that is over 20% less.  This strange result is made more so by the fact that the two shops are side by side.

 

Modern methods of valuation of retail premises
[6]        The normal method of valuing a shop is by zoning.  The zoning method is based on the principle that the area to the front of a shop, known as Zone A, is the most valuable in retail terms and that in the area towards the rear, and in the upper floors, the rental value of the floor space declines.  In this method the starting point is to fix the Zone A rate by the normal process of survey evidence and either to apply percentages of the Zone A rate to the various areas of floor space outwith Zone A or, as the assessor has done in this case, to apply a percentage reduction factor to the various areas of floor space outwith Zone A and to apply the full Zone A rate to the reduced area. 

[7]        In large retail units with extensive floor space, often on one level, and in the case of department stores, experience has shown that the most satisfactory method of valuation is to apply an overall rate per square metre, the rate being derived from survey evidence of rental values in large units of that kind.  It is generally agreed that in the letting of large shops there is a different and more limited market and that rental values per square metre are usually lower than in standard shops.

 

The assessors’ schemes
[8]        For many years the valuation of retail premises has been based on the schemes drawn up by the Scottish Assessors’ Association (SAA).  At each Revaluation, the revised SAA schemes build on previous schemes and take account of changing conditions in retail.

[9]        For the 2010 Revaluation the valuation of standard shops was based on the SAA Commercial Property Committee’s Practice Note 40.  The valuation of large shops and department stores was based on the Committee’s Practice Note 37.  Both Notes emphasise that the rental values applied must be derived from survey evidence. 

 

Practice Note 40
[10]      Practice Note 40 provides inter alia that the basis of valuation for standard shops is the application of the comparative principle based on a rate per square metre derived from local rental evidence.  The Note sets out the standard reduction factors to be applied for Zones B, C and D.  It provides for the treatment of ancillary floors;  for the specific adjustments to value to be made for disadvantageous layouts, heating, sprinklers, toilet facilities and so on; and for the application of quantum and inverse quantum adjustments for units that are significantly larger or smaller than the average standard shop.  The Note appends the standard zone depths that are to be adopted by the assessors in their respective valuation areas. 

 

Practice Note 37
[11]      Practice Note 37 recognises that there is no fixed starting point in terms of size at which a shop becomes a large shop for the purposes of valuation.  It suggests that in outlying areas and in small towns, the category of large shop will generally include stores that have a gross internal area of over 1850 sm.  It suggests that in city centres the large stores will in general have a floor-plate in excess of 1000 sm.  The Note distinguishes three categories to which it applies; namely (1) large shops, (2) large town centre stores and small department stores and (3) large department stores.  It records that large shops will generally range from 1850 sm GIA to 3500 sm GIA. 

 

The 2010 Revaluation

Survey evidence

[12]      For the 2010 Revaluation the assessor had survey evidence that rents for zoned shops in the Centre in 2006-2007 were in the range £864 to £975 psm.  From this evidence he derived a Zone A rate of £925 psm.  The assessor’s analysis of the valuations of all of the zoned units in the mall indicated that professional advisers had generally accepted that rate.

[13]      The five shops that were classified as large were Marks and Spencer (5603.63 sm GIA); BHS (4049.34 sm); Woolworths (3313.92 sm), Boots (2151.54 sm) and Bairds (2150.72 sm).  Bairds is a department store that trades on several floors.  The assessor’s analysis of rents for the large shops, and primarily the rent for the former Woolworths store which was fixed in 2006 at £352,000 pa, produced an overall rate of £110 psm.

 

The assessor’s valuation of the appeal subjects
[14]      The trading area of the appeal subjects is on the ground floor.  On the first floor there are ancillary stores and staff accommodation occupying 31% of the total measured area.  The trading area is air-conditioned. 

[15]      It was agreed that the appeal subjects had a GIA of 1251.93 sm.  At the hearing the assessor revised his calculation of the reduced area to 361.87 sm.  To the reduced area he applied the Zone A rate.  That produced an initial value of £334,730.  To that the assessor added a figure of £5699, being 814.18sm at £7 psm, for the benefit of air-conditioning.  To the resulting figure of £340,429 he applied a quantum adjustment of 13.75%.  That produced an NAV/RV of £293,621, rounded down to £290,000. 

 

The valuation of Boots

[16]      The trading area of the Boots unit is on the ground floor.  On the first floor there is the storage and ancillary floor space.  To the agreed GIA the assessor applied his overall rate.  That produced an NAV/RV, rounded down, of £236,000. 

 

The proceedings before the Committee
The case for the appellant
[17]      The appellant’s professional witness, Mr Neil Rankin, argued that the appeal subjects should be valued by “an overall approach”.  He relied on the valuations of the Boots shop and of the former Woolworths, which were valued by an overall rate; and on two shops in the Centre and on Primark in the nearby Quarry Street, which were valued by zoning.

[18]      He also referred to the valuation of a shop in Brandon Parade, Motherwell, that had been valued by zoning and on the valuation of a large shop in the Antonine Centre, Cumbernauld, that had been valued on an overall rate.  He submitted that these comparisons demonstrated that the assessor was not bound to value a unit of the size of the appeal subjects by zoning and that in a zoned valuation a quantum allowance could be of the order of 30%.

[19]      The starting point of the appellant’s witness in his valuation was as follows:

“If we ‘stand back and look’ then it is clear that the RV on W H Smith should be assessed at a level that is no higher than that of the neighbouring Boots unit which is more than 70% larger in terms of GIA” (Statement, para 5.2).

 

He was also of the view that the NAV/RV of the appeal subjects should not fall below that of the former Dorothy Perkins unit, which at 1030 sm GIA was agreed at £195,000, or the smaller but similarly configured unit occupied by New Look, which was assessed at £170,000.

[20]      The appellant’s witness took as best evidence the October 2006 rent review on the former Woolworths store at £350,000 pa on a GIA of 3329 sm; and the December 2008 rent review on the former Dorothy Perkins unit at £162,000 pa on a GIA of 1030 sm.  These represented rents of £105 psm and £189 psm respectively.  Since the appeal subjects lay between these two in terms of GIA, a direct interpolation gave an overall valuation rate of £181 psm. 

[21]      On the view that the value of larger retail units is invariably less location-sensitive than that of smaller units, the witness then turned from rental evidence to evidence of the values entered in the Roll.  He looked to the Primark shop at Quarry Street.  It had a GIA of 1381 sm and an NAV/RV fixed on appeal at £241,000.  That devalued to a rate of £174.50 psm.

[22]      From this evidence the witness concluded that for the appeal subjects an overall rate of £175 psm would be “fair and reasonable”.  That produced a rateable value, rounded up, of £220,000.

[23]      As an alternative, and as a cross-check, he considered that the subjects could be valued at the same figure on a zoned valuation, using the assessor’s zoned areas, if a quantum adjustment of 35% was applied. 

 

The case for the assessor
[24]      The assessor’s witness, Ms Christine Maxwell, contended that the appeal subjects were different from the large shops in terms of gross internal area and general configuration.  The valuation of the former Dorothy Perkins unit, which was of comparable size, had been agreed on the basis that it was zoned as a standard unit with an end allowance to reflect its awkward layout.  The appeal subjects were similar in size to the Primark shop, which the Committee had held to have been correctly valued by the zoning method. 

[25]      From an analysis of rents of zoned units in the main part of the mall the assessor derived a rent for the appeal subjects of £910 psm.  This value was in line with the evidence of rents agreed in 2004, which ranged from £877 to £932 psm, and with the evidence of rents agreed closer to the tone date in the years 2006 to 2007, which ranged from £864 to £975 psm.  For the valuation of the appeal subjects on a zoned basis to reach the figure contended for by the appellant, it was necessary to apply a quantum allowance of 35%.  There was no evidence of such a discount in shops of comparable size in the Centre. 

[26]      There was normally a greater demand for smaller units by reason of the larger field of would-be tenants from whom landlords could pick and choose.  Occupiers of standard units would not be in the market for shops with a large floor-plate of the kind typically occupied by anchor tenants.  Smaller properties attracted greater rents because of the greater demand.  For this reason the Boots unit was correctly valued as a large shop. 

 

The Committee’s decision
[27]      The Committee held that the subjects were correctly valued by the zoning method.  It accepted that there was no local evidence to justify the quantum allowance of 35% that would be necessary if the appellant’s valuation were to be reached by that method.  The allowance given to Primark was only 15%.  That for the Dorothy Perkins unit was only 12%.  Furthermore, on the overall basis of valuation that the appellant’s witness preferred, the rate of £175 psm was 60% more than the rate of £110 applied for other large shops. 

[28]      The Committee concluded that the appellant’s proposed overall rate of £175 was effectively based on inverse quantum and was neither properly calculated nor credible. 

[29]      The Committee then considered the local rental evidence.  The assessor had applied a rate of £910 with an adjustment for quantum.  That figure was out of step with the rent that was then being paid for the appeal subjects, but was not out of step with the other evidence of rents struck in 2004 or in 2006-2007.  On a valuation on an overall basis, it brought out a rate that was more than double the assessor’s rate for the larger shops. 

[30]      The Committee accepted the argument for the assessor that although Boots had a lower rateable value than the appeal subjects, this could be explained in the light of these factors.  It accepted that the assessor had tendered a clear justification for the difference in the valuations of the appeal subjects and Boots.  It was satisfied that the assessor had adequately explained the basis upon which he had applied his chosen method, that he had soundly applied it and that his approach to valuation was to be preferred.  Although the Committee had doubts about the fairness of the assessor’s valuation when it was compared with that of Boots, it felt bound to acknowledge that the assessor had adequately explained the valuation and that the appellant’s witness had not put forward any properly calculated or credible challenge to it.

 

Conclusions

 

The issue and the scope of the appeal
[31]      The central proposition in this appeal is that the subjects of appeal should be valued in such a way as to correct an alleged anomaly between the assessor’s valuation of them and his valuation of the Boots shop. 

[32]      I do not accept that proposition.  This appeal is concerned only with the valuation of the appellant’s shop.  The only question is whether it has been soundly valued in accordance with section 6(8) of the Valuation and Rating (Scotland) Act 1956.  If the valuation is correct, it would be contrary to law if it were to be reduced for the purpose of a supposed harmonisation with the valuation of other subjects. 

[33]      Each shop in the Centre was valued in accordance with a scheme.  The large shops were valued on the basis of an overall rate per square metre in accordance with Practice Note 37.  Each of the standard shops was valued by the zoning method in accordance with Practice Note 40.  The assessor treated the appeal subjects as a standard shop and valued them accordingly.  There was evidence that the valuations that were agreed between the assessor and professional advisers in relation to other standard shops in the Centre were agreed on that basis. 

[34]      The Committee considered the assessor’s evidence in detail and concluded that it was supported by the primary evidence of rents.  It decided that the valuation of the appeal subjects by the zoning method was the appropriate methodology.  In my opinion it was entitled on the evidence so to decide.  Its decision on the point is one that we cannot impugn.  The Committee found that the assessor’s Zone A rate, which was applied to all standard units in the Centre, was vouched by survey evidence and was appropriate.  Since the assessor’s revised calculation of the reduced floor area of the appeal subjects was not in dispute, it followed that the assessor had correctly applied the scheme.  It followed also that the valuation of the appeal subjects was in line with the valuations of the other standard units in the Centre.  The Committee was entitled on the evidence to reach these findings.  We have no reason to disturb them.  That, in my opinion, is the short and conclusive answer to this appeal. 

 

The appellant’s case

 

[35]      Counsel for the appellant submitted that the alleged anomaly is unfair to the appellant and that in order to put it right, a different valuation methodology should be adopted for the appeal subjects.   It is accepted on behalf of the appellant that if the zoning method is applied, that result can be achieved only if an end allowance of 35% is made for quantum; but the Committee rejected that approach on the view that that figure was out of all proportion to the discount rates used in the other two cases in the Centre where such an allowance had been made.

[36]      To achieve the desired fairness, the methodology preferred by the appellant’s witness is in substance to treat the appeal subjects, contrary to Practice Note 40, as if they were a large shop, and then to apply to them an overall rate per square metre that is 60% greater than the rate that the assessor has applied. 

[37]      In my view, the basic flaw in the appellant’s case is the underlying assumption that it is the valuation of the appellant’s shop that is anomalous.  I cannot see why that assumption should be made.  In my view, the two factual issues were (1) whether a zoned valuation of the appeal subjects was appropriate; and (2) if so, whether the assessor’s Zone A rate was soundly based. 

[38]      The findings in fact support the Committee’s conclusion that the valuation of the appellant’s shop is correct both in methodology and in calculation.  Therefore, if there is an anomaly, that is not a consequence of the valuation appealed against. 

[39]      The second flaw in the appellant’s case is that it requires the appeal subjects to be valued by a methodology by which no other shop in the Centre has been valued and which is at odds with both of the assessor’s schemes.  That rate is derived from an interpolation of the appeal subjects between the GIAs of a large store valued under Practice Note 37, and a standard unit valued under Practice Note 40.  In my view, that methodology lacks coherence. 

[40]      If the appellant’s shop were to be the only shop in the Centre to be valued by this method, its valuation would no longer be congruent with the valuations of the other standard shops.

 

The assessor’s view on the Boots valuation

 

[41]      The evidence for the assessor’s was that, notwithstanding the seeming inconsistency of the Boots valuation with that of the appeal subjects, the valuation in both cases reflected what would be the outcome in a letting on the statutory terms.  It may be that there is room for scepticism about that contention.  If there is an anomaly, it may have resulted from the assessor’s having set too low a threshold for large shop valuations perhaps because the department store is relatively small.  That is not a question that we need explore. 

 

Disposal
[42]      I propose to your Lordship and to your Ladyship that we should refuse the appeal.

 

 

LANDS VALUATION APPEAL COURT, COURT OF SESSION

[2014] CSIH 72

XA41/14

Lord President

Lord Menzies

Lady Dorrian

OPINION OF LORD MENZIES

in the Appeal by

 

W H SMITH PLC

Appellant;

against

 

THE ASSESSOR FOR THE LANARKSHIRE VALUATION

JOINT BOARD

Respondent:

 

For the appellant:  Haddow, QC; DWF Biggart Baillie

For the respondent:  Stuart, QC;  Simpson & Marwick

 

22 August 2014

[43]      For the reasons given by your Lordship in the chair I agree that this appeal should be refused. 

 

 

 

LANDS VALUATION APPEAL COURT, COURT OF SESSION

[2014] CSIH 72

XA41/14

Lord President

Lord Menzies

Lady Dorrian

OPINION OF LADY DORRIAN

in the Appeal by

 

W H SMITH PLC

Appellant;

against

 

THE ASSESSOR FOR THE LANARKSHIRE VALUATION

JOINT BOARD

Respondent:

 

For the appellant:  Haddow, QC; DWF Biggart Baillie

For the respondent:  Stuart, QC;  Simpson & Marwick

 

22 August 2014

[44]      For the reasons given by your Lordship in the chair I agree that we should refuse the appeal.  I have nothing further to add.