This is an application in terms of the Land Compensation (Scotland) Act 1963 (“the Act”) for the determination of compensation for the compulsory acquisition of subjects at 48 Campbell Street Hamilton. The applicants, as the former heritable proprietors of the subjects, are Jane McGee and Helen Thomson. The acquiring authority is South Lanarkshire Council.
The parties are in dispute as to assessment of the open market value of the subjects and the proper means of determining open market value, having regard to the evidence available in the case. We have concluded that sufficient evidence exists to justify use of the comparative method in preference to a residual method and that the open market value of the subjects at the date of valuation was £83,000.
Horn v Sunderland Corporation  2 KB 26
Corton Caravans and Chalets Limited v Anglian Water Services Limited ACQ/19/2001
Clinker & Ash Limited v Southern Gas Board  EGD 533
Yorkshire Traction Co Ltd. v South Yorkshire Passenger Transport executive ACQ/191/2000
At the hearing the applicants were represented by Iain Drummond, solicitor, who led in evidence Mr William Reid, developer of property at 19 Gateside Street, Hamilton and Mr John M Clelland, chartered surveyor and partner in the firm of Whyte and Barrie, 32 Campbell Street. The respondents were represented by Mr Stephen Goldie, solicitor, who called in evidence Mr Julian A Morris BSc, chartered surveyor and project officer within the respondents’ physical regeneration team in Hamilton. Following the hearing, the Tribunal made an unaccompanied inspection of the locus of the subjects, their surroundings and comparable properties.
During the hearing it became apparent that the experts were not using the same figures for various relevant areas. The differences had consequential effects on calculations. Following the hearing parties agreed the relevant areas. Because the agreed figures were different from those used by the witnesses we required to look afresh at their various calculations. In the event the necessary alterations have not proved to be crucial to our decision. We have, accordingly, simply set out the evidence as given at the hearing, with the exception that yards have been converted to metres.
The subjects comprised single storey shop premises with land to the rear and a frontage of 10.52 metres to Campbell Street. They have an area of 277.5m2. By virtue of a General Vesting Declaration in pursuance of The South Lanarkshire Council (48 Campbell Street, Hamilton) Compulsory Purchase Order 1997, the respondents acquired ownership of the subjects on 25 June 1999. Parties were agreed that this was the relevant date for the purpose of determining the value of the subjects in terms of the Act.
Despite protracted negotiations, parties have been unable to agree the amount payable as compensation for the applicants’ loss of their interest in the subjects. In April 2001 the respondents made an advance payment including a sum of £40,500, being 90% of their estimate of the open market value of the subjects at £45,000 and including surveyor’s and lawyer’s fees. At the hearing the applicants contended that the open market value of the subjects at the valuation date was £107,000. The respondents’ figure was £35,000.
The subjects are centrally located in Hamilton. Campbell Street connects Cadzow Street, a shopping thoroughfare, to the New Cross Shopping centre, a modern shopping development at that end of Campbell Street. Campbell Lane runs at right angles and connects Campbell Street to Quarry Street a principal shopping thoroughfare to the east. On the east side of Quarry Street there is a covered shopping mall, known as the Regent Centre. To the west, Cadzow Lane connects Campbell Street to Leechlee Road which is part of the inner ring road system and defines the edge of the central area of Hamilton. The subjects lie within the street block on the west side of Campbell Street between Chapel Street (at the entrance to the New Cross Centre and connecting Campbell Street with Leechlee Road) and Cadzow Lane. Access to properties in Campbell Street from Leechlee Road is not practicable for traffic reasons. Across the road from the subjects is a police headquarters building.
The local plan in force at the valuation date was the Hamilton Local Plan 1983 which indicated that Campbell Street, like Cadzow Street, was in a secondary shopping location next to the primary shopping location which is defined as the New Cross Centre, Quarry Street and the Regent Centre. The local plan contained a specific objective of housing rehabilitation in respect of the properties adjacent to, and north of, the subjects, namely 36-46 Campbell Street. These properties comprised a tenement with three commercial premises on the ground floor and ten flats above. The purpose, following Policy 3.1, was to remove unfit housing and to replace it with low cost social housing. In 1990 vacant possession of these subjects was secured through the exercise of the Hamilton (Campbell Street) Housing Action Area for Demolition Compulsory Purchase Order 1986. The total cost, including disturbance costs, was £171,800. In February 1991 the site was cleared and used for temporary car parking.
In 1991 Whyte & Barrie redeveloped their property at 32 Campbell Street. This property is located on the corner of Campbell Street and Cadzow Lane connecting with Leechlee Road and with a frontage to all three. The existing building, on part of the site, was a single storey office. That property was valued in its existing use, on the instructions of the Royal Bank of Scotland, by MacFarlane & Co, chartered surveyors, in the sum of £105,000 (“the MacFarlane valuation”). The remainder of the site was purchased from the respondents. The site was developed with a three storey modern structure comprising commercial premises on the ground floor with two floors of offices above.
The relevant block of Campbell Street was then characterised by having what Mr Morris described as ‘book ends’ (of sound buildings) with the cleared site in the middle flanked by the subjects at 48 and property at No. 34. On both these properties there were single storey commercial buildings. The subjects were of inferior construction and in need of repair. There was a shop frontage. They were let to a music retailer. The building at No. 34 was more substantial but with inherent defects in its foundations and also in need of repair. It was in the nature of a church hall, with entrance from the street but no shop frontage. It was used as an amusement arcade. Neither building had any architectural merit.
The cleared site at Nos. 36-46, and the potential development sites at Nos. 34 and 48, could have been redeveloped individually.
In 1995 No. 34 Campbell Street came on to the market with vacant possession. It was purchased by the respondents in May of that year for a sum of £85,000. It was the intention of the respondents to incorporate that property into the cleared site at Nos. 36-46 in order to create a larger site for redevelopment.
After having acquired the subjects in 1999 the respondents made payment of £14,000, in respect of disturbance claims to the tenant of the subjects. The respondents sold the whole site comprising Nos. 34, 36-46 and 48 Campbell Street for £135,000. This figure was determined by the District Valuer on the joint reference of the respondents, the purchaser, the Clyde Valley Housing Association, and Scottish Homes.
A great deal of evidence was given concerning events which took place during negotiations between the parties’ surveyors. We had understood that both sides saw this as a necessary prelude to an attack on the credibility of the other side’s expert. In the event, however, we heard no submission that the experts had not been acting in good faith. We detected that relationships between the witnesses themselves had become a little strained. This was, perhaps, exemplified by the terms of correspondence relating to the measurements agreed by the experts after the hearing. Mr Clelland intimated the figures with an accompanying re-statement of his calculations showing the effect of the change. This was a confusing and, perhaps, tendentious analysis to be compared with the analysis of the original figures upon which it appeared to have been based (page 20 of his report). That analysis in itself appeared to be of a circular nature. The later one provoked a reaction from Mr Morris which was not easy to accept as entirely justified. In any event, we are satisfied that nothing turns on issues of credibility. We, of course, heard submissions on reliability. Both solicitors pointed to various factors in support of their contentions that their own witness was the more reliable. We have taken these factors into consideration in our analysis of the evidence. However, the main primary facts are fairly clear and it is for the Tribunal to consider what inferences can properly be drawn from them.
We set out briefly the broad areas of agreement and reasons for disagreement.
Both surveyors agreed that the proper basis of assessment was by reference to section 12, and subsequent sections, of the Act. They agreed that open market value could be found by reference to either existing use value or development value, whichever was the higher. They agreed that the subjects would receive planning permission for commercial premises on the ground floor and either residential or office use on two upper floors. They agreed that, if the higher figure were to be for development value, it would be proper to deduct the £14,000 costs incurred by the respondents in respect of disturbance claims settled with the outgoing tenant.
They disagreed as to the appropriate means of determining the development value. Mr Clelland maintained that a valuation in straight comparison with other development sites was the preferred method and that, in the present instance, there was sufficient comparable evidence to support a valuation. He contended that, as an alternative method should only be used when it was not possible to apply the comparative method, there was no justification for any such alternative in this case. Mr Morris maintained that a residual valuation was the preferred method. He argued that this lay behind every open market bid. He had understood Mr Clelland to be happy with this approach until analysis showed that it could not support the figure claimed. In any event, he contended that the existing use value of the subjects was higher than development value.
Mr Clelland considered this property to be a good comparison because it was located close by, was of broadly similar size (its actual area is 269m2), had been redeveloped on a commercial basis, and was an example of a single storey existing building being replaced by a three storey development. The actual results of the project were available. The income on completion was £65,000. At a yield of 11% that represented a capital value for the completed development of £585,000. Building costs had been £353,540. Taking the MacFarlane valuation of £105,000 the amount available for developer’s profit was £127,460 (actually £126,460) or 21.78% (actually 21.62%) of capital value. He concluded that it was therefore safe to take £105,000 as the value of the property as a cleared site. On his area of 255m2, that produced a rate of £412/m2. This analysis did not appear to make any allowance for the incorporation of the 90m2 area purchased from the Council for £7000.
Mr Morris argued that the valuation of the single storey existing office building by MacFarlane & Co was not evidence of the site value for which no independent assessment had been made. The owners as chartered surveyors were in a unique position to take a favourable view of profit and to minimise professional fees through the exercise of their own expertise. In any event this site was superior to the subjects because it had three frontages, to Campbell Street, Cadzow Lane and Leechlee Road and a superior location relative to the retail locations in the town centre.
Mr Morris referred to the sale by the respondents of 90m2 to Whyte & Barrie in 1992, in order to allow for the extension of the proposed development. He said this was equivalent to £90.91m2 (sic). This transaction provided evidence of the price payable for small town centre development sites suitable for medium scale development.
Mr Clelland placed great reliance on the sale of this property, extending to 240m2, It had been placed on the market by the commercial arm of his firm, seeking offers of over £95,000. There was considerable interest which translated into three known possible purchasers. One was the respondents who wanted the property for redevelopment, one was a restaurateur who was interested in using the building as it stood, and the other was Modern Housing Ltd. who were interested in developing the site for housing. The sale went to a closing date. The successful bidders were the respondents at £85,000. They had bought the property for redevelopment. Mr Morris said explicitly that there was no broader social purpose behind the purchase. The site would be developed along with Nos. 36 – 46 but he did not suggest that there was any element of “marriage value”. He accepted that a small site might be developed more intensively than a larger one.
The property was similar in size and character to the subjects and was very close to them. Each had had a poor quality single storey building on it.
Submitted in evidence was an undated letter from Mr A Smith, Director of Modern Housing Ltd, indicating that he was prepared to instruct his firm’s solicitors to make an offer in the sum of £82,000. He went on to say that, “If your client will accept a conditional offer to enable me to explore the planning position further I may be prepared to reconsider”. Mr Clelland explained that there were a number of developers who contacted his firm on a regular basis. Often they would make a low offer and then negotiate a price from that position. He accepted that this letter was not equivalent of an offer but it could be taken at its face value. It had been submitted prior to the sale of No. 34 and as part of this informal negotiating process. Modern Housing was one of the firms that kept in touch with Whyte & Barrie in respect of development sites and who made approaches in this way. Modern Housing had never let his firm down in such cases and he considered the offer to be firmly on the table for acceptance or negotiation upwards following enquiries of the planning authority.
Mr Morris did not accept the price paid for No. 34 as sound comparable evidence of development value. He maintained that it was evidence of existing use value and as such could not be translated to development value. He said that when he discussed the matter with Mr Scott Cameron, the commercial agent within Whyte & Barrie, he was told that there was strong interest in the property. He was only aware of one other potential bidder at that time who was the restaurateur interested in using the existing building. He agreed that the development potential of No. 34 was broadly comparable with No. 48 in that they could both be developed with a 10 metre deep building comprising commercial use on the ground floor and two upper floors of residential or office use. He accepted that the interest of Modern Housing Ltd lay in redeveloping the site. He had spoken to Mr Smith who indicated that he had considered building eight flats on the site. Eight flats with a site value each of £10,000 would suggest a site value of £80,000 and he was not surprised at Modern Housing Ltd’s offer of £82,000. He did not accept that construction of eight flats would necessarily be possible.
The Tribunal heard evidence from Mr Reid who had purchased this property in October 2001, as a cleared site, for redevelopment. It has an area of 2890m2. It had been placed on the market by the commercial arm of Whyte & Barrie at an asking price of £70/80,000. It was on the market for five or six years. There was interest from property developers but the price could not be achieved. Mr Reid and Mr Clelland said that there was particular difficulty with the site because the only access was from the street frontage and that was made difficult by the presence of a pedestrian crossing and safety barriers along the pavement immediately in front of the property. That made for difficulty for ingress of building materials and their storage and added to the cost of construction. When Mr Reid offered £40,000 for the property he had allowed for additional building costs of £30,000 attributable to the difficulty of access. He proposed to construct a shop with flats above on four floors covering most of the site. The building work was now complete. He thought that his allowance for these difficulties was low and should have been £40,000. Although final figures were not available he anticipated that the development would be profitable. He traded from the shop on the ground floor and expected that a proportion if not all of the value of the shop would accrue to him as a return on the development.
Mr Clelland considered that this development was broadly similar in type and scale to that which could be carried out on the subjects. It was located in the town centre of Hamilton. He felt it appropriate to adjust the purchase price upwards by £40,000 to reflect the costs associated with developing the site, and was therefore able to attribute an open market value of £80,000 to the property as a development site.
Mr Morris considered this site to be comparable, in value terms, with the subjects. It was also similar in terms of frontage and area. It was sold without the benefit of detailed planning permission. Planning permission was obtained in April 2002 for development on four and a half storeys with one ground floor shop at 152m2 and seven flats above with a total gross internal area of 444m2. The one bedroom flats have been selling at £55,000 fixed prices. He considered that the project could have made a 20% return on the basis that Mr Reid received the shop at zero cost. A shop in that location would command a rent equating to Zone A rate of £160/m2, generating an income of £20,000, and 9 Years’ Purchase. That would produce a capital value of £180,000 which he considered represented a return of 20%.
Both witnesses referred to a development site at Castle Street. Mr Clelland had been involved in the negotiations, on behalf of two clients, for the sale of the site to the respondents. He had based part of his claim on a residual valuation. The residential element was based on a comparison of unit site values. He understood from the respondents’ planning department, that a 2/3 storey development with restrictions on density would be permitted. Valuation was based on ground floor commercial use and 30 flats. Subsequently the land had been sold at a profit for higher and denser development following a planning application made by the developer who built 44 flats on the site. Although he had, in fact, cautioned his client to seek a clawback in the sale contract in respect of any permitted increase in the intensity of development, Mr Clelland said that he was aggrieved at this outcome. He had relied on representations made on behalf of the Council about the planning position. He used this example to demonstrate that a residual valuation was depended upon planning assumptions made as the starting point of the calculation, and these assumptions could not always be relied upon.
Mr Morris explained the reasons for the planning changes. The respondents had spent considerable amounts of money on demolition, decontamination and a ground condition report. This was done to enhance the development potential of the site. The respondents had sold at a price which afforded them profit on site assembly and preparation. That was reasonable. The increase in density had come about because the purchasers had identified ground floor residential as a more profitable use than commercial. The saving in commercially related parking space had permitted higher density housing.
Neither witness attempted to use the evidence of this transaction as a comparable on the question of value.
Mr Clelland’s valuation of the subjects on a comparative basis was based on two events, the redevelopment of No. 32 Campbell Street and the sale of No. 34 Campbell Street.
At No. 32 there had been an independent valuation at £105,000. He considered that figure, plus the cost of demolition, to be the value of the cleared site. He analysed the actual costs of realising the development at No 32 as follows:-
|Gross development value||£585,000|
|Quantity surveyor’s fee (@2%) (est)||6,400|
|Marketing fees (est)||6,500|
|Site Value (=MacFarlane valuation)||105,000|
|Developer’s profit (21.62% of gross development value)||£126,460||(as corrected)|
Mr Clelland considered that the rate derived from sale of No. 34 could be directly applied to the subjects without further analysis.
He then proceeded to analyse his two comparables, and apply his findings to the subjects, as follows:-
|Address||Area m2||Site Value £||Rate £/m2||Date|
|Address||Area m2||Rate £/m2||Site Value £||Date|
Although he appeared to derive his comparative rental figure without adjustment for differences in time, he then adjusted his estimate of site value to take into account the time between the dates of these comparative events and the valuation date of 25 June 1999. He made the adjustment having analysed the growth in rents at 32 Campbell Street between 1993 and 1998:-
|Tenant||Rent (£)||% increase|
|J Watson Scott||20,000||24,500||22.50||4.50|
|Brunches Sandwich Shop||9,000||10,000||11.11||2.22|
On the basis of this data he considered that the average rate rise over the 5 year period was 10%. This was a roughly similar period between the comparison events and the valuation date. He decided to apply a 10% rise in capital values for development sites to allow for the differences in time.
His valuation of the subjects at the relevant date then became:-
|Site value (as above)||£110,000|
|Add 10% capital appreciation||11,000|
|Deduct compensation paid to tenant||14,000|
|Open market value||£107,000|
Mr Morris first prepared a valuation of the subjects as existing at the valuation date using the investment method of valuation. The subjects were let at the valuation date at an annual rental of £6,100 per annum for a term ending 1 June 2001. Due to the poor condition of the structure he considered that the subjects could not then be re-let without expenditure costs of £15,000 (as at the valuation date). Even after refurbishment of the premises he considered that a tenant of only limited covenant would be attracted because of the tertiary location of the subjects. His valuation was:-
|(Unexpired term 25/6/1999 – 1/6/2001): YP 1.93 yrs @ 13%||1.62|
|Void for 9 months|
|YP 15 yrs @ 15%||5.85|
|Deferred 2.68 yrs (@ 15%)||0.69||40,810||(sic)|
|Less: Equivalent cost of repairs at date of valuation||15,000|
Mr Morris acknowledged that he had not made provision in his valuation for the value of the reversion accruing at the end of the new lease. He also acknowledged that the exiting lease was on a full repairing and insuring basis with the tenant liable for the cost of necessary repairs at termination. It also appears that there was an error made in calculating the present value of the 15 year lease.
If Mr Morris’ investment valuation is corrected, in respect of these elements, the result is as follows:-
|(Unexpired term 25/6/1999 – 1/6/2001): YP 1.93 yrs @ 13%||1.62|
|Void for 9 months|
|Reversion to revised rental||7,200|
|YP in perpetuity @ 15%||6.667|
|Deferred 2.68 yrs (@ 15%)||0.69||4.60|
Mr Morris said that the comparables of No. 32 and No. 34 Campbell Street were not relevant, because both figures were based on existing use and not development value. He considered the sale of the small parcel of land at No 32 to be relevant and noted that it produced a rate of £90.91/m2 (the figures as given in fact produce a rate of £77.78/m2.)
He considered the sale of Nos. 34-48 to be relevant. That produced a rate of £127.12m2. He thought that the purchase price of £40,000 paid at 19 Gateside Street had taken into account the difficulties for construction and that figure accurately reflected the open market value of the development site. That sale produced a rate of £138.40/m2. He indexed these rates by application of the Retail Price Index and obtained rates relevant to the valuation date as follows:-
|19 Gateside St||10/2001||289||40,000||174.3||38,003||131.49|
He proposed a rate for the subjects of £125/m2 which he observed was slightly higher than that achieved for the sale to the Clyde Valley Housing Association of the properties at Nos. 34-48, which as adjusted for time was £123.76/m2 Applying that rate to the area of the subjects he produced a valuation as follows:-
|278m2 @ £125/m2||=||£34,750|
|Less: payment to tenant||14,000|
Mr Morris observed that the same rate applied to No. 34 would produce a valuation of about £36,000.
However, Mr Morris did not consider that the comparative method of valuation was appropriate. His preferred method of valuation of the value of the subjects as a site for redevelopment was the residual.
He prepared a set of residual valuations designed to test for the most profitable option. They were based on two principal assumptions as to possible development; firstly, with a shop either 9.4 metres or 18.8 metres deep on the ground floor and secondly with either offices or flats on two upper floors. He found that the type of development producing the highest land value was the mix of shop with offices above and that the highest residual value was that comprising a shop of 18.8 metres deep. That gave a site value of the subjects of £28,933. His calculation was as follows:-
|Ground floor shop||131.30||175.00||22,978|
|First floor offices||82.27||100.00||8,227|
|Top floor offices||73.35||95.00||6,968|
|Ground floor shop||£22,978 x YP @ 11.10% x PV for 6 mths||196,392|
|First floor offices||£8,227 x YP @ 12.00% x PV for 3 mths||66,643|
|Top floor offices||£6,968 x YP @ 12.00% x PV for 3 mths||56,447|
|Ground floor shop||186.50||485.00||90,453|
|First floor offices||93.25||485.00||45,226|
|Top floor offices||84.33||485.00||40,900|
|Constr. des. Management||0.50%||909|
|Sales legal fees||1.00%||3,195|
|Residual (available for site purchase) (9% of capital value)||28,933|
From this there would have to be deducted the sum of £14,000 paid as compensation to the sitting tenants. Since the existing use value (on his calculation) was the highest of these three approaches he proposed that figure as the correct one for the payment of compensation for the compulsory purchase of the subjects.
Mr Clelland did not provide a residual valuation. He said this was because he did not regard that method as being in any way appropriate even as a check. It depended on too many assumptions. He admitted that he had prepared a valuation based on this approach as part of the negotiation. He told us that he had deliberately accepted some of Mr Morris’s assumed figures as part of that exercise, hoping as part of his overall “game plan” to persuade him in due course that some of the figures should be changed. However, he thought the exercise quite inappropriate when good comparative material was, as here, to hand. His experience in relation to Castle Street was repeatedly relied on by him as justifying that attitude.
He did illustrate his criticism of the approach taken by Mr Morris by challenging various factors in the calculation. He suggested that the structure should be a full three storeys with consequently increased building and lettable areas. The shop rent should be £220/m2 reflecting the level obtained at No 32. The second floor offices should be let at £100/m2. The whole income should be capitalised at 9 Year’s Purchase. Professional fees should be reduced to reflect market conditions in 1999. A developer would have been prepared to allow a rate of 15 per cent as profit for such a development. Adjustment to meet these points would produce a residual value of the subjects of £118,000 (later confirmed in submissions as £115,913).
Mr Morris’ residual valuation recalculated by the Tribunal to take into account Mr Clelland’s proposed changes is presented on the next page. In doing so a short period has been allowed for shop fitting in order for the result to approximate as closely as possible to Mr Clelland’s figure.
It should be noted for avoidance of doubt that both experts gave detailed evidence in support of their preferred figures. Mr Morris pointed out that no direct evidence of the equivalent rate per m2 had been exhibited in relation to No. 32. He stressed that the locations were different.
|Ground floor shop||131.30||220.00||28,886|
|First floor offices||82.27||100.00||8,227|
|Top floor offices||82.27||100.00||8,227|
|Ground floor shop||£28,886 x YP @ 11.11% x PV for 2 mths||255,450|
|First floor offices||£8,227 x YP @ 11.11%||74,043|
|Top floor offices||£8,227 x YP @ 11.11%||74,043|
|Ground floor shop||186.50||485.00||90,453|
|First floor offices||93.25||485.00||45,226|
|Top floor offices||93.25||485.00||45,226|
|Constr. des. Management||0.50%||932|
|Sales legal fees||1.00%||4,036|
|Finance costs (taken as the same)||8,117|
|Residual (available for site purchase) (29% of capital value)||116,165|
We have attempted, below, to give weight to the parties’ submissions on the facts and the inferences to be drawn from them, and it is unnecessary to set these out at length. Mr Drummond set out the legal basis of the claim: section 12. Indeed, there was no dispute on legal issues. He submitted that the preferred approach to the value of the subjects was the comparative method. If there were comparables they should be applied directly. To the extent that they were not directly comparable they should be adjusted or adapted. So, the matter turned on analysis of comparables and the question of whether they could be adjusted to fit the subjects. Only if that approach proved fruitless could the residual method of valuation be considered.
Mr Drummond submitted that the transactions at Nos. 36-46 Campbell Street and Castle Street were not comparable. Indeed, there was no real argument about the latter. The sale of Nos. 36-46 Campbell Street in 1999 for the sum of £135,000, was a valuation carried out by the District Valuer on a joint reference by the three parties involved. No private developers were invited to bid. There was no market test of the value of the site which was developed with low cost social housing. That the transaction could not be said to be representative of the open market could be demonstrated by Mr Morris’ claim that the derived value of No. 34 from that transaction was £36,315, while the respondents said they could justify the price paid for purchase of those subjects for development at £85,000 in the open market.
19 Gateside Street was agreed to be relevant. Mr Reid purchased for £40,000. But for the access problem he would have bid £70,000. Adjustments were required because it was in a less desirable location than the subjects and further away from the primary shopping areas including the New Cross Centre. It would therefore command lower rent than the subjects. Mr Clelland had treated that comparison as justifying a figure for the subjects of £80,000 to allow for the various differences.
Mr Drummond also invited the Tribunal to disregard the transaction of the small area of ground at 32 Campbell Street. It was not an open market transaction, having been conducted exclusively between the parties. That area was landlocked in any practical sense.
Nos. 32 and 34 Campbell Street were the ‘crucial transactions’. These comparisons could be adopted with some adjustment to take into account differences in area and the time gap to the valuation date. Since these were directly comparable there was no need to consider either the investment or the residual methods of valuation.
The type of development achievable on No. 34 was the same as the type of development achievable on the subjects. The areas and locations were very similar. Therefore the evidence from the transaction at No. 34 ought to be applied directly to the subjects.
Mr Morris’ application of the Retail Price Index was not appropriate. The adjustment for time should reflect changes in property value over time. Mr Clelland’s evidence of change and comparative value should be accepted.
The residual method of valuation should be disregarded as unnecessary. If it were to be applied then consideration would have to be given to the factors spoken to by Mr Clelland. He had wide experience of small scale commercial development as against the experience of Mr Morris with large scale joint ventures undertaken by the respondents. Mr Clelland’s figures should be preferred. If the Tribunal should find it proper to apply the residual method of valuation then Mr Clelland’s figures should be accepted. As applied to Mr Morris’ table, Mr Clelland’s revisions produced a figure of £115,913. Although this was, of course, above the sum now claimed, he stressed the claimant’s view that the comparable evidence should be the basis of the claim.
The investment method of valuation should be excluded from consideration. It was in any case inaccurate in that no allowance had been made for the reversionary value of the subjects and a sum had been taken off for repairs where a full repairing and insuring lease was in place.
In sum, he asked the Tribunal to make an award of £107,000 less the interim payment with interest from 25 June 1999 to the date of payment and expenses taxed on the Court of Session scale. He referred to offers made; to section 11; and to the Tribunal’s discretion under Rule 33. He asked for certification of Mr Clelland as an expert but pointed out that the advance payment included payment of the appropriate fees under Ryde’s Scale.
For the respondents Mr Goldie submitted that the task of the Tribunal was to determine which method of valuation was consistent with open market value as defined in section 12(2) of the Act. Mr Morris’ valuation had been consistent with the principle of equivalence set out in Horn v Sunderland. Mr Clelland’s approach, based on the guidelines in respect of the determination of open market value in the RICS Red Book, was suspect: Yorkshire Traction Co Ltd. It should therefore be viewed with caution. Mr Morris on the other hand had been thorough. He had carried out a full investigation and three methods of valuation had been looked at.
Mr Clelland did not produce an investment valuation. He did not challenge Mr Morris’ figures in the investment valuation, although the omission of the reversion was accepted as requiring correction. He had agreed that a limited covenant tenant was less attractive. Mr Morris’ valuation of £35,000 should stand as the value of the subjects in their existing use at the valuation date.
Regarding the residual method of valuation Mr Clelland had sought to maximise the claim. His input of £220/m2 for the ground floor space was, in Mr Morris’ opinion, not achievable. Mr Morris had fully explained all his inputs. In particular it was to be noted that he had accepted £180 per square metre as a compromise. It was above the figure he personally thought justified. His evidence was to be preferred. The experts had not actually disagreed over the density of development on the subjects.
Mr Clelland had abandoned the application of the residual method because it had not produced the maximum result. Mr Goldie accepted that Mr Clelland’s evidence that he was upset and irritated by the experience over the Castle Street transaction could be taken at face value. He did not suggest that it was something contrived as an excuse to avoid the residual method. However, the experience of that development could have affected his judgement regarding the approach to valuation. In contrast to Mr Morris, he had not investigated fully the range of methods of valuation available for the determination of open market value. Mr Morris’ application of the residual approach, which he had tested with sensitivity analysis, was credible and reliable.
The use of the residual approach was sanctioned in Clinker & Ash Limited where it was observed that each case in valuation turns on its merits and in Corton Caravans and Chalets Limited where it was observed that the residual approach could be used in the absence of appropriate comparable evidence. The Tribunal should attach weight to Mr Morris’ residual valuation and accept it as producing a realistic open market valuation.
Mr Morris had explained in detail why the comparables cited were not appropriate. No. 32 was better located and three sided. There was greater footfall. There was no actual sale. The MacFarlane valuation was not a site value but was for the bank to indicate the worth of the existing premises. The sale of the small site at No. 32 was not concessionary by the respondents. It could have been sold for the purposes of a shop to any other interested party. That transaction could be used as a comparable.
No. 34 was an opportunity purchase by the respondents made in order to avoid future disturbance cost upon compulsory acquisition. The respondents were purchasing an existing building at existing use value. The building at No. 34 was more substantial than that at the subjects. The Modern Homes Ltd letter was not an actual offer. It had no bearing on the existing use of the subjects.
Mr Morris’ evidence that 19 Gateside Street was the only proper comparable should be accepted. This was the only site comparable in size and location. It was also on the periphery of the town centre and shared value characteristics with the subjects.
In conclusion, Mr Goldie submitted that Mr Morris’ approach, using the residual method of valuation, should be preferred. Compensation should be awarded in the sum of £35,000 under deduction of the amount of the advance payment in respect of compensation. He further submitted that all questions of expenses should be reserved.
There was no dispute as to the identity of the subjects to be valued and no doubt that the figure to be determined was the open market value as at 25 June 1999. It was not in doubt that the potential purchasers would include people whose interest was in developing the site. Existing planning policy supported mixed use and a purchaser could reasonably have expected to be able to develop as housing, offices or shops. It was agreed that the claimants were entitled to the highest figure justified by the evidence.
We heard a good deal of evidence in relation to existing use value. Mr Morris seemed to think it might produce the highest valuation. However, as will be seen, we have reached a different conclusion. It is unnecessary to elaborate the detail bearing upon existing use. It may be noted, however, that although he came to accept that as the lease was a full repairing lease it might be unnecessary to allow for the full cost of repairs, there may be a doubt as to whether the tenants would, in practice, have been able or prepared to meet these costs. We heard evidence that the structure was inherently unsound. It is difficult to accept that an existing use valuation would produce the highest value.
Although there was some criticism of Mr Clelland’s reference to the “Red Book” we do not think that any significant point of principle arises in this case. It is important to recognise that his references were made in relation to analysis of evidence derived from the comparable transactions. He did not rely directly on the Red Book when valuing the open market value of the subjects. In particular, it is clear that no question of special interest arose in relation to the subjects. They were to be valued as an isolated unit.
The dispute about special interest arose in relation to the transaction at No. 34. We think it misleading to attempt to analyse evidence of completed transactions by reference to the Red Book or, for that matter, to the assumptions required by section 12. Regard must be had to the evidence bearing on the particular circumstances of any such transaction to see to what extent it is truly comparable. If it appears that there is some feature which would not be replicated on an open market sale of the subjects, the first question is whether it is of such significance as to deprive the transaction of any comparable evidential value. If the feature is not of such significance as to vitiate the reference altogether, consideration must then be given to the nature and extent of any adjustment. If there is a special element which is alleged to be common to both the comparable and the subjects in dispute, difficult questions may arise as to how section 12 is to apply. But, as we have said, it is not suggested in this case that any special interest element arises in relation to the subjects.
There is no doubt that the property at No. 34 provided an unusually good physical comparison with the subjects in dispute. We deal below with the dispute about the relative positions of No. 32 and the subjects but, on any view, we are satisfied that no significant difference in location would be perceived between No. 34 and No. 48 in the eyes of prospective purchasers.
Had there not been direct evidence from Mr Morris, based on his personal involvement in the transaction, the facts available for analysis would have left us in little doubt that this was a valid closely comparable transaction. The subjects were physically similar. The buyer plainly did not want to use the existing building. The property was bought for development. The successful bid was below the price invited but in line with a figure proposed by another potential developer.
In short, the question of whether or not this transaction can be relied on as a sound basis for comparative assessment, turns entirely on the fact that, in this case, we have direct evidence of the buyer’s motive. The justification for disregarding this comparable or, indeed, for discounting in any significant way the figure derived from it must be found in the detail of that evidence.
At the end of the day, there was no evidence of special interest. In his written “expert opinion”, Mr Morris (at 7.3) had said: “Although the Council at the time was acquiring a building for clearance it paid what was considered at the time necessary to outbid all other potential bidders in order to avoid the payment in the future of additional compensation to any occupier of the building. The Council justified the acquisition price by the savings that could be made in future disturbance compensation, the cost of promoting compulsory purchase and the value of the site for redevelopment in conjunction with the site already owned by the Council at 36-46 Campbell Street. The Council therefore acted as a special purchaser, the value of which interest should quite properly be disregarded in the assessment of Open Market Value.” At 10.1 he said: “Ultimately the price paid by the Council was justifiable by reference to the perceived value the site added to the already owned site at 36-46 Campbell Street”. But in his evidence to us Mr Morris did not suggest that the price paid was to reflect any element of marriage value. It was accepted that the site at No. 34, taken on its own, could have been developed more intensively than the combined site. It was not argued that the addition of No. 34 inflated the value of Nos. 36-46. Mr Morris explicitly rejected a suggestion made to him by the Tribunal that the reason for the purchase might have been to achieve some other civic purpose such as removal of unsightly buildings. On the contrary, on his evidence, the price paid by the respondents for No. 34 was a price they thought appropriate to acquire the site for development.
The supposed speciality was that they were bidding against potential purchasers who might put an existing use value on the site. However, that, in itself, does not change the nature of their own assessment. Their price was a price paid for the site. They had assessed the open market value, in its existing use, at £75,000. We did not hear detail of the basis of that assessment. There was, of course, no suggestion that any detailed residual valuation exercise had been carried out. The thinking behind the ultimate offer of £85,000 was that if the building had been occupied they would have had to pay compensation for disturbance. It was plainly cheaper to buy when empty. But, whatever the thinking, the fact remains that they considered it reasonable to acquire the land for development at a price of £85,000 and on the basis of Mr Morris’ evidence it appears that there was no special motive for the purchase. There was said to be a special justification for the price but that is quite a different point. That the sum offered was to outbid other possible bidders means no more than that they thought it necessary to beat competition in order to secure land for development.
In short, the evidence of Mr Morris tended to support the inference that the transaction was evidence of a price paid on the open market to acquire the site for development. Further, there is nothing in the evidence bearing on the transaction itself to show that the figure was not a reasonable price to pay for that purpose. Mr Morris confirmed that he would not have been able to offer an unreasonable sum. Further, the figure is supported by the evidence of the letter from Modern Homes which, on the face of it, was an unconditional offer – of an offer - of £82,000 for development purposes.
It may be noted, for completeness, that the cost of demolition ought, in theory, to be added to the agreed price, in order to get an open market value for the site. However it was agreed that, broadly speaking, the two sites were comparable in this respect.
It is clear that a proper understanding of the whole evidence relating to the sale of No. 34 is at the heart of this case. Mr Clelland stressed that the principle of equivalence meant that his clients should get compensation at the same level as the sum paid by the acquiring authority for that very similar site: Horn v Sunderland Corporation. We are quite satisfied that this is a misunderstanding of the term “equivalence” as used in that case. The transaction at No. 34 is simply an adminicle of evidence to be analysed to see what light it casts on open market value. There can be no presumption that the value of one site is the same as another simply because of the identity of the purchaser. However, his approach was understandable. Proprietors would reasonably be aggrieved if the authority paid less on a compulsory acquisition than they would be prepared to pay for virtually identical subjects on the open market.
We stress the conclusion discussed above that, although Mr Morris tried to justify the price paid for No. 34 by reference to various factors, what was being acquired by the authority in that case and in relation to the subjects was a development site. That was what they were to pay for.
It may be that, implicit in Mr Morris’ thinking, lay a concept that the local authority was to be treated as a special interest purchaser because it had wider objectives than any private developer and was able to take such objectives into account. It was not constrained by private sector assessment of value. It would not have surprised us to hear such an argument advanced. As we have seen, it was hinted at in his written opinion. It also seems to have been assumed by Messrs Whyte and Barrie that the local authority had aspirations for Campbell Street as a whole which might have led to a loss of their own business if they had not taken the positive action they did, by rebuilding. In other words there might well have been some public interest motive behind the transaction. But, Mr Morris expressly said there was no such wider motive and stressed that the price paid had to be justified. It was a reasonable price to pay. It is fair to say that in justifying the price, he seemed to put particular weight on the fact that it was cheaper to buy the subjects empty than to have to compensate existing users. That pointed, perhaps, to a mind set more familiar with implementing public schemes than assessing open market value. We cannot avoid a suspicion that Mr Morris’ evidence did not do justice to the whole thinking behind the transaction.
Doing the best we can with all the evidence, we have what, on the face of it, appears to have been a proposal from a private developer to make an unconditional offer to buy the site for development at £82,000. We note, of course, that the sale went to a closing date without a formal offer emerging. Mr Clelland gave evidence to the effect that this figure was recognised to be below the seller’s expectations. There is no suggestion that this proposal was tainted either by special interest or in any other way. The seller’s initial marketing assessment was at £95,000. It may be recognised that this was, no doubt, based on existing use. However, there is no reason why the seller could not have held out for that level of return had there been a significant existing use value. Mr Morris’ evidence was that his initial assessment was at £75,000. He said he added “two extra bids” in order to ensure that the Council acquired the subjects.
With some hesitation, we have decided that the figure of £85,000, cannot simply be accepted as the proper open market figure derived from analysis of the transaction at No. 34 for comparative purposes. Although we consider that Mr Morris did not establish any feature of his purchase which prevented the price paid being used as a straight comparison, evidence about the figure of £82,000 and the evidence that the local authority, for whatever reason, allowed two extra bids gives some weight to our impression that the evidence bearing on the motivation of the local authority may have been incomplete. If we accept that they were determined to top the “open market figure” it is appropriate to exclude at least the second “extra bid” from our consideration. It must be recognised that despite the undoubted importance of using comparable evidence when available, it is equally important to keep in mind that the exercise is not one which admits of mathematical accuracy. We think that the whole evidence justifies our taking £80,000 as the effective figure in relation to the transaction at No. 34.
We are satisfied that evidence of comparable open market transactions is the best guide to open market value. It is unnecessary to cite authority for such a well established proposition but, in a different context, Mr Goldie referred us to the decision in Yorkshire Traction Company Limited and we agree with the views of the Tribunal Member in that case: “Comparable transactions are clearly the most direct and best guides to the value of a property”: para. 68.
We do not doubt that where sound comparative evidence is not available, the residual method provides an acceptable approach to valuation. However, having regard to our above analysis of the transaction at No. 34, it is unnecessary to attempt such a valuation. We consider that, having identified a reliable comparison, the proper approach is next to examine other potentially comparable material and to see whether it casts doubt on the reliability of the main transaction. The wider range of transactions, even if more remote in physical terms, might tend to support the direct physical comparison or might, on the contrary, point to the need for special care by demonstrating that the transaction principally relied on, was contrary to general market trends.
We consider that the evidence derived from 32 Campbell Street and 19 Gateside Street can properly be viewed as broadly supportive of the reliability of the valuation based on comparison with No. 34. The transactions at Nos. 36-46 and at the small site at No. 32 point to much lower figures. But, of course, one was based on a valuation by the District Valuer and the other on direct negotiation.
In relation to No. 32, Mr Clelland’s analysis of the final development costs appeared to show that equating existing use value with site value allowed a generous margin of profit. However, the relevant question is the level of profit which might be normally anticipated at the outset. Reducing the profit figure to, say, 20%, demonstrates that the assessed site value of £105,000 was moderate. Further, we are not satisfied that Mr Clelland’s analysis made proper allowance for the sum of £7000 paid for part of the site. If that was, indeed, to be added and allowance made for cost of demolition, adjustment to bring the total up to valuation date would indicate a figure for comparison of over £140,000.
No. 32 is much the same size as the subjects but it has the advantage of a frontage on three sides. Because of its location we accept that it would have a greater developed value by being able to command somewhat higher rents than the subjects. More important is the fact that the frontage allows 100% development of the area. Accordingly the site value would be significantly greater than either Nos. 34 or 48. We cannot take this material as giving direct support to use of the figure we have taken for No. 34, as a comparable but, equally, we are satisfied that it casts no doubt on the reliability of that figure. On the other hand, even making generous allowance for differences in site configuration and location, it is hard to reconcile the evidence from No. 32 with Mr Morris’s level of valuation of the subjects.
We accept from the evidence and our own observation that the cleared site 19 Gateside Street was very difficult to service for the purpose of construction and that the same difficulties would not exist at Nos 34 and 48. It is possible to park in front of each property and temporary access for construction and storage might additionally have been available from the rear. We heard that 19 Gateside Street was advertised at offers in region of £80,000. This may well have reflected site value derived from investment criteria while failing to allow for additional costs of construction. We accept Mr Reid’s evidence that those additional costs were perceived to be at least £30,000. We heard from him that a more prescient developer would have allowed something in the region of £40,000. Given that these additional costs would not be incurred at the subjects and accepting that the two sites were broadly comparable in value terms, with a similar frontage and size, the evidence of the Gateside Street transaction suggests that had it enjoyed a position similar to the subjects it would have had an open market value of about £80,000 in October 2001. Using the “All items” RPI table, to take that figure back to the valuation date would reduce it to £77,000.
Mr Clelland’s evidence was that the location of the site at Gateside Street would not justify as high a value as the subjects. Mr Morris on the other hand thought Gateside Street might be of higher value. He thought that a central location was not necessary of value for housing. We hesitate to put weight on our own impression as we have no experience of values in Hamilton. We would not be surprised to find the subjects attracting a higher value than Gateside Street. We would doubt whether that would provide a complete explanation for the disparity in figures. But, we do not consider the evidence from Gateside Street justifies rejection of the prime comparison.
The site at Nos. 36-46 was developed at a very low density. On inspection we were struck by the amount of space devoted to parking and landscaping and by the size of the opening provided for vehicular access to the rear of the premises. In his valuation report, the District Valuer narrated the detail of the grant of planning permission and his conversation with planning officials. He appears to have accepted that the valuation should be based on the constraints demonstrated by that planning permission. We are satisfied that the extent of parking etc is an important element in valuation of this site. It is not a feature which would have been replicated in relation either to No. 34 or to the subjects taken on their own.
Mr Morris argued that the District Valuer’s figure for the overall site would have had to be wrong by an unrealistically large margin to justify the claimants’ figures. However, we do not accept that there would be any inexplicable error. We note, for example, that the apportioned value of No. 34 (on the corrected area) would be something under £35,000. Mr Morris, however, advised us that the sum of £85,000 actually paid for that site had to be justified as reasonable. It is apparent that differences in approach can produce quite divergent figures. Because this was simply a valuation, we do not think that any inference arises from the transaction relating to Nos. 36-46 which would cast doubt on evidence derived from the direct comparable at No. 34.
The sale of the small unit at the west end of No. 32 was also not directly comparable. Mr Morris contended that the unit had potential as an independent development. He contended that the calculated figure of £90 per square metre reflected that potential. We have noted a caveat as to the arithmetic but it is not important for present purposes. Mr Clelland gave evidence that the site had little or no value except as part of a larger development. He thought it too small to develop itself. In any event it was positioned beside a pedestrian crossing and barriers. There was no vehicular access from Leechlee Street and only pedestrian access from the lane. There would have been difficulty with drainage because of the proximity of their existing building. His evidence on this was matter was challenged but it was not suggested that it was an opinion which could not reasonably have been accepted by the seller at the time. No inference from this transaction would have any necessary bearing on evidence derived from No. 34.
In short, we find that comparison with the sale at No. 34 is a reliable one and we are satisfied that it is therefore to be taken as the preferred method of establishing the open market value of the subjects. Having regard to the physical details of the two sites, we are satisfied that the sites are sufficiently similar in area to justify direct comparison and that the open market value for the subjects can be found by direct reference to the figure derived from No. 34. It is unnecessary and inappropriate to attempt to proceed by comparison of the rate per square metre because the shape of the site and the proximity of other buildings necessarily means that in neither case could the whole site be built upon. The precise configuration of the developments would depend on their nature and relationship with existing property. Development for housing would require more window space than development for offices. It would be the capacity for realisable units of development rather than precise areas which would be of greater significance to potential developers interested in these sites.
No. 34 is slightly smaller in area than No 48. But, it has a wider frontage. The difference may have been of the order of one metre. Having regard to the constraints of building in a relatively confined space, some adjustment would be required to allow for this difference. We accept Mr Morris’ evidence that, for planning reasons there would be a limit to the depth of developable area at the rear of the site. On the other hand, considering the intensity of development carried out at 19 Gateside Street we are satisfied that private development of these relatively small sites would be much denser than the social housing with parking that is now there. We consider that the developable potential of these two properties can be taken to be much the same in terms of ground floor commercial use and the number and size of flats or offices above. The parties’ emphasis on comparative areas meant that we did not hear specific evidence of the significance of the different frontages. In the circumstances we can only approach it on a broad basis. There is no doubt as to the importance of frontage in relation to valuation of shops. We conclude that if the subjects had been offered for sale in 1995, instead of No. 34, offers of around £75,000 could have been expected from developers in the open market.
Having accepted this open market value of £75,000 based essentially on comparison with the transaction at No. 34 in May 1995, we have to consider what adjustment might be necessary to produce a figure at the valuation date of June 1999. Mr Morris accepted that adjustment would be necessary. He proposed reference to the Retail Price Index to be an acceptable measure of the change in the capital value of development sites in this locality. The figures for all items show a rise from 149.6 in May 1995 to 165.6 in June 1999: a rise of 16 points or 10.7% over that period. We see no reason not to accept that figure. We did not find Mr Clelland’s approach satisfactory. We consider that an assessment based on comparable rates per metre, requires adjustment of rates for inflation before averaging is attempted. Further, it is plain that rates of increase over one five year period – even if derived from relevant material – are not a secure guide to changes in value levels over a different period. Applying the RPI adjustment to the figure of £75,000 produces a figure of £83,021, say £83,000, at the valuation date.
Mr Morris’s contention was that any site available for redevelopment would be analysed using the residual method of valuation to determine the maximum bid that a prospective purchaser could make. However, there was no direct supporting evidence of that in relation to the transactions discussed and Mr Clelland contradicted it. The subjects and other sites such as No. 34 are relatively small in scale and were apparently appraised in a quite unsophisticated way. Mr Morris had spoken to Mr Smith of Modern Housing Ltd and was able to tell us that the figure was based on the unit site value attributable to individual flatted dwelling houses. There was no suggestion that any detailed calculation was carried out. We accept that experienced developers will take a simple rule of thumb approach. Mr Smith was apparently prepared to make a bid simply “to get a foot in the door”. He would deal with the detailed planning and economic issues later.
Mr Reid had taken general advice but again it was not suggested that he had prepared a detailed appraisal before he had purchased 19 Gateside Street although he had calculated the unusual costs of access. Mr Morris did not say that he had undertaken a residual valuation of No. 34 before the bid for that property. He said that was because the Respondents thought they would have to outbid offers based on existing use value. But their intention was to redevelop. They had to be satisfied that the sum paid was reasonable for that.
A ‘back-of the envelope’ calculation of the kind Mr Morris had been able to make in relation to the amount of profit available at 19 Gateside Street by estimating the likely value of the shop there and the selling price of the flats, would often be sufficient for a broad estimate to be made by a developer of infill sites. Practical experience would be more reliable than the apparent accuracy of full calculation based on a series of what could be no more than best assessments.
Our conclusion from this limited analysis of developer behaviour is that simple calculations of site value would be made on the basis of comparative unit site values elsewhere, such as those for flats, and approximations of the capital value of ground floor commercial premises.
As we are persuaded that a comparative assessment is the more reliable approach and that suitable comparative evidence exists, it is unnecessary to examine the detail of the residual valuation analysis. A figure based on sound comparative evidence does not require to be supported by a residual valuation but we accept that the residual method can provide a guide. If the figures derived from such an exercise were far from the figure derived on comparative basis, this would cast doubt on one or other. Mr Morris is to be commended for his rigorous approach to the whole question. Having rejected No. 34 as a comparable because of his own understanding of the nature of that transaction, he was left to try to find other means of assessment. He carefully investigated all the possibilities.
However, the residual method depends on the reliability of the individual inputs to the calculation. Mr Morris and Mr Clelland only differed significantly in their opinions on two of the inputs – the shop rental rate and the percentage of developer’s profit. Mr Morris’s resultant figure was £29,000 while Mr Clelland’s was £116,000. There is a considerable difference both between these figures and the figure based on a comparative valuation. If no explanation can be found, the reliability of the comparable figure might be left in doubt.
Mr Goldie referred to the decision in Clinker and Ash Ltd as an illustration of acceptance of a residual method. In accepting such approach in the circumstances of that case, the Member observed: “The Tribunal has frequently rejected such valuations as having too many uncertain elements and has almost invariably done so when some simpler method (such as the use of comparables) is available”. It is salutary to have regard to the reasoning behind such rejection. He went on to explain how the residual valuation calculation in the real world could be a precision valuation instrument because the pressures on both sides to reach a deal tended to produce the right balance between the estimate of completed value and the estimate of development cost. However where the residual value method was used in the context of an arbitration process (such as the current proceedings) the tendency of the claimant to use figures, on each side of the equation, which suited his case and of the acquiring authority to use contrary figures was not balanced by market pressure to conclude a deal. In a quotation from an earlier case he concluded: “Having observed on so many occasions the working out of these tendencies in terms of widely conflicting ‘valuations,’ the deep impression on the minds of the Tribunal is that under arbitration conditions … once valuers are let loose upon residual valuations, however honest the valuers and reasoned their arguments, they can prove almost anything”.
It may be noted at the outset that although this exercise was developed in the evidence on the basis of a conflict between the views of the two witnesses, the real issue is to attempt to put ourselves in the shoes of a potential purchaser. What figure might such a person have used? There is greater scope for variation in assessment of some elements than others. For example, a developer might be expected to look for direct evidence of comparable passing rents, when seeking to predict his return. He might, on the other hand to be able to form his own view of the level of architect’s fees he would have to incur by knowing what work he required an architect for and what he could do from his own experience or resources. It would also be up to him to decide what profit level was acceptable. Putting the matter very generally, our impression was that Mr Morris laid a good deal of stress on what would be “reasonable” figures without taking seriously the range of figures which might have been within the contemplation of a prospective developer of this site. It is one thing to have a good knowledge of the typical tenders for architectural services obtained by a local authority and quite another to know what cost a developer would expect to have to incur in relation to a particular type of development.
We think that Mr Morris’ figures could realistically be adjusted in several respects. In the first place, we are satisfied that a higher rent for the shop might reasonably have been assumed. We see no reason to doubt Mr Clelland’s evidence of rental levels at No. 32. Although we do not accept that the subjects would command the same level as the development at No. 32, we think that a figure of £200 per m2 could well have been assumed.
Although we recognise the force of Mr Morris’ submission that a 2½ storey construction might, in practice, be more sensible than a three storey building as the increased structural cost meant any difference in return was minimal, we accept that a developer seeking to maximise his profit might have assumed a 3 storey construction. Accordingly, the top floor office rentable area would be 82.27 m2. We do not, however, accept Mr Clelland’s suggestion that the top floor rent would then be the same as the first floor. Although a full floor, as opposed to coombe ceilings would, perhaps, be easier to rent, we accept Mr Morris’ contention that the assumed rental income would be lower.
We accept Mr Clelland’s contention that the fees proposed for architect and surveyor are conservative and consider that 4% and 2.5% might equally well have been used. There was, of course, a very sharp conflict as to the appropriate level of developer’s profit. It is plain that this is of considerable importance. Essentially the question is whether a developer might have been found for this small site in Hamilton prepared to take a return for risk of 15% or less. As Mr Clelland pointed out, this depends upon the experience of the developer, his competence in assessment of risk, and the competing commitments on his workforce at the material time. He had experience of clients prepared to accept 10 to 12%. We can accept on the basis of Mr Clelland’s evidence that a prospective purchaser might have been prepared to accept only a 15% return.
A further adjustment might have been made in relation to the proposed deferral periods. The premises were of a basic character and a developer might well have expected to be able to conclude his marketing during construction although, no doubt, some time would have to be allowed for shop-fitting. However, Mr Clelland did not challenge Mr Morris’s position on this and we accept it as reasonable.
Making the appropriate adjustments to Mr Morris’ tabulated calculation, and removing the provision for tenant relocation to make the comparison direct with the comparative valuation produces a residual value as shown on the next page.:-
|Ground floor shop||131.30||200.00||26,220|
|First floor offices||82.27||100.00||8,227|
|Top floor offices||82.27||95.00||7,816|
|Ground floor shop||£26,220 x YP @ 11.10% x PV for 6 mths||224,440|
|First floor offices||£8,227 x YP @ 12.00% x PV for 3 mths||66,776|
|Top floor offices||£7,816 x YP @ 12.00% x PV for 3 mths||63,440|
|Ground floor shop||186.50||485.00||90,453|
|First floor offices||93.25||485.00||45,226|
|Top floor offices||93.25||485.00||45,226|
|Constr. des. Management||0.50%||932|
|Sales legal fees||1.00%||3,547|
|Residual (available for site purchase) (21.3% of capital value)||75,616|
As we have observed this exercise is simply a broad check. We consider the figure brought out by this analysis to raise no real doubt as to the reliability of the figure derived from the comparable.
From our open market value assessment of £83,000 the sum of £14,000 paid as compensation to the outgoing tenant falls to be deducted. The final figure will, however, have to include expenses of negotiation and appropriate interest. We understand that there is not likely to be any dispute about these elements but we are not entirely clear whether it is thought that they have, in some way, been covered by the advance payment. We shall continue the cause for four weeks to allow parties to attempt to reach agreement on these matters and arrange any further procedures which may be necessary thereafter. We would hope to be able to deal with any issues of expenses on paper.
Decision issued: 30 March 2004
Certified a true copy of the statement of reasons for the decision of the Lands Tribunal intimated to parties on 30 March 2004
Clerk to the Tribunal