This is a referral for the determination of the amount of compensation due following the compulsory acquisition of a one half pro indiviso share of the upper floors of a building comprising 84-100 Union Street Glasgow. Although the reference was initiated by the acquiring authority, Glasgow City Council, it was ultimately treated as a claim by the former proprietors, Paratus (No. 403) Limited.
We heard evidence and submissions at Edinburgh on 23 to 26 April and on 18 and 19 June 2007. Mr David Logan, advocate, appeared for the claimants. He led evidence from Mr Hamish Munro, Chartered Surveyor; Mr Thomas Dyer, Managing Director of the respondents; Mr Stephen McCluskey of Leslie Keats & Co Ltd, (“Keats”) cost consultants and loss adjusters; Mr Ian Millar of Millar Stone Restoration, stone masons. Mr John Robertson, advocate appeared for the acquiring authority and led evidence from Mr Alan Jardine Manager of Valuation Section of Glasgow Council; Mr John McGee a Partner of Gardiner and Theobald (“G&T”), Cost Consultants and Project Managers; and Mr Neil Dryburgh a partner of Montagu Evans, Chartered Surveyors.
The Tribunal concluded that in the circumstances of this case where there was no dispute over the extent of repair works required to the building no real purpose would be served by an inspection of the inside of the building. The Surveyor member did make an unaccompanied inspection of the building from the outside.
Assessor for City of Glasgow v Ron Wood Greeting Cards and others 1999 LVAC (V/5/19/1998)
David Watson Property Management v Woowlich Equitable Building Society 1992 S.C. (H.L.) 21
Land Compensation (Scotland) Act 1963
Town and Country Planning (Scotland) Act 1997
Section 12 of the Land Compensation (Scotland) Act of 1963 is in the following terms:-
12 - Compensation in respect of any compulsory acquisition shall be assessed in accordance with the following rules:-
(2) The value of the land shall, subject as hereinafter provided, be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise:
The parties were agreed that subsection (2) applied and that there were no issues arising under subsections (1) and (3) to (6).
The subjects are a one half share of the upper floors of the building known as “Egyptian Halls”, described below. The building is Grade A listed and a Compulsory Purchase Order (CPO) was obtained by the applicants following concern that necessary repairs had not been carried out and that the building was at risk of further deterioration.
The parties approached the assessment of compensation on what is described as a “residual basis”, namely the ascertainment of the worth of the acquired subjects on completion of the necessary repair and refurbishment works less the estimated cost. Appropriate allowance was to be made for grant assistance from Historic Scotland and from Glasgow City Council. The Applicants contended that the cost net of grant exceeded the potential completed value and thus on their residual basis there was no positive value in the subjects at the relevant date of acquisition. They conceded that a party in the market might be prepared to pay a “nominal” sum, notwithstanding the outcome of their residual calculation, and stated their opinion of “open market” value as £25,000. We understood that this was derived indirectly from the figure of £26,000 being the price paid to the owner of the other 50% pro indiviso share by the owners of the ground floor shops but neither party placed any direct reliance on that figure.
The claimants had obtained quotations from a series of contractors to carry out the work in accordance with the same specifications as the applicants. They based their residual valuation on these costs, again net of the expected grants. The result of their calculations showed a positive value.
A detailed analysis of the repair works required to the upper floors had been prepared in 1998. This took the form of a report by a firm of architects, the Morrison Partnership (along with engineers, Peter Stephen & Partners) and was referred to as the “Morrison Report”. The Tribunal had the version as finally revised on 7th July 2000. Parties agreed that the work specified therein should be used as the basis for calculation of costs. This facilitated a direct comparison of the figures used by both parties and the Tribunal is grateful to parties for this sensible approach.
The Applicants had concluded a “back to back” agreement with the owner of the ground floor shops to sell the upper floors to them on completion of the compulsory acquisition procedures. The price was to be reimbursement to the Council of all costs incurred by the Council in compulsorily acquiring the upper floor subjects. This would include the sum assessed by the Tribunal as appropriate compensation as well as other costs and outlays.
The subjects are situated at 92 Union Street Glasgow and comprise the four upper floors of a five storey and basement building known as 84 -100 Union Street. On the ground floor there are four retail shop units, each with a basement and situated with two on each side of a central entrance which provides access to the four upper floors. The building is bounded at the rear by a narrow service lane providing loading and other limited accesses to the buildings bordering it. Upper floors in the locality may be used for a variety of purposes but are mainly offices or stores used in association with the ground floor shops. Some such floors are vacant, apparently pending redevelopment for residential purposes.
The building was designed by the renowned architect Alexander “Greek” Thomson. It was built in1871-1874. It is recognised as being one of his finest commercial buildings and is shown as “Grade A” in the schedule of buildings of Historic or Architectural merit held by the Scottish Executive. It is constructed of stone with ornate carvings and features on the front elevation with extensive fenestrations on all floors. Upper floors are supported by cast iron columns and beams which, in turn are carried by the stone external walls. Glasgow City Council regard the building as one of the city’s most significant architectural buildings, of prime importance in the history of the City as a trading centre.
Although the ground floor shops are occupied and continue to trade, the upper floors have been vacant for a long number of years. General neglect and inadequate maintenance had resulted in the building suffering water penetration and general decay. On 24 January 1991 the then Glasgow District Council served a Listed Building Repair Notice (LBRN) on the then owners specifying works which the Council required to be carried out to preserve the building. These owners so far as the upper floors at 92 were concerned were Paratus (No. 403) Ltd and Mr Man Fung Lung each owning a 50% pro indiviso share in the upper floors. The work required by the LBRN was not carried out and as a result the City council sought and obtained a compulsory purchase order known as “The Egyptian Halls, Union Street Compulsory Purchase Order 1996”, confirmed on 26th May 1996.(C.P.O.) Entry to the property at No 92 was eventually taken in January 2003. Compensation falls to be assessed as at this date.
The Council’s primary concern was the repair and preservation of the building and they had no desire to retain ownership either in the short term or long term. They accordingly entered into an agreement with Union Street Properties Limited (USPL) owners of the ground floor shops in terms of which, on completion of the compulsory purchase procedures, the upper floors would be transferred to USPL on reimbursement of all of the City Council’s costs. In 2006 the half share in No 92 attributed to Mr Man Fung Lung was acquired by USPL at a price of £26,000. Mr. Man Fung Lung had previously gone to Hong Kong after some dispute with HM Custom and Excise. The negotiations with USPL were conducted by a relative based in Scotland.
Union Street Developments, part of USPL commissioned the Morrison Report on the works required to the whole building to ensure compliance with the LBRN. A Planning Permission granted by Glasgow City Council in 6 November 2000, along with a listed building consent of the same date, gave permission for the scope of works proposed by the Morrison Group and set out in their report. The Morrison report was intended for issue to Historic Scotland in connection with an anticipated application for grant assistance.
Following the collapse of negotiations between the parties, each commissioned reports as to the cost of the various works at the agreed valuation date. Each used the scope of works set out in the Morrison report as the base for their pricing. There was no significant difference of opinion between the parties on the extent of work required with the exception of the stone cleaning.
Opinions have changed over the years on the most appropriate way to deal with discoloured or dirty stonework. Previously, invasive actions were taken such as high pressure water washing, chemical treatment or sand blasting. Current thinking, endorsed by Scottish Heritage is that minimal work only should be carried out. This might involve brushing to remove excess loose dirt. It is now thought that excessive treatment causes significant further decay in the future and that the retention of a layer of dirt or grime built up over a period of time has a preservative effect. In a similar manner attitudes to damaged stone have changed. Minor defects or damage are now ignored. This change of approach was in place by January 2003.
The parties had agreed a value of £ 2,500,000 for the upper floors assuming the works of repair to the building had been carried out and that the floors were finished for office use. Unfortunately, it became clear that it was only the final figure which had been agreed. The parties had differing views on how that figure had been calculated. They had agreed that the cost of fitting out the upper floors for office use would be £975,000 but there was some question as to what specification was assumed for this cost and a dispute as to whether allowance for design fees for fitting out work should be added.
There were no comparable sales transactions involving buildings in the locality of the reference subjects which were in any way similar or in a comparable physical condition.
Prior to January 2003 the respondents undertook the removal of decayed and wet timbers within the upper floors as well as patching repairs to the roof. This reduced the incidence of further deterioration of the fabric.
The title deeds of the whole building prescribe that common repairs are to be met by the various owners in the building in accordance with the Rateable Value applying at the relevant time. The detail is set out in the discussion below.
At January 2003 the total Rateable Values of the upper floors was £133,800 and the corresponding figure for the four shop units on the ground floor and basement was £162,400. The Valuation Roll included one further entry described as a “showcase” but there was no evidence that this existed at the relevant date. No actual rates were paid in respect of the upper floor building as it was Grade A listed and in need of repair. The shop proprietors had successfully appealed because of the general state of the building. Their share of rates was proportionately much lower in 2003 than it had typically been prior to allowance being made for the fact that the upper floors were in a state of disrepair.
Capital grants to meet part of the costs of the repair works would have been available from both Scottish Heritage and Glasgow City Council at the date of valuation.
The Company Accounts for USPL for the year ended June 2005 state that:-
“In November 2003 all properties were valued at £2,650,000 by Chesterton International Property Consultants, Glasgow (original cost £2,440,434)” Included in the above valuation is £350,000 relating to the upper floors at 84-100 Union Street. The title is currently held in the name of Union Street Developments Limited, the commonly owned sister company of Union Street Properties Limited. The conveyance of the title to Union Street Properties Limited has been agreed by Glasgow City Council and the grant and funding providers and is solely subject to completion of the legal process. The directors believe that the valuation requires to be included to accurately show the position regarding investment properties.”
Within an earlier note in the accounts, under the heading of Investment properties there is recorded the undernoted paragraph:-
“Investment properties are stated at valuation which is based on open market value. In accordance with SSAP 19, no depreciation is provided in respect of investment properties. This may be a departure from the requirements of the Companies Act 1985, which requires all properties to be depreciated. In the opinion of the directors this departure is necessary for the financial statements to give a true and fair view in accordance with applicable accounting standards, as the properties are included in the financial statements at their open market value.”
The Accounts were compiled by a firm of accountants based in Dundee and were signed by a Director of the company on 2 Feb 2006.
Residual valuations are a well established valuation method, almost exclusively used in development situations. They are based on predicted costs and inevitably contain a large number of variables which, individually or combined, can have a significant effect on the outcome. Ultimately a decision on what bid should be submitted will be made by the developer based on his view of which assumptions are most likely to be achieved by him.
Developer’s profit is the name given to an allowance made in development appraisals and residual valuations to reflect the amount and degree of risk involved in the particular scheme. It is customarily made as a percentage of the total development costs and is then added to these costs before the total is deducted from the estimated value of the completed scheme. It represents the amount of profit which the developer seeks for his involvement in actively dealing with the scheme. A normal allowance would be 15%.
We heard detailed evidence on the costs which parties contended would be incurred in complying with the LBRN and to refurbish the building to the condition required to support the agreed value of £2,500,000 for the upper floors as a completed project. Three professional reports were available to us. The first was the Morrison report. This comprehensively reviewed the building and described in narrative form the works required. There was a schedule of works described in the report as “Detailed Repair Recommendations and Costs”. A series of photographs were attached as were drawings of the building in its present state and its proposed layout after completion of the works. The drawings included detail of the front elevation outlining the areas of decay and how the features of the building could be preserved during the repair works. The report ran to 48 pages and had, in addition, a report from a firm of Engineers, Peter Stephen & Partners and a report from Edinburgh Fire Consultants Ltd. on fire safety issues in the building. The Morrison report also incorporated a report from Graciela Ainsworth who is a stone Conservator. This dealt with the repair works required to the stonework and the proposals for stone cleaning. The Schedule of works in the Morrison report ran to 25 pages. It was costed out on a trade by trade basis. Many of the individual work elements were aggregated and not individually priced out. The works proposed by the stone conservator were included as a lump sum based on Graciela Ainsworth’s “indicative cost figure”.
The claimants commissioned a report from Keats and, in turn, the Council instructed a report from Montagu Evans. Mr Dryburgh (of Montagu Evans) recognised that the exercise required expertise in pricing and commissioned a report from G&T. Both parties’ reports followed the format of the earlier Morrison report in relation to the scope of works and applied their pricing to similar, if not identical, items of work. The authors of these two reports agreed that the Morrison report could be safely adopted as comprehensively summarising the actual repair works required.
The parties were agreed on many aspects of the proper approach to assessment. The basis of valuation was the rules set out in section 12 of the Land Compensation (Scotland) Act 1963. The valuation date was January 2003. Both parties adopted the residual method as the only one available in the circumstances, subject to checking with any other available information. They had agreed an end value for a building repaired and refurbished to a standard appropriate to office use in the location. That was £2,500,000. There was some dispute as to precisely what work was necessary to fit out the subjects to a suitable standard but, ultimately the only live dispute was whether professional fees at 10% fell to be added. As far as the actual repairs were concerned, both sides agreed that the building required substantial work to comply with the requirements of the LBRN and used the Scheme described in the Morrison report as fairly setting out the work required and providing a fair basis of comparison. It was further agreed that although valuation of a half share of property would not necessarily be a straightforward operation, it was appropriate to take it as 50% of the whole in this case.
Parties were also agreed that the figures under discussion required to be adjusted to reflect the valuation date and that a proper reduction factor to be applied to the 2006 figures, in this respect was 12.5%. There was ultimately no dispute that a developers’ profit would be allowed in making the residual calculation and that normal costs of sale would also require to be allowed for.
Although we heard evidence of sums expended by the claimants before the valuation date, it was agreed that these were irrelevant to assessment of compensation. The value of the work done would be reflected in the state of the building at the valuation date.
It was not disputed that the difference between the two sets of figures could be attributed, in broad terms, to the different approaches taken. The claimants’ contended that Mr McCluskey’s approach was preferable. It was based on direct quotations by contractors prepared to do the specified work and familiar with the building itself. McGee’s evidence was said to demonstrate a bias in favour of maximising costs. The acquiring authority contended, in essence, that the Keats’ approach was not reliable. It was argued that the Tribunal had insufficient information to test the figures. The contractors had insufficient information to provide reliable figures. The Tribunal should, accordingly, prefer the approach of Mr Dryburgh who had instructed expert independent assessment by Mr McGee. His approach was careful and soundly based with reference to a wealth of reliable detail and experience.
Counsel advanced detailed submissions in support of their main contentions and their respective reliability of Mr McCluskey and Mr McGee. We deal further with this in the discussion below. Counsels’ submissions on the various detailed items in dispute tended to turn on their contentions as to the relative weight of the competing witnesses. We have found their critiques to be of great assistance but see no purpose in recording the detail.
One issue of law arose in relation to construction of the sharing provisions in the title. Submissions on each side were short and unencumbered by reference to authority. Mr Logan referred to sections 42 and 43 of the Town and Country Planning (Scotland) Act 1997. He stressed that the LBRN had statutory effect. He contended that the LBRN should be taken to crystallise liability for maintenance. It demonstrated failure to meet the maintenance obligations in the title and the measure of liability for that failure should be assessed by reference to the rateable values at its date, namely, 1991. Mr Robertson’s primary position was that the title conditions required regard to the valuation date. However, he accepted that this was not a legal requirement. The comparative percentages at that date were not “hard”. A potential purchaser could allow for the possibility of change in rateable values. In his submission, the relevant date would be the date of entering contracts for the repair work. However, a potential purchaser would regard the prospect of changing the ratable values as difficult and uncertain. Although he accepted that the Tribunal should determine the proper construction of the title condition and that the hypothetical developer could be taken to have that determination in mind, he stressed that the starting point was the rateable values as shown at the date of valuation. It could not be assumed that they would ever be changed.
Parties were agreed that the grant on offer from Glasgow City Council could be treated as a fixed sum to be deducted from the costs of repairs. However, we heard submissions bearing on the grant available from Historic Scotland. The parties were eventually agreed that there was insufficient basis for any account to be taken of any supposed restriction on grant based on a concept of “reasonable rate of return to a developer”. The final contentions were simply Mr Logan’s submission that on the whole evidence there was no reason not to accept that grant as a fixed figure and Mr Robertson’s contention that it should be treated as a percentage of cost which would accordingly fall if costs fell.
Neither party suggested that the broad agreement to adopt a residual valuation precluded reference to any other means of assessment by way of a check. Three sources were mentioned. Mr Logan sought some support from evidence that some unspecified developers had said that they might have offered for the building had it been available. Mr Robertson said that no weight should be placed on such vague evidence. Mr Logan, in turn, put no weight on the fact that Union Street Properties Ltd had paid £26,000 for the half share attributable to Mr Man Fung Lung. This was described as a sale but it was not clear what Mr Lung was selling as title had been taken under the CPO. He might simply have been settling his right to claim in the present proceedings. But he had never entered the process. Mr Robertson, on the other hand contended, that whatever the formal legal status, this was evidence of a real market transaction. It was reasonable for Mr Dryburgh to have regard to it. But in context, any sum under £50,000 could be treated as nominal. It might have been a nuisance value payment. Neither side put any weight on the valuation which appeared in the accounts of Union Street Properties Ltd.
Counsel were also agreed about various incidental matters. Although Mr Logan had gone to great effort to produce a table following the complicated rules for calculation of interest, it was eventually agreed that the applicants’ Finance Department would be able to carry out an interest calculation on any compensation agreed or awarded and that our Order should leave that matter for them to deal with. Mr Robertson also agreed that the claims made by Mr Munro and Mr McCluskey in the sums of £8780 and £25,165 respectively for their work in assessing appropriate compensation should form part of the claim. There was no challenge to the figures claimed. During the hearing it was agreed that the only allowance required for professional fees arising from the disposal of the completed upper floors were Property Agent and Legal Sales fees of £37,500, the inclusion by Mr Dryburgh of letting fees thus falling to be deleted. Counsel were agreed that the cause was suitable for employment of junior counsel and that any taxation should be on the Sheriff Court scale. They agreed that Mr Munro, Mr McCluskey, Mr Dryburgh and Mr McGee should be certified as expert witnesses. The question of the expenses of the procedure before the Tribunal should be deferred.
We are satisfied that the residual method of valuation is not a “market valuation” and does not of itself provide “the amount which the land if sold in the open market by a willing seller might be expected to realise” in terms of section 12. The residual valuation would do no more than inform the prospective buyer who would recognise the significance of the variables involved in such a calculation. The only direct evidence from a professional developer was that from Mr Dyer who had worked with Keats and was confident from his experience that he could carry out the development on the basis of their figures. He was not cross-examined on that point and it is entitled to some weight. We did not hear direct evidence from any other developer as to how a developer would approach the two very different types of assessment presented to us. We consider that it is necessary to take a broader approach than simply choosing between the two professional opinions upon which the residual calculations were based. We are satisfied that in assessing a value based on competing cost assessments a developer would take a discriminating approach to the figures. Where differences between the two advisers were small, the developer might reasonably have been expected to split the difference. Where differences were substantial they would take a view as to the preferred evidence but allow for the conflicting advice.
The essential conflict between Mr McCluskey and Mr McGee arose from the fact that they were approaching the problem from quite different perspectives. We found both to be credible witnesses, giving their opinions honestly although we had some reservations about the reliability of some of Mr McCluskey’s evidence.
We did not accept that Mr Logan’s criticism of Mr McGee was well-founded. He pointed to various items suggesting that they were indicative of a man with an agenda. That agenda was, supposedly, to provide the highest costs he could. This, of course, represents a serious criticism of a professional witness. Put bluntly, the proposition must be understood to be that instead of simply giving his independent professional assessment he had decided deliberately to inflate the figures. We do not accept that there was anything in the evidence to justify any such conclusion. There was no attempt to establish any reason for him to take such an approach. We accept, as fair comment, the proposition that he might have been expected to go behind the Graciela Ainsworth report and its costings in relation to the major item of stonework. His failure to do so left a large part of the total assessment open to challenge on matters which he was unable to speak to. However, he did provide an explanation for his approach and we do not accept that this is a sound basis for challenge to his personal integrity. We do not accept that the examples of other possible errors in aspects of his report point to any bias. In course of a long and detailed analysis it is not surprising to find a witness conceding that minor errors have, or might have, occurred. He spoke to them in evidence. He was criticised for not going on to attempt to demonstrate the full impact of such errors on his ultimate calculation.
There is no doubt that where an expert has been forced to accept that he has made an error, he can be expected, in giving honest evidence, to point to the consequences of his error if these are important and unlikely to be realised by the tribunal or by others involved in the case. But when an expert is forced in cross-examination to accept that an error has been made he can often safely assume that the consequences of this error will be apparent to the other side. An expert may prefer to err on the side of full disclosure and opt to bring matters specifically to attention. But this will always be a matter of circumstances. It may be quite obvious that a particular change in evidence whether by correction of an error or by qualification of an opinion will have implications for other parts of the evidence. It seems to us that this was so in the present case. Mr McGee must have realised that with conflicting evidence on a variety of issues it was inevitable that a recalculation would have to be done by the Tribunal in light of all the evidence. Further, there is no suggestion that he was ever asked to recalculate. His initial role was as adviser to Montagu Evans. We accept that without express instructions it was reasonable for him to take the view that he need do no more than speak honestly to the figures he had produced.
It may be added that we are not persuaded that his evidence on the particular issues was an unqualified acceptance of error. One issue related to background heating. This was undoubtedly confused by the absence of any explicit provision or indeed mention, in the Keats report. In relation to down pipes we did not understand him to accept that down pipes were to be taken as included in the plumbing. He distinguished between “waste disposal” and “rain water” goods. We think it entirely reasonable that the Spiral Limited quotation should not be read as intended to include the latter.
Our acceptance of Mr McGee as an honest witness doing his best to explain things accurately in the witness box does not, of course, mean that we accept all of his evidence as reliable for the purposes of the present exercise. There was a conflict of approaches and it is necessary to look at individual items in light of that conflict.
We are satisfied that Mr McCluskey approached the matter in good faith and intended to give his evidence honestly. However, having persuaded himself that his own approach was right and that it provided a positive return, it appeared to us that his attitude thereafter was somewhat defensive. He was clearly reluctant to accept that omissions had been made. He accordingly looked for possible explanations for his failures to make express mention of certain items of cost. We accept that he did so in good faith but cannot avoid the conclusion that if he had had more time to reflect, he might have had to accept that some omissions had been made. In any event, we did not find all his explanations persuasive. We look at some examples of this below but, first, we look at his overall approach.
Mr McCluskey’s approach was to assume individual specialist contractors acting under a project manager. He had obtained direct quotations from a series of experienced contractors. He had invited them to familiarise themselves with what was involved. They had seen the specification in the Morrison Report. They had had opportunities of visiting the site. He had obtained a number of quotations. He had not taken the cheapest but had used his experience to choose appropriate contractors. We are satisfied that Mr McCluskey’s general approach was entirely reasonable. We had no doubt that where there was a conflict between his figures and those advanced by Mr McGee, it was likely that the latter’s figures erred on the side of caution. Mr McCluskey was supported by some clear and firm views expressed by Mr Millar. The latter impressed us as being a “hands on”, personally active and knowledgeable co-proprietor of a stone mason’s business.
Mr McGee had prepared his views assuming the appointment of one main contractor, responsible for the entire project, using individual specialists as required. Mr McGee’s approach reflected that which would be more likely to be adopted by large scale business where the handling of a project would be handed to professionals to carry out in a traditional way employing architects, cost consultants or quantity surveyors as well as engineers and other relevant specialists. This approach seemed to us to be one where a full cost was allowed for in respect of every item. It was, in short, “done by the book” so that there was little likelihood that the costs would be exceeded.
Mr McGee initially gave evidence that he considered that the level of detail provided was at a preliminary stage. He said he had treated the level of specification as being at stage B of the standard schedule of services published by R.I.A.S. However, in cross-examination, he accepted that the level of detail available to Mr McCluskey’s contractors was at least at stage D. It was quite advanced in terms of the specification of work.
In relation to the question of the detail of specification provided by the Morrison report, it may be observed that there seemed to be no doubt that there was a positive offer from Historic Scotland of a grant based on that report. We heard evidence of the care with which Historic Scotland approached these matters. They must have been satisfied that the report provided sufficient level of detail for their purposes. Mr Robertson in his submissions referred to the contractors as expressing concern about the amount of detail in the contract but we think this was a misunderstanding of the point which was being made by them. The contractors thought that they could do things better. Their criticism was not of the level of detail provided but of the nature of the work proposed. We are satisfied that the Morrison report and the site visits did, indeed, allow the contractors to prepare their figures with some confidence.
We are satisfied that a practical developer would, broadly speaking, have to take the type of approach spoken to by Mr McCluskey. This approach appears to us to be the more market driven one. An element of risk would be accepted. He would fix his offer on the basis of the best advice he could get from experienced contractors examining the actual problems rather than follow the more conservative approach of Mr McGee. The latter’s caution would not be ignored but would be the start point for further investigation, discussion and review. We consider that Mr McCluskey’s approach would be regarded as a step further down the road than Mr McGee’s.
Although we favour the general approach taken by the claimants, we do have reservations about important aspects of Mr McCluskey’s evidence. We thought, for example, that there was inadequate provision for certain elements such as supervision or ultimate responsibility being taken for the total contract. Further, we noted that the individual contractors whose estimates had been used in preparing the estimated cost were names unknown to the tribunal and to Mr McGee. While our surveyor member would not necessarily have expected to recognise all the names of the firms proposed by Mr McClukey, he has wide experience of construction in and around Glasgow and it was thought surprising that none was recognised. They are all apparently based in Lanarkshire. None appeared to have more than one office or operating base. Mr McGee fairly said that he would not expect to know all contractors but was surprised that neither he nor his own experienced colleagues recognised the contractors relied upon. We were given no information as to the identities of other range of firms approached. Mr McCluskey’s evidence as to the number of contractors approached and the numbers who had taken an active interest varied. We were wholly dependent on his judgment as to the reliability of the contractors whose figures were produced. We have no doubt that any developer would have wished further information before they would have been prepared to accept the figures as robust.
A further difficulty in the present case was that although all the contractors invited to tender may not have been aware of the whole background, it is likely that most were aware that Mr McCluskey was not in a position to accept or even recommend positive acceptance of their offers. He did make the point, which we accept, that any tendering contractors never know for sure which offers may prove of interest. They would be trying to make sensible costings. They would want to be considered for the business. However, we do not think that a developer could put quite as much reliance on the exercise carried by Mr McCluskey as he would on tenders actively solicited by a proprietor on the point of placing contracts for the work.
As we have said we found that there were occasions when Mr McCluskey appeared overly defensive in the witness box. An example of this related to the whole concept of use of a project manager as opposed to a main contractor. It was suggested that this way of working would have substantially reduced the costs. There is no doubt that the role of the “project manager” was plainly an important one although there was some discussion as to precisely what was meant. There might be a difference between a “project manager” and a “construction manager”. What was required was someone who would coordinate the various trades. In the witness-box, Mr McCluskey named Ian Ballantyne as his manager. Mr Ballantyne was employed by Paragon Design who had been instructed as structural engineers. We were told that he also worked in his own name. In the Keats report there was no explicit identification of the project manager and no explicit allowance for the fees of any project or construction manager. Pressed on this point Mr McCluskey said that they had not decided how the contract was to be carried out. He later said that the project manager would be employed by the architect. The cost would, accordingly, be covered by the architect’s fees. We did not find this evidence persuasive. The architect’s quotation did not so much as hint at recognition that they would be required to carry out the additional role of manager. When Mr McCluskey was giving his evidence about the level of architect’s fee he stressed that it would be a prestigious project for an architect. There was no reference at that point to the fact that it would include the extra element of project management. We found it difficult to avoid the impression that Mr McCluskey was left, in the witness box, simply seeking a possible explanation for figures which he genuinely believed to be inclusive and well founded.
Another example related to background heating as part of the overall cost of repair and refurbishment. He appeared to say that this was part of the plumbing contract. We found it impossible to read the main quotation from Spiral Services as covering any form of heating. Their quotation at £80,519.50 was clearly for items of pure plumbing. The express references to the “full heating and supply/extraction ventilation price” was described in their letter as “currently coming in at £144,784.90”. We do not know whether that was treated as a positive offer to perform at that price but, in any event, we do not see that figure reflected in the detailed costings. Whatever the truth of the matter, the evidence was far too confused to be persuasive.
We also noted, for example, that he was prepared to resist the need for a deduction to allow for a “developer’s profit”. This was on the basis that the developer would make his profit from use of the subjects. This was an illogical approach. The calculation was based on the view that there was an agreed figure of £2,500,000 as the end value. This was an unsatisfactory approach to a matter which was plainly of considerable significance in relation to the overall calculation.
We also consider that Mr McCluskey’s approach to apportionment was somewhat lacking in professional rigour. The basis of the Council’s assessment had been spelled out. He knew it turned on the titles. There was no attempt to obtain and study the titles or to take advice. He decided that the council’s apportionment was not “fair”. Instead of attempting an analysis of the historical rating pattern for the subjects in question he looked at rates on other buildings and apparently concluded that 32% was established. He allowed a mark up of 10 to 15% plus a further mark up of 5% to produce a “reasonable” figure of 38%. Neither the first figure nor the subsequent allowances had any basis in the existing titles. He did not attempt to allocate individual items to common costs or upper or lower floors in accordance with the titles. He appeared to treat the LBRN work as common to be apportioned in accordance with his assessed apportionment and to apply the same approach to the remainder by a different route. In the event, we consider that the figures he took were not unreasonable and, as will be seen, his actual percentage apportionment of common costs to the upper proprietors was higher than we have ultimately accepted. However, this whole passage of evidence was confused and unconvincing.
The overall result is that, although we accept his basic honesty and his professional ability, we have some reservation about the reliability of his evidence. We cannot simply adopt the approach urged by Mr Logan of simply treating him as a sound basis for all the figures and of the capacity of the various contractors to carry out the work. As we have said, we think a discriminating approach is required and our doubt about Mr McCluskey does give rise to a difficulty for the claimants.
The method adopted by parties, based on the Morrison Report has enabled us to set down in tabular form the respective position of the parties adopting the same elements of work. This tabulated schedule is attached as Appendix 1. Two columns set out the figures spoken to by the two cost consultants and we then set out in a third column our conclusions as to the appropriate figures based on the evidence before us before calculating the effects of the various additional percentage based calculations. Where the differences are not significant we have taken the view that a developer would be expected to take a fairly robust approach and we have dealt with such items by simply splitting the difference. We have generally rounded off the figures. That approach underlies several of the figures and will be obvious in context without detailed explanation for every figure chosen. Mr McGee accepted that the important differences between the parties were those relating to stonework, preliminaries, contingencies and the split of costs. We have set out our reasons in relation to these matters and to other issues where there were significant differences between the parties’ positions. We do not attempt to set out full calculations in this part of the Note but simply to explain the basis upon which we have chosen the figures in the third column of the appended table.
We deal in turn with the following heads: roof repairs; stonework; the sharing of costs; the Historic Scotland Grant; fitting out works; and the various percentage allowances for preliminaries, contingencies and fees. We then consider the overall assessment in light of these issues and the other evidence.
The totals falling under this category were assessed by Keats at £226,258 and by G&T at £312,271. In substance, however, the difference arose from just three items: the main roof repair; reinstatement of the cupola; and repair of front rooflight. The greatest difference appeared to be in respect of the main roof repair. Mr McGee had taken a figure which appeared to be expressed in terms of a rate of £150 per square metre over the whole area of the roof. This was challenged as inappropriate on the basis that there were various roof lights, such as cupolas, which occupied a significant area. He explained that he had taken that into account. He had made allowance for the glass areas. Any inaccuracy was, he suggested, more than met by the extra costs of upstands and flashings. We found this a somewhat surprising answer. In the context of an exercise designed to test the figures advanced by Keats, it might have been expected that the flat roof would have been measured and a rate applied to it, with separate costings for the work in the vicinity of the rooflights.
We have had considerable difficulty in making an assessment in respect of these items. We consider that the figure suggested by Mr McCluskey for repair of the cupola was much lower than we might have expected. On the other hand, although Mr McGee was able to explain the make up of his rate per square metre, Mr McCluskey was in no doubt that it was very high. This was his direct evidence and was not based upon figures provided by his contractors.
How then would developers have viewed these figures? At the end of the day, this can only be a matter of impression. We consider that on the limited evidence available to us they would prefer the G&T figures for the cupola and front rooflight but take the view that the overall rate was too broad an approach to the combination of roof and roof lights. They would modify it to give some weight to Mr McCluskey’s view. We adopt a figure of £100,000 instead of the £127,500 used by Mr McGee.
This falls under two heads. For repair, Keats allowed £338,919 while G&T assessed this at £464,000. An even bigger difference is seen in relation to cleaning where the figures are £105,345 and £646,949 respectively.
It is clear that the G&T figures were based on the Graciela Ainsworth report included within the Morrison report. Although the applicants were aware that this was a major aspect of the disputed claim, no direct evidence was led to support these figures. The report itself makes clear the author’s position that the figures given are not to be relied upon. The applicants placed much weight on the fact that the Morrison report had the approval of Historic Scotland who would be closely involved in every stage of the work on the façade. However, as we have noted above, we were satisfied that there had been a radical change in approach to this type of work since 2000 when the report was finalised.
We found Mr Millar to be a persuasive witness. He plainly had long experience. He spoke with apparent authority on all aspects of repair, restoration and cleaning of stonework. He was able to give lucid explanations of all aspects of repair and appeared to have a sound knowledge of Historic Scotland practice and the requirements of the planning system in this connection. Although Mr Millar had not been able to examine all the stone from a scaffold which would be necessary to determine the final requirements, he had been able to examine the stone from the windows and from the street. The frontage is formed of rows of identical columns or pillars either interspersed with windows or, on the top level with continuous windows running behind. Mr Millar did not say how many windows he had used. It is not clear how many were capable of being opened.
We have little doubt that, on a broad basis, the Keats approach should be preferred. We accept, however, that the stonework was the area of highest risk of unexpected cost. Although we heard no specific evidence to suggest that scaffold inspection would be likely to disclose a radically greater need for repair than was apparent from the windows, we consider this risk can best be dealt with by allowing a specific uplift of 10% to the figures quoted for this work. The figure discussed below as a general allowance for contingencies would be in addition to this specific allowance.
There was a substantial difference between the parties under this head. Most of this difference was related to costs of specific items. Broadly, there was agreement that the services were not included in the grant eligible items. As we have seen there was a suggestion that Mr McGee ought to have included the smoke detector system as part of the eligible work. This was not followed in submission and we have not thought it of sufficient significance to require separate consideration.
The bulk of the dispute related to the categories listed as follows: heating 7.7.3; fire alarm and detection 7.7.7; smoke controls 7.7.8; and automatic sprinkler 7.7.20. The difference arising from these four items was £202,535. We did not find Mr McCluskey’s evidence on this matter adequate to explain his figures. In particular we were not persuaded that proper allowance had been made for the element of heating at the relevant stage. When asked about this in cross-examination he initially said there was no specific figure at 7.7.3 because the cost of heating had been “spread to subcontractors, for example to plumbing”. Reference was then made to the written quotation from Spiral Services. As we have observed above, this seemed to make it plain that heating was not included. He then said that most of the heating was allowed for as part of the fit-out figure. When it was pointed out that there was no mention of heating as part of the £39 per square metre, he said it was obvious. Any surveyor would know it was included. We found no satisfactory evidence that his figures included heating as part of the process of repair for which “background heating” was specified in the Morrison report.
In relation to the fire alarm systems he said they allowed only for the main system. The individual alarms etc would be part of the fitting out costs. This would not cover all the fire alarm system as individual occupiers would wish to tailor positioning of detectors and alarms to their own layout.
Put shortly, we were not satisfied by the evidence led on behalf of the claimant on these matters and consider it appropriate to rely on Mr McGee’s approach to them. In relation to the other items falling under this head there was a total overall difference between parties of about £23,000 arising from a series of minor differences. We think it appropriate to split the difference in that respect.
The literature from Historic Scotland, “Grants for the Repair of Historic Buildings” appeared to us to make it tolerably clear that the grant on offer from them was based on a percentage of the total projected cost. Although it said that there were no fixed rates of grant and that each application was considered on its merits, it went on to state: “As a matter of practice, the maximum rate of grant for local authorities is 25% of eligible costs; private owners generally receive up to 33% …” We are satisfied that the weight of evidence supports the view that the grant to be expected from this source would be based on such a percentage. The figure of £930,000 which was on offer was in line with that; being approximately 32% of the costs as set out in the Morrison report. We heard that that report had been prepared with a view to submission for such grant. In any event, we were not persuaded that there was evidence to give a developer any reason to expect more than a grant of 33%. We are satisfied that the Keats calculations were in error in relying on the figure of £930,000 as a fixed contribution.
The grant falls to be calculated on the basis that the grant available from Historic Scotland will be one third of the cost of eligible repairs. There was no dispute that the Council grant was a fixed sum of £100,000. Both grants cover the entire building and require to be apportioned.
It might be thought to be an unusual feature of the case that the surveyors involved agreed a value without agreeing precisely what they were valuing. Both had in mind office use in the particular location but they had not attempted to agree the level of refurbishment work involved. Accordingly they had not agreed the standard of finish they each had in mind. We are satisfied that in the present context the matter should be assessed by looking at the minimum level of work reasonably required. Mr McCluskey explained his reasons for a relatively limited specification. He thought the likely purchaser would wish to divide the space up for their own purposes and would require minimal fittings. He thought the figure of £39 per square metre adequate for the purpose. Although there was some dispute as to what this might include, it was not disputed that this was a realistic figure in itself. The ultimate dispute was whether an allowance should be made for professional fees.
It was clear that there would be a professional involvement in design and specification, however basic the actual fit out. It was not contended that any fee had been allowed for in the £39 rate. The suggestion was that an architect would be willing to do this type of work for little or nothing to land the main contract. Mr Robertson pointed out that this seemed to assume that fitting-out would be agreed before the tendering stage. We are satisfied that some fee should be added. The work proposed was very basic or standard type and we have no doubt that a very modest figure would suffice. We think a figure of one third of that allowed for the architect’s input to the main work would be adequate and we round that to 2%. This results in a total sum for fit out of £994,500.
The items which were agreed to be expressed in terms of appropriate percentages are contract preliminaries, contingencies and professional fees.
In respect of preliminaries, the apparent conflict was between 10% as contended for by Keats and 17.21% spoken to by Mr McGee. In fact, the latter figure was derived from an assessed cost of £10,000 per week over a 52 week contract period. The resultant sum was then expressed as a percentage of the total cost.
There were various reasons for the difference between the figures. As we have said, the general approach taken by Mr McGee was plainly conservative compared with that of Mr McCluskey. However, the substantive difference here was that they had adopted different models for control of the work. Mr McGee envisaged a main contractor. He would expect to pay for a range of essentials including items such as securing the site; provision of waste skips; huts and toilet facilities; insurance; health and safety requirements, insurance and the like. These items were inescapable and had to be assumed within the head of “preliminaries”. Mr McCluskey contended that his model of project management meant that the individual contractors had to make their own provision for many of these items. It could be assumed that they were included in their quotations. This issue was not explored in any great detail with him and Mr Logan accordingly contended that the tribunal should be slow to find that there were cost elements missing. We have found this another difficult area where the evidence was much less detailed than we might have expected. We did not have any clear explanation from Mr McCluskey as to what he did assume to be included in his percentage figure. We accept that the managed approach assumes that contractors will have to make their own provision for items which might otherwise be provided by the main contractor. However, we are far from clear as to what extent this was done. There was no cross examination of Mr Millar to the effect that his figures relied on other parties to cover any significant elements of his work. This certainly supports Mr McCluskey’s view that each individual contractor expected to provide for himself. However, we recognise that there would be a need for items used in common and we are satisfied that it is appropriate to take the usual approach of assessing a competitive percentage based on projected cost. Mr McCluskey implicitly accepted this by allowing a figure of 10%. In the whole circumstances we consider the figure advanced by G&T is too high. As we are not persuaded that Mr McCluskey was entitled to rely on all his contractors understanding that they had to provide fully for themselves we have selected 12.5% as a more realistic figure.
Assessment of an appropriate percentage to allow for contingencies depends on the view taken of the accuracy of the information available to the various contractors. In the normal course, the percentage allowed will reduce as time goes by because each stage of a assessment allows the risk to be reduced. There could in theory come a point where all the risk was transferred from the employer to the individual contractors but there is no dispute that in practice allowance is always made for contingencies. The allowance would reduce as matters progressed. This would usually be because as particular work became clearer the cost element would become more certain. Mr McGee was of the view that matters were still at a very early stage. He also expressed the view that this was a particularly difficult type of work. Accordingly, a full figure was needed under this head. Mr Logan commented in submission that the bulk of the complexity lay in the façade, but the witnesses had not been asked to make that distinction in giving their evidence. All the evidence was to the effect that this was a complex and difficult project. As discussed above we have made specific allowance for contingencies in respect of the stone work. The rest of the building had been fully stripped out. The problems were patent. We recognise that there may be some force in his comment but we cannot ignore the direct evidence of the witnesses. We do accept that the stage at which figures spoken to by Mr McCluskey were put forward was not nearly as early as Mr McGee had assumed. The Morrison report, of course, fell short of being a Bill of Quantities but it was not disputed that a great deal of research had been carried out as the basis of the report to establish the appropriate scheme and the materials and construction to be utilised. In addition, it was clear that the various contractors had inspected the locus and we accept Mr McCluskey’s evidence that they had a full understanding of the work required. There is a considerable overlap between the need for detailed design and instruction by an architect and the work expected of skilled tradesman working to a workmanlike standard. We are satisfied that much of the work required in the present case fell largely in the latter category. We consider that after weighing the implications of the comparatively advanced stage at which the allowance was to be made against the complex nature of this specific building, a developer would wish to make an allowance of 10% for general contingencies. It would be higher had we not allowed a specific figure in relation to the stonework.
We prefer Mr McGee’s evidence that the normal practice is to add the percentage for contingencies after allowing for preliminary works. This is consistent with our expert understanding.
At first glance, the difference between the Keats and G&T approaches to professional fees is comparatively modest. They are stated at 13.04% and 15% respectively. However, the former figure appears to be an error in the Keats table. The actual total of individual fees proposed by them is 11.89% and it is that which is reflected in the actual sums allowed. Underlying their figures is the claim that the nature of the project and the prestige attached to it would lead to competitive quotations. We accept this.
We have a specific concern about the claim that the figures produced by Keats are on the basis that the whole operation will be conducted by a project manager. We have no difficulty in accepting that this is an appropriate approach. However, there is no specific allowance for such a role in any of the figures produced. We have touched on this above in commenting on the quality of the evidence and need not repeat it. We are satisfied that the quotation for the architect’s services was not intended to cover the role of project manager. We had no direct evidence of the typical range of project managers fees but we are satisfied that it would be unlikely to be below 3% having regard to levels for other professions.
In the circumstances, we think that a potential developer would allow for the role of project manager and that a figure of at least 15% is necessary for professional fees.
The fitting out works are not eligible for grant and are wholly the responsibility of the upper floor proprietors. That is not in dispute. However, the proper approach to other items is a matter of some confusion and dispute. It is convenient to look first at allocation of items and then at the question of how cost of shared items is to be allocated. In relation to allocation, two separate divisions are required. It is necessary to distinguish grant eligible and non-grant eligible work. This is because we are satisfied that the Historic Scotland grant would be based on a proportion of one-third of cost and it is necessary to ascertain the relevant items of cost to allow that grant to be assessed. It is also necessary to identify a division between items to be shared between upper and lower proprietors and those which fall solely on upper proprietors. An aspect of this is, of course, to identify any elements which should fall out of the calculation because they are solely attributable to the lower properties. Apportionment is a separate exercise. That is to determine how cost of shared items is to be divided between upper and lower proprietors. Where the items of shared cost will have the benefit of grant assistance, the grant requires to be deducted.
We refer to the need to distinguish between grant eligible and non-eligible items to avoid risk of confusion of this with the LBRN issues discussed below. We think that the emphasis on LBRN works has tended to obscure the real questions. The description of work as part of the LBRN works should have had no bearing in relation to the division between upper and lower proprietors as that division depends on the title. In relation to grant, Mr McCluskey seemed to say that the grant from Historic Scotland only covered LBRN work. However, that could hardly be right as a matter of theory. Proprietors may well wish to carry out repairs before any such notice is served. It might of course, be substantially correct in relation to the work and in the main calculation at Appendix A of the Keats report, there appeared to be no dispute about which items were and were not grant aided. Because, as we consider below, the grant from Historic Scotland is, in our view, proportionate to cost and the £100,000 from Glasgow City Council is a fixed figure, the appropriate deduction of grant is not an entirely straightforward exercise. Although we cannot be confident that a sound approach has been taken, we do not think there is any doubt about the principle and we deal with the calculations in our table on the lines apparently agreed.
In relation to the allocation of items of work between upper and lower proprietors, it is unfortunate that Keats did not attempt to address this issue directly. They were appointed to produce a claim for loss and compensation. This required an accurate assessment of the question of who was to pay or contribute to the cost of each item. We think they were distracted from this by their attempts to comment on the initial valuation by the applicants. This had included an argument that a contribution from lower floor proprietors could only be assumed in respect of LBRN work. This was not ultimately maintained in submissions before us but the initial assumption was that as only upper floor proprietors would benefit from the “additional works”, such works would have to be funded in its entirety by the upper proprietors. A division between LBRN and this other work was accordingly necessary. The applicants valuation put forward £3,693,260.34 for the full repair scheme out of which £3,323,934.31 was said to be attributable to the need to comply with LBRN. The source of the figures was unspecified but it appeared that the latter was simply 90% of the former.
Keats did not accept this division. They carried out a direct analysis of the items to show that the maximum to be classed as essential repairs was 80%. As this exercise was, on the face of it, favourable to the Council, it may be taken as an indication of the underlying attempt by Mr McCluskey to provide a wholly honest appraisal. However, matters became confused in their ultimate “valuation analysis”. Mr McCluskey made an assessment of the work required for the LBRN. But, the actual analysis set out in the claim (at page 15) produced a deceptive distinction between “Share of LBRN costs” and “Additional Costs”. The former were expressly shown as 78% of the total and as expressly subject to 38% apportionment. The latter were simple shown as a figure £194,859. However, the appended note showed that this latter figure was simply the balance of the original total with the same sharing of 38% applied to it. In short, despite the elaborate analysis in his Appendix D to effect a division of the full development costs before refurbishment, he had simply applied the same sharing apportionment to both parts.
There is nothing in the report or in Mr McCluskey’s direct evidence which provides any assistance as to the proper allocation of items either in relation to grant or to sharing. We are satisfied that his written report did not approach the matter on the proper basis and that his various references to the LBRN works have simply served to confuse and distract. The G&T report did approach matters on an item by item basis and attempted to apply the sharing apportionment only to the common elements.
As we discuss further below it is of critical importance in determining whether an item is to be shared in any way, to know whether what has been costed relates only to the upper floor parts of the work. However, that was occasionally a matter of inference rather than direct evidence. An example would be the cost of fire alarms. The system as a whole might arguably be said to be for benefit of the whole building and, accordingly to be treated as common. But if the claim was only costed in respect of the upper floor elements of that system, it would not be appropriate to split the costs as if it was indeed a system covering the whole building. Such examples apart, the main questions had to be determined by reference to the titles.
The “Burdens” section of the Title Sheet sets out matters as follows:-
“The subjects hereby disponed shall be held by our said disponee and his foresaids in all time coming under the burden of upholding and maintaining in good order and repair jointly with us and our successors, proprietors for the time being of the remaining portions of the tenement … the foundations, gables, walls and roof (including hatchway and chimney stack but excluding the rooflights and also chimney cans, those used in connection with any part of the tenement being the property of the proprietor of that part, as also, in so far as used in common the drain, soil waste and rain water pipes, and the water, gas and other pipes and electric cables and also the pavement in front of and lane … and all other parts and pertinents of said tenement which are or may be common or mutual to the respective proprietors thereof, … and that in the proportion which the assessed rent of said subjects hereby disponed, as appearing in the Valuation Roll for the time being, bears to the total assessed rental of said tenement as appearing therein at the time”
It further provides:-
“Declaring further that our said disponee and his foresaids as proprietors of the subjects hereby disponed shall be bound to contribute jointly with the other proprietors of the upper flats of said tenement of the expense of maintaining in good order and repair the front close and back entrance, front and back stairways and landings, passenger elevator in the front close and goods hoists in the back entrance … and that in the proportion which the assessed rent of said subjects hereby disponed, as appearing in the Valuation Roll for the time being, bears to the total assessed rental of the upper flats of said tenement as appearing in the said roll at that time.”
Although we heard no submissions seeking to analyse these provisions, some comment is appropriate. We proceed on the basis that, by implication the services which are not “used in common” must fall to the responsibility of the associated proprietor. A difficulty arises in relation to the expression "those used in connection with any part of the tenement being the property of the proprietor of that part" because of the absence of any closing bracket. However, it is probable that it was intended to come after the second word "part". The absence of express reference to floors must mean that the common law provisions apply: floors and ceilings are owned jointly by the respective proprietors who have an obligation to maintain them. There is no reference to “windows” and we heard no discussion of their status. At common law they would, no doubt, be the property of the proprietor who used them but this may be because such proprietor would also own the wall in which they were set. If they fall to be regarded as part of a wall they would be covered by the express terms.
We shall return below to the implications of the sharing provision but now turn to the detail of the allocation of items of cost. There was little attempt on behalf of the respondents to deal expressly with allocation of specific items either by reference to the title or on any other basis. Near the end of the evidence, Mr Logan put some points of detail to Mr Dryburgh. It appeared that there were some possible errors in the Keats report. Item 188.8.131.52 referred to “fixed timber windows”. The report showed them as “common”, in other words to be shared proportionately with the lower proprietors. However, as that specific item was directed at the original shop fronts, Mr Dryburgh was prepared to accede to the proposition that these should not have appeared at all in the costing being wholly attributable to the ground floor. Similarly, we understood him to accept that as item 7.4.6 was work internal to the shops it should not have been included.
As will be seen, we have some doubt about this first point but, in light of the explicit concessions, we accept that these items should be wholly excluded from the cost side. The figures, on the basis of the Keats report, were £23,760 and £13,446 respectively, a total of £37,206.
Apart from these items we consider that the breakdown of allocation of items in the G&T report should be preferred. That report attempted to allocate items according to the titles. There may have been some substance in Mr Robertson’s suggestion, in his closing submissions, that the report erred, if anything, in favour of the claimants. He pointed, for example, to the acceptance in the report of the windows as being part of the walls and thus being common. The windows might have been allocated to the relevant floors. However, there was no attempt to press this point or to examine it in detail either in evidence or submissions. We note that the design of the building was unusual. In the whole circumstances we think it inappropriate to attempt to change the allocations presented in the report.
It may be added that we did consider certain specific items. The wiring for the fire alarm and detection and the automatic sprinkler system might have been thought to be for the protection of the building as a whole rather than an upper floor item. However, there was no explicit discussion of this allocation. It was not clear to what extent the figures used in the Keats report related to the actual work to be carried out on the lower floors. We understood that they had made provision for the fact that the services had to run through the lower floors but we heard no detailed breakdown. This was all to be covered by their broad sharing approach. However, having heard no evidence on behalf of the claimants specifically directed to these matters and explicit argument about the breakdown, we think it appropriate to accept the G&T allocation.
We also considered the various items relating to repairs to floors. Mr McGee allocated all the work in respect of the actual floors in the upper premises to the upper floors. There is no mention of floors in the title and we accept Mr Robertson’s submission that these are entirely the property of the upper floor proprietors. But, because of the method of construction of the building, floors were an essential feature of the structure. The work was to ensure the structural integrity of the entire building. In the present case we heard from Mr Dryburgh that, before they decided to allocate this item wholly to the upper floor proprietors, there was some discussion of the fact that work on the floors would contribute to the overall stability of the building. In other words, the allocation made in the G&T report was made after some thought. Mr Robertson expressly asserted that the allocation of this item to the upper floors was “plainly correct”. This was not challenged. The primary responsibility of the upper floor proprietors was to maintain their property and the claimants can be taken to have accepted that it was inevitable that they should bear the whole cost of repair of the floors even if such repair contributed to additional stability. There was no suggestion that the original building was in any way unstable. Had the floors been soundly maintained throughout, there would have been no requirement for the radical re-assessment of work discussed in the Morrison report. In the circumstances, we accept that this work was all the responsibility of the upper floor proprietors.
In his submissions, Mr Logan made reference to the fact that Mr McGee did not, in his evidence, speak to the reasons for the allocation of the costs in his report. However, we noted Mr McGee’s evidence as being that this was a matter discussed with Mr Dryburgh. It was Mr Dryburgh who had studied the title provisions and decided the allocation. Mr Logan also made submissions to the effect that there was insufficient detail in the items listed to say which of the “additional works” was upper and which was lower. He instanced the windows and doors. He also referred to the analysis by Mr McGee at page 14 of 14 of the G&T Cost Comparison. In relation to “Additional Scheme Costs it is noted: “(G&T opinion relate 100% to the upper floors)”. He pointed out that Mr McGee had not been asked about that. He suggested that G&T had treated all the additional costs as falling on the upper floors. However, this passage was not explained in evidence and it is not entirely clear how it relates to the other parts of the Comparison. On the face it, the note might be intended to say that their costings of additional scheme works were based only on the actual elements of work carried out on the upper floors. It must be said that this was not entirely clear but we were impressed by Mr McGee’s cautious and careful approach. This deliberate note could hardly have been intended to say that work actually carried out on the lower floors should be allocated 100% to the upper floors.
It may be added that this page was part of a comment on the Keats’ “Original valuation analysis”. We did not understand this page of analysis to be critical to the itemised approach taken in the preceding pages where Mr McGee has dealt with matters on an item by item basis. It is obvious that although an item covering the whole building might properly be treated as common it might be a practical approach to cost only the actually work on the upper floors. In that event the cost could be treated as solely an upper floor item. This might well produce a different figure from one based on a share of total cost but, on the limited information we have, it could not be said to be wrong. In any event, we think this is simply an example of the confusion arising out of the “LBRN” and “additional works” split favoured by Mr McCluskey. In the substantive part of the G&T report at Appendix A nearly all windows and doors appear to have been accepted as common costs. Similarly, although Mr Logan pointed to the fact that the lighting in 7.5.1 was not part of the LBRN and was a part of the “additional scheme works” which should have been treated as common, we can see that it was in fact treated by G&T as a common item: page 6 of 14.
Counsel argued that item 184.108.40.206 and 220.127.116.11 clearly related to the shops alone and should not have been included as common items. This was not raised with witnesses but he supported his assertion by reference to the Morrison report at pages 34 and 35 where there was discussion of the relevant item of work as it affected the shops. However, we note that the itemised list on page 34 is not explicitly limited to shops. These items are part of the “general requirements”. The report goes on to discussion of the upper floors under the same head at page 36. In short, the items of work seemed to cover both upper and lower floors. An apportionment of this work on a direct factual basis might well have been appropriate. In other words, the work under item 7.4.1 relating to ground floor might have been costed separately from the same type of work on the upper floors and simply excluded. Sharing by reference to rateable value would not have been necessary. However, it might not always be easy to identify distinct costs simply because work is carried out in quite separate parts of the building. Particular stages of work might be carried out by a team working together. A contractors establishment costs might be shared. In absence of any attempt to deal with the whole facts in relation to these items, we consider that it is not unreasonable to accept a division on the basis of the overall apportionment of rateable value.
A similar comment can be made about the treatment of the mezzanine fittings in the shops. Mr Robertson pointed out that item 7.7.11 had been excluded from the G&T report on the basis that it was not part of the upper floor. However, it may be noted that in Keats report there was no separate allowance for this. It was included as part of item 7.7.10 which was treated as common. Here again, the effect is that part of the work has effectively been excluded through the mechanism of the sharing on the basis of rateable value, rather than by identifying specific costs which should not be included. In absence of specific figures the former approach can be taken to produce an acceptable figure.
In short, although we can see that there might be a need for an allocation of costs between upper and lower proprietors on a factual basis as opposed to the sharing which is required for what are truly common items, we are satisfied that the G&T approach to these matters is sufficiently robust for present purposes. In the overall context the specific examples are of little significance.
The more important issue in terms of ultimate quantification in the present case is the appropriate percentage share of common costs. Although this question was presented as turning on the words “for the time being” as they appeared in the title, the real question is the nature of the liability and the point in time at which it emerges. We think it clear that the percentage share is not fixed at the date of valuation. That particular date is not within the contemplation of the title provisions. Accordingly, the 45.25% used by G&T cannot be regarded as authoritative merely because that was the actual percentage calculated by reference to the valuation roll as it stood at that date.
What is to be apportioned by reference to the valuation roll is the “burden of upholding and maintaining in good order and repair” the various specified common items. As it is the liability to carry out the work which is in issue, we prefer the view that the appropriate percentage to apply should be assessed at the date when the liability for carrying out the repairs first crystallised. That was when liability to pay for repairs was incurred. We accept that identification of such a date might not always be easy to determine but in the context of the present case the date of the LBRN on 24 Jan 1991 provided an easy reference point. There was no dispute that if we accepted an approach based on need for repair work rather than the actual cost of ultimately carrying out repairs, that was a suitable date. On that date the respective Rateable Values of the Upper floors and the Ground floors were £ 104,050 and £225,500 and the share attributable to the upper floors was 31.573%.
It may be added that as a practical matter, it is clear that to attempt to apportion shares simply by reference to when a tradesman presented his bill might be quite capricious. We do not accept that this title had in mind the date of payment as a critical date. Attempts were made to find some other date by reference to the date of entering contracts for the work to be done but this would be equally unsatisfactory. A proprietor would delay placing contracts pending a rating appeal. We also recognise that this issue has been subject of discussion in various cases. Where repairs are to be carried out under statutory procedures there may be a primary liability on the owner at a date when payment is due. However, no case bearing on construction of any title condition was cited to us. We did remind ourselves of the discussion in David Watson v Woolwich Equitable Building Society, which touched on similar issues, but it concerned a liability to make an actual payment to a factor and seems to have no bearing on the present case.
The practical importance of the problem presented by the sharing arrangement arose from the fact that the proportion shown on the Valuation roll at date of valuation was plainly an aberration. The proprietors of the upper floors had had no interest to challenge the assessed amounts as they appeared in roll current for 2003. This was because they did not in fact require to pay any rates because the building was listed and awaiting repair. The lower proprietors who were trading had obtained a reduction at appeal because of the state of the building: Assessor for City of Glasgow v Ron Wood Greetings Cards and others. We are entirely satisfied that if the upper floor figures had been challenged they would also have been reduced. On balance of probability we think that the relative proportion of upper to lower floor liability would have been restored to something on the lines of the historical percentages. Had we not been persuaded that the date of LBRN should be taken as the relevant date in the present case, this approach would, in any event, have led to the same or a similar result. It was suggested that we should look at the matter from the viewpoint of prospective developers. They would not be sure whether an appeal would succeed and would factor that risk into their assessment. However, on an issue such as this, which turns on issues of law, we must reach our own conclusion. We are persuaded that the proportion to be determined from the rolls would be the rolls as corrected by any appeal. We are satisfied the proportionate figure would be of the same order as that appearing in 1991 because there was no positive reason to suggest any other proportion. In any event, as we have explained, we consider that the 1991 percentages should be applied in the present case. Accordingly our figures are based on a share of 31.573% of the common costs.
We have prepared the residual calculation adopting Mr Dryburgh’s approach. We have adopted parties’ agreed figure for professional fees and have allowed for financing costs at the interest rates used by Mr Dryburgh which were not challenged. Although not directly raised in evidence we have taken the view that an allowance of £25,000 for marketing costs (in addition to an agent’s marketing fee) is excessive and have reduced this to £10,000.
The residual valuation calculation set out in our Appendix 1 shows that, on our interpretation and assessment of the evidence led before us, the costs likely to be associated with the works exceed the parties’ agreed valuation of the building when completed of £2,500,000. We were, of course not required to form any view on that figure.
At the beginning of our “Discussion” we set out our views as to how we believe a developer would be likely to deal with the conflicting cost advices being given to him. By their nature development opportunities almost always involve a balance of the nature of the works, the costs and the end value. There can be, and often are, large risks associated with developments but likewise there is the potential of significant profits. It is, of course a competitive market, not least because of the opportunities for large profits. There are many developers in the market and their hunger for opportunities will depend on their financial position, their past experience and the view they take of how they believe they could balance the conflicting pressures on the development opportunity being reviewed.
The costs as we have determined them on the evidence adduced exceed the agreed value by a significant but not a very large margin. In a market situation a developer, who had carried out an exercise similar to the one we have done (including discussions with his costs advisors to refine the costs) might well have been expected to carry out a further reappraisal, looking at all aspects of the situation in an endeavour to see whether some opportunity existed enabling him to take a further view on whether he would make a positive bid for this property.
This Tribunal as well as our colleagues in England have regularly commented on the shortcomings of residual valuation. There is no doubt that it cannot be taken as accurately representing “open market value”. Counsel acknowledged this. The usual problems are in calculating the cost making due allowance for all the variable elements to be included. This may distract from the evidence relied on to establish the end value. This would be important in a case like the present where the potential “marriage value” having regard to the interests of the ground floor proprietor would be a significant element in any open market assessment. We did hear some evidence as to how Mr Munro and Mr Jardine had approached this. Allowance had been made for the risks involved in shared subjects. We had some doubt as to whether sufficient weight had been given to the fact that the market would recognise that in practice the subjects would all come under the one owner. However, where parties are professionally represented and are clearly knowledgeable we recognise that there may be valid reasons for the particular approach taken.
In any event, it is clear that the only evidence which might have justified us in taking a figure in excess of £2,500,000 as the end value was the evidence of the accounts of the acquiring company. As we have said, these purported to be an accurate valuation by a company closely involved. But Mr Logan was explicit in saying that no weight should be placed on them and we recognise that there were reasons for this approach. We simply do not know whether the figure as it appeared in the accounts was based on a more sanguine view of cost or a more optimistic view of end value. If it was the former, we plainly would be wrong to accept it in preference to the assessment we have made on the basis of careful scrutiny of expert evidence. If the latter, we must, in any event, accept that the valuation by Chesterton could hardly have been as exhaustive as the exercise carried out by the two separate parties before us and we do not know what qualifications might have appeared in their valuation.
The significance of the accounts lies, not in the figure produced by the valuer, but in the fact that Union Street Developments accepted it and were prepared to certify it as accurate. They were intimately involved in the whole operation. They already knew of the assessment of cost made by the Morrison report. This evidence gives support to the view of Mr Dyer, the only other developer involved, that the subjects could be developed at a profit. However, we think it cannot be treated as doing any more than that. In the particular circumstances of how this case was argued we have no reason to reject the figure proferred by the acquiring authority as appropriate; namely, £25,000.
In addition to an award in respect of the value of the property, it was agreed that the claimants were entitled to recover the costs of the experts who advised on value. The figures of £8,780 and £25,165 were not ultimately disputed. We understand that the claimants are not registered for VAT and accordingly as they will be unable to recover VAT it is necessary to add it giving figures of £10,316.50 and £29,568.88 respectively. It was agreed that we should not attempt to calculate appropriate statutory interest as the Council had a computer programme which would allow this to be done easily and accurately.
|for the applicants:||Mr J Robertson, Advocate, instructed by City of Glasgow Council|
|for the respondents:||Mr D Logan, Advocate, instructed by Messrs J Myles & Co, Solicitors, Dundee|
|Heard:||Edinburgh, 23 to 26 April and 18 & 19 June 2007|
K M Barclay, FRICS
|Decision issued:||1 August 2007|
Certified a true copy of the statement of reasons for the decision of the Lands Tribunal for Scotland given and intimated to parties on 1 August 2007.
Neil M Tainsh — Clerk to the Tribunal
|Description||Keats||G & T||LTS|
|Roof & Rainwater disposal:|
|Cupola reinstatement||8,864||20,650||} 45,000|
|Repair of front rooflight||7,946||24,500|
|Balance of roof item||145,488||139,621||140,000|
|SUB-TOTAL||£ 226,258||£ 312,271||£ 285,000|
|SUB-TOTAL||£ 444,264||£ 1,110,969||£ 489,000|
|SUB-TOTAL||£ 208,346||£ 204,400||£ 207,000|
|SUB-TOTAL||£ 53,495||£ 59,000||£ 57,000|
|SUB-TOTAL||£ 259,806||£ 267,250||£ 263,000|
|SUB-TOTAL||£ 440,035||£ 437,340||£ 439,000|
|INTERIM TOTAL||£ 1,632,204||£ 2,391,230||£ 1,740,000|
|SUB-TOTAL||£ 406,288||£ 631,680||£ 620,000|
(15% includes project management cost)
|Fire consultant||£ 4,422||£ 4,422||£ 4,422|
|Photogrammatic Survey||£ 5,500||£ 5,500||£ 5,500|
|Building Warrant Fee||£ 4,661||£ 4,661||£ 4,661|
|Percentage allocation of costs of common repairs to Upper floors||38%||45.25%||31.573%|
|FITTING-OUT COSTS Inc. FEES||£ 975,000||£ 1,072,500||£ 994,500|
Rain-water and Roofs............................. £ 285,000 Masonry.......................................... £ 489,000 Windows........................ £207,000 Less ground floor shop window reinstatement......... £ 23,760 £ 183,240 Doors............................................ £ 57,000 Interiors........................................ £ 263,000 Floor Repairs.................. £439,000 Less removal of stairs in ground floor shops........... £ 13,446 £ 425,554 Services......................................... £ 620,000 Total..................... £ 2,322,794 Add Prelims 12.5%......... £ 290,349 Sub-total................. £ 2,613,143 Add Contingencies 10%..... £ 261,314 Sub-total................. £ 2,874,457 Professional fees 15%..... £ 431,168 Fire consultant........... £ 4,422 Photogrammatic survey..... £ 5,500 Building Warrant fee...... £ 4,661 Total..................... £ 3,320,208 NB Figures are exclusive of VAT Back-date to valuation date 12.5%..... £ 415,026 Cost at valuation date................ £ 2,905,183 Of which costs applicable to upper floor proprietors only are:- Cupola and rooflights........ £ 77,000 Rear stair doors............. £ 4,800 Floors....................... £ 375,000 Services..................... £ 600,000 £1,056,800 Inclusive of addition for Prelims, Contingencies and fees on above.......... £1,503,958 Back-dated to 12.5%.......... £ 187,995 Costs applicable to upper floor proprietors at valuation date.............................. £ 1,315,964 Costs for shared elements........................ £ 1,589,219 Of which share applicable to upper floors at 31.573%.............................. £ 501,764 Add costs solely applicable to upper floors...... £ 1,315,964 Total for upper floors........................... £ 1,817,728 Less grant. Available at 33.33% of eligible costs. Upper floor proprietors would share grant at same percentage for common elements. Total cost of works as above...................... £2,905,183 Less non eligible elements:- Services..... £ 620,000 After allowance for prelims., contingencies, fees and backdating................. £ 772,045 Cost eligible for grant...... £2,133,138 Grant available: Historic Scotland @33.33%.... £ 710,975 Glasgow Council.............. £ 100,000 Total Grant.................. £ 810,975 Whereof upper floor share 31.573%................ £ 256,049 Net Cost after grant............................. £ 1,561,679
Costs as above................................... £ 1,561,679 Add fit-out costs................................ £ 994,500 Add sale fees and marketing costs................ £ 47,500 Finance Costs £1,561,679 @6.25% @0.5......£ 48,802 £ 994,500 @6.25% @0.5 @0.5 £ 15,539 £ 64,341 Total............................................ £ 2,668,020 Add developer’s Profit @15%...................... £ 400,203 Total Cost......... £ 3,068,223 Say................ £ 3,068,000 Agreed valuation of upper floors on completion of all works..................... £ 2,500,000 Accordingly no surplus arises
Certified a true copy of the Appendix 1 to the statement of reasons for the decision of the Lands Tribunal for Scotland intimated to parties on 1 August 2007
Neil M Tainsh — Clerk to the Tribunal