This is an appeal by Campsie Spring Scotland Limited against an entry in the valuation roll in respect of subjects described as "Boreholes etc" at Glorat Estate, Lennoxtown. The subjects have existed since 1 January 1985 but had been inadvertently omitted from the valuation roll. This appeal relates to the first entry made in the roll and is effective from 1 April 1997. It was agreed that the valuation date was 1 April 1995, the date of the last general revaluation, and the tone date for assessment of rental value was 1 April 1993.
At the hearing the ratepayers were represented by Mr Raymond Doherty, QC, who led evidence from Mr James R Conway, the managing director of the appellant company and from Mr Norman Pollock, ARICS, a director of NAI Gooch Webster. The assessor was represented by Mr Geoffrey Clarke, Advocate, who led evidence from Mr Lawrence Wilson, ARICS, a divisional assessor.
The appeal subjects are entered in the valuation roll at a net annual value of £80,000 which figures includes an agreed sum of £10,000 in respect of rateable plant and machinery.
From the Grounds of Appeal it appeared that the substantive issue between the parties was whether the assessment of the heritable subjects occupied by the appellants should reflect the value of the right to take water. Ground 5 stated "The running water under the Glorat Estate including that taken by the Appellants is not a mineral. It is not lands and heritages. It does not fall to be entered in the valuation roll, nor does the annual value of the plots, boreholes, plant and equipment fall to be increased to reflect the value of the water taken. The plots, boreholes, plant and equipment are not mineral workings."
At the outset of the hearing Mr Doherty intimated that it was not now disputed that the right to take water ought to be reflected in the valuation. On that basis the net annual value contended for by the ratepayers was £57,500. He said there were three areas of dispute outstanding. In the first place, although he understood that it was agreed that the assessment should be on the basis of royalty payments made over a period of five years, there was a dispute as to whether that should be a period of five years ending in the year of the tone date or should include royalties paid in 1994. Secondly, the ratepayers disputed the assessor's contention that the payments actually made in each year should be index linked to reflect the changes in the Retail Price Index (RPI) to 1 April 1993. Finally, there was a question as to whether the royalty was wholly in respect of the right to take water. The ratepayers contended that part of it was in return for the landlord's agreement not to allow water arising on other parts of the estate to be used for commercial sale.
There was no dispute on issues of facts and the picture presented by the evidence can be set out briefly as follows.
Campsie Spring Scotland Limited ("Campsie") is part of the Hazelwood Foods Group and has a storage, bottling and distribution plant at Veitch Place, Lennoxtown. The water bottled at the plant is taken from natural spring wells and from boreholes all some two miles away from the plant and lying under several plots of ground leased by the ratepayers on the lower slopes of the Campsie Hills. The water collected from the wells and the boreholes is fed to the bottling plant through a network of pipes where it is either bottled immediately or put in storage for bottling later. At 1 January 1995 Campsie had 8 natural springs and 12 boreholes from which the company could take water.
Campsie are the tenants of the subjects of appeal in terms of a lease between Miss Elizabeth Gloriana Stirling and William Roxburgh (the original named tenant) entered into in or about 1985. The lease is in respect of six plots of ground, four of which each measure 30 yards by 20 yards (600 square yards), one measures 30 yards by 30 yards (900 square yards) and the last measures 30 yards by 40 yards (1200 square yards). The lease is for a period of 99 years from 1 January 1985. The plots were leased "together with the right to draw, extract, pipe, store, bottle and distribute, supplies of spring water from the said six plots or areas of ground".
Clause THIRD of the lease gives the tenant the exclusive right to draw spring water from the Lands of Glorat from wells to be dug by the tenant on sites within the said six plots leased. The rights conferred in the lease do not prevent the landlord or any other tenant or occupier of the Lands of Glorat or other third party from drawing and using spring water for any purpose other than for bottling or marketing. This clause also makes provision for other sites required by the tenant to be leased as required for a similar use. Such sites are to be the subject of separate agreements.
Mr Conway told the tribunal that when Campsie started the operation they particularly wanted the six plots covered by the lease because that was where the natural spring wells were to be found. They also wanted the exclusive right because they were concerned that the landlords could, and perhaps would, authorise others to draw water from other parts of the Glorat Estate. If others were to tap into and extract water from the same source as Campsie, it could affect the amount of water his company were able to bottle. He said the landlord seemed quite happy to grant the exclusive right. The additional boreholes were on plots which, by agreement, were governed by the terms and conditions of the original lease.
Clause SEVENTH of the lease deals with the tenant's obligation to pay to the landlord a royalty throughout the duration of the lease calculated on the basis of One penny per twelve litres of water bottled at the bottling and distribution plant and subject to agreement that the volume of water so bottled was deemed not to be less than 3,600,000 litres in the first year, 7,200,000 litres in the second, and thereafter 12,000,000 litres per annum. The lease stipulated that the royalty would be paid half-yearly and that at 1 January each year the rate of royalty payable would be adjusted in accordance with the then current retail price index. Provision was made for a substitute index if the RPI was no longer maintained.
The assessor requested and obtained from Campsie details of the volume of water bottled and the royalty payments made half-yearly to the landlord in each of the eight years covering the period from 1 January 1990 to 31 December 1997. These were set out in tabular form in his production no. 2A. This showed the payment dates, the periods covered by each payment, volumes bottled, basic royalty calculated by reference to the rate set out in the lease (ie. the 1985 level), the RPI adjustment made in each year, and the effect of adding that adjustment figure. The information provided for the six-monthly periods was then summarised to give figures of total volumes bottled and royalties actually paid in each of the eight years ending 31 December 1990 to 1997.
The assessor's production no. 2B repeated the base data provided by the ratepayers as set out in production 2A but only for the five year period from 1 January 1990 to 31 December 1994. However, it then set out adjustments to bring the royalties from their 1985 level to the equivalent for the 1993 tone year. This was done by applying for each year the RPI adjustment factor of 0.5314 appropriate at 1 April 1993. This had the effect of increasing the ratepayers' indexing adjustments for the years before 1993 and decreasing the adjustment for each payment after 1993. The figures shown in the last column of this production represent the annual royalty payment adjusted to the tone date, 1 April 1993.
In his deliberations about the assessment Mr Wilson considered there were three possible ways to approach the valuation:-
With regard to (i) he had entered the appeal subjects in the valuation roll effective from 1 April 1997 which meant that the assessment had to reflect the level of value established in the roll at 1 April 1995, the general revaluation date, which in turn was based on a tone date of 1 April 1993. While that was the tone date the valuations were to reflect the physical circumstances of the properties at 1 January 1995. (These dates derived from the Valuation Timetable (Scotland) Order 1995 and were not in dispute.)
Mr Wilson accepted the land had not altered but he considered its value was much enhanced by the value of the water rights. He concluded therefore that the "physical circumstances" as at 1 January 1995 were best represented by the volume of water bottled in the year ending 31 December 1994. The royalties paid for that year, adjusted to the tone date, 1 April 1993, would produce a value which was consistent with the statutory timetable. The resultant figure was substantially higher than the value he proposed.
With regard to (ii) he used the figures for the twelve month period ending 30 June 1993 closest to the tone date. The resultant figure was still significantly higher than the value he ultimately proposed.
In considering (iii) he looked at the average volume of water bottled (55.477 million litres) and the average royalty paid, adjusted to take account of RPI, (£70,798) over the five years prior to the date of valuation, by which he meant 1 April 1995. He concluded that this third method was the fairest approach and stated his valuation based on these figures thus:-
|Value of Plots and Water Rights at Rent Passing||70,798|
|Value of Plant and Machinery (AGREED)||10,000|
|Net Annual Value say||80,000|
Mr Pollock's investigations revealed that, including Campsie, there are only six mineral water bottling plants in Scotland. Of those six operators, only Campsie and a company, Deeside Spring Water in Ballater, pay a royalty for the right to extract water. The assessor also made reference to this comparison. However the figures show that the scale of the operation there is insignificant in relation to Campsie and since they are dealing with water from spas aiming at a curative spring water market the parties accept that it is not a useful comparator.
Mr Pollock came to the conclusion that the appropriate way to determine the assessment of the appeal subjects was by reference to the royalties paid by Campsie to the landlord as at 1 April 1993. He initially proposed that the net annual value should be based on the royalties paid in the three years 1990, 1991 and 1992 but, on the basis that where annual value is linked to turnover it is normal practice to use an average of the figures over a five year period, the valuation to which he spoke included the figures for 1989 and 1993. The average figure over that five year period was £55,844.
He then suggested that a deduction of 15% from that average figure was justified because the royalty paid represented more than just rent for the plots let. In the lease the landlord has undertaken that none of the remaining Lands of Glorat will be used by her or others for the drawing of spring water for bottling and marketing. That obligation is a consideration other than rent which, he contended, is of considerable value. Based on his judgement as a valuer, he decided a deduction of 15% to be appropriate.
Mr Pollock disagreed with the assessor's application of an RPI factor to each yearly royalty payment to obtain the equivalent royalty payment as at 1 April 1993. His view was that if an average royalty payment over a period of years was the basis of the valuation the actual passing figure for each year should be used and not an indexed figure. (His calculations, of course, were based on acceptance of the contractual indexing upon which the passing figures were based).
In his view the net annual value should be calculated thus:-
|Average royalties for 1989, 1990, 1991, 1992 and 1993||£55,844|
|Less deduction for the 'consideration other than rent' 15%||8,377|
|Add Plant and Machinery as agreed||£10,000|
|Net Annual Value say||£57,500|
Mr Doherty submitted that the disputed issues in the case required to be understood against a background of six general principles.
1. The lands and heritages which are the subject of assessment are the plots occupied by the ratepayers, some in terms of the lease and some under subsequent agreements governed by the lease. The ratepayers occupy no other land on the Estate except insofar as they have rights to take pipes and cables over it.
2. The right to extract water is a "use of the plot". The water itself is not part of the lands and heritages.
3. Running water such as spring water, does not belong to anyone. It is moveable property and is a res nullius: Stair Memorial Encyclopaedia, Volume 18, 273-274; 301. It was clear that in relation to each plot the source from which the ratepayers took their supplies was running water.
4. By reason of their proximity to the springs and underground running water and their consequent right to use such water, the plots have a value which must be reflected in the annual assessment.
5. The annual value is the rent which the hypothetical landlord and tenant would agree at tone date in respect of the occupation of the land.
6. It was plain on a proper construction of clause 3 of the lease that the royalty payment was not made solely in respect of rent for the plots. Part represented payment for the landlord giving up his right to use the other land, either himself or by others, to take water for commercial purposes. Although expressed as an exclusive right the effect was by way of an obligation limiting the nature of the use which can be made of the remaining land. Payment which is in respect of land held by the landlord cannot be included as part of the rent: Armour on Valuation for Rating 19-03; John Menzies v Assessor for Glasgow (No. 2) 1937 SC 288 and cases therein referred to. He stressed that the issue was not whether the rental payment conveyed a benefit to the tenant. The essential point was that the payment was made because the landlord accepted a restriction affecting her other property. Such a payment could not be treated as part of the rent.
Turning from these general principles, Mr Doherty dealt with the three issues in dispute. He suggested that it was common ground that a period of five years of payment of royalties should be taken. He referred to Mr Pollock's evidence that this was the method used in practice in relation to minerals and was the normal basis where assessment was on the Revenue principle. Mr Wilson had said that this was his preferred method as it was the fairest.
The first substantive point of disagreement between the parties was the question of whether the five years should be to 31 December 1994 as contended for by the assessor or to 31 December 1993 being the year which ended in the year of the tone date. He stressed that the test was what would have been agreed by a hypothetical landlord and tenant at the tone date. It was plain, he submitted, that they would look only at past royalties. There was an unfairness in the assessor looking at information which would not have been likely to be in the hands of assessors had the valuation proceeded at the time of the 1995 quinquennial revaluation. The ratepayers' approach also accorded with practise. It was supported by the decision of the Tribunal in Cairngorm Chairlift Company Ltd v Assessor for Highland Region 1995 SLT (Lands Tr) 35 at 37 J-K. It was clear that parties in that case had used the period of five years up to the tone date. At page 42 G to H the Tribunal said that assessment could only be based on information available to the hypothetical tenant at that date. He did not dispute use of figures for the whole year of the tone date. He submitted there was no justification for using evidence from a subsequent period.
In relation to the indexing of the figures he challenged the assessor's approach. He submitted that as a matter of practice including practice in relation to assessment under the Revenue principle, actual figures would have been used. This is what a landlord and tenant would have taken into account. This was the approach taken by the Tribunal in the Cairngorm case (page 44 D-E). He accepted that the decision on this point was a decision on fact but submitted that it demonstrated the practice.
The final issue was the deduction from the royalty payments because they were in part attributable to the landlord having given up his right to use the remaining land for supply of water for commercial purposes. He stressed that this was an obligation relating to use of other land. Its purpose was to preserve the water supply for the tenants and to ensure they had no direct competition. There was no room for dispute on principle. It was a question of valuation. Mr Pollock had taken a conservative figure of 15%. That should be accepted. Mr Wilson's submission that if there was any value it was cancelled by consideration other than rent was plainly an after-thought. It had not been part of Mr Wilson's initial thinking that there was any consideration other than rent. The obligation to which Mr Wilson referred would, in any event, be implied at common law.
Mr Clark expressed his agreement with the first four of the general submissions for the ratepayers. He accepted, in principle, the sixth proposition that any portion of royalty payments attributable to restrictions on a landlord's use of retained land ought to be deducted from assessment of rent but submitted that there was no justification for this in the evidence. In relation to the fifth proposition he did not dispute the proposition as it stood but submitted that the figures required to be adjusted to take account of changes in physical circumstances, namely, the increased water physically taken and bottled.
In relation to what Mr Doherty had described as the three issues in dispute, Mr Clarke indicated that issue of which figures to use was a complicated question. He preferred to approach the matter by considering first the question of index linking. That could be seen as a separate point although it was one which affected all the figures.
The assessor had to consider the appropriate level at the tone date. In many cases a problem arises as to how historical figures should be assessed or adjusted to demonstrate the tone value. There is often a dispute as to how to take account of inflation. This is separate from the question of how to take account of trends of real increase in figures. In the present case there was no dispute that it was appropriate, generally speaking, to adjust the figures from year to year by reference to the RPI. That was agreed between the parties to the lease. The figures were set out by them. It was clear that if the particular landlord and tenant had been assessing rent at the tone date they would have taken account of the RPI. This practice in relation to these particular subjects was very strong evidence of what a hypothetical landlord and tenant would do. There was no proper contradictory evidence.
In any event, in support of his argument that it was appropriate to adjust by reference to was the submission that it was necessary for valuation for rating purposes to attempt to treat like with like. It was very common in such valuation practice to have regard to index figures for that purpose. It was obvious that some allowance had to be made for inflation. There was no justification for ignoring it. Accordingly, whatever figures were taken as the basis of assessment, these figures should be adjusted to 1993 values and it was appropriate in this case to use the RPI as Mr Wilson had done.
The question of which year or years should be the basis of assessment was a matter of some difficulty. The rent was in practice measured by reference to the water taken. It must follow that the amount of water taken was a physical circumstance relative to the subjects. He stressed that there had been no agreement that there should be a five year average approach. This was simply Mr Wilson's fairest approach and, accordingly, his preference out of the various possible approaches spoken to by him. He submitted that the Tribunal was not bound to accept the five year period. It could look at all Mr Wilson's evidence. A change by reference to the volume of water extracted was quite different from circumstances such as a change in weather which was held, in the Cairngorm case not to be relevant (at 42 C-F).
As the ratepayers accepted that the pattern over a five year period should be examined and as the amounts of water physically extracted had changed over that period he contended that the physical circumstances must surely be said to change. He agreed that this argument relied on acceptance of a royalty basis as the proper valuation. If the subjects had been let on a fixed rent or had been owner-occupied his argument would not have applied directly. He accepted that it was the right to take water which was being valued not the volume of water bottled. However what was bottled was agreed by the ratepayers to be the measure of that right. There was a physical element in this.
He accepted that, in terms of the Schedule to the said 1995 Order, valuation was to be made "on the basis of the physical circumstances of the properties as at 1 January 1995". He accepted, from the Tribunal, that in the normal course the physical circumstances of subjects would not depend upon whether or not they were in use on the reference date. He also accepted the probability that little bottling would be done on that date. It was a matter of common sense that assessment required to be based on some other day. He accepted there was no specific authority for this.
Mr Clarke said it was clear that the amount extracted had grown dramatically year on year. The figures in more recent years were very much higher than the early years. If valuation was made by averaging the past five years when there was a steady increase in the measure for each year the valuation would obviously be out of date. This would apply on a quinquennial valuation. He did not accept that there was a standard practice in respect of such subjects. They were unique in the experience of this Tribunal. In any event, as a matter of common sense, allowance had to be made for this dramatic increase. If a hypothetical landlord and tenant were carrying out assessment at tone date they would have regard to trends. If it was plain that the figures were constantly increasing this would be reflected. If there was any doubt about this it would be more logical simply to take the passing rent at the tone date as the best measure. That was the assessor's second approach.
Finally, he submitted that in relation to the argument on deduction from the rent to reflect the landlord's undertaking in respect of her other lands, there was no evidence to justify such deduction. He did not dispute that in an appropriate case such deduction should be made. However the onus was on the appellants. There was not sufficient evidence. The Tribunal had the conflicting views of two valuers. Mr Pollock's evidence in support of a fifteen per cent deduction was said to be based on experience. However he had not in fact considered demand. There was no evidence that the landlord saw herself as giving up anything of value.
He did not put much weight on the argument that other clauses might be a quid pro quo for any part of the rent which was not strictly in respect of the subjects. However if there was a relevant quid pro quo it did not matter that it was an afterthought by the assessor. The Tribunal was entitled to look at the lease to see what would have been in the mind of the landlord and tenant at the time.
We accept Mr Clarke's approach that the issue of indexation can be taken first. As there was no agreement that the proper basis of assessment was to take an average of royalty returns over five years, it is inappropriate to start by focussing on the issue of precisely which five years should be taken.
We are satisfied that, in modern practice, the hypothetical landlord and tenant, given evidence of historical rents would recognise a need to adjust them to allow for inflation. It is clear that reference to the Retail Price Index would be one way of making such allowance. It is not, of course, the only way and the Tribunal is familiar with the type of disputes which can arise as to the appropriate method of indexation to allow for inflation. What is clear is that some form of indexation is routinely used before reliance is made on historical figures. In the present case, the best evidence of the approach of a hypothetical landlord and tenant to subjects such as the subjects of appeal is the evidence of the conduct of the actual landlord and tenant. It is plain that they agreed that royalty payments or rent should be adjusted annually on the basis of the RPI. We accept that as a proper approach.
We are, of course, aware that in the case of Cairngorm Chairlift Co Ltd, supra, the Tribunal was not satisfied that a hypothetical landlord and tenant would make an adjustment for inflation. However, as Mr Doherty accepted, that was a decision on a matter of fact. There was some evidence in that case that a tenant would not do so. It appears that the contrary proposition was presented on the basis of assertions of principle and practice. Had it been supported by adequate direct evidence the Tribunal might have reached a different view. In any event, we must reach our own conclusion on issues of fact. We are entirely satisfied that in looking at figures from a period prior to the year in issue the hypothetical landlord and tenant would make some allowance for inflation. We are satisfied that in the present case the evidence of the actual parties is persuasive of this and of the fact that the RPI is the appropriate method to use.
We turn to the substantive issue. Parties were agreed that in the absence of any relevant comparable subjects, the only way to determine the annual value of the land being used to extract water was by reference to the royalties actually paid by the ratepayers to their landlord. There is no doubt that this is the best evidence available in the present case against which to consider the hypothetical landlord and tenant. We heard no evidence of what such hypothetical landlord and tenant might have been expected to take into consideration at tone date in relation to the particular subjects and the industry of which these subjects, with their right to take water, were a part. In other words we heard no evidence of what the hypothetical negotiators would have had in mind beyond the bare table of increasing use of water. We did hear some evidence that use of bottled water had become increasingly fashionable and that the current level of use was well in excess of anything likely to have been contemplated in 1985. The steady increase, year on year, tends to give an impression of the inevitability of increase. However, we are not satisfied on the evidence, that there was any justification for inferring a belief by the hypothetical parties in 1993 either that increase was inevitable or that there was no risk of a downturn. We are conscious of the dangers of speculation on matters about which we heard no evidence. Suffice to say that we do not know to what extent the growth was due to increased public demand - although we have no doubt that this played a major part; - to what extent it was due to the present ratepayers' particular marketing strategy; and to what extent it was due to the fluctuating marketing fortunes or misfortunes of others.
We are satisfied that in attempting to strike a proper figure at April 1993 there can be no justification for direct reference to figures which could not have been available to the hypothetical parties at that time. The concession of the ratepayers that reference should be made to the figures to the end of that year does not alter this view. We think this clear as a matter of principle and authority: Cairngorm Chairlift Co Ltd, supra, at page 42 G-K. On the other hand we accept that it would be appropriate to proceed on an assumption that the hypothetical parties would take account of a pattern of steadily rising growth and would project that growth forward in some way: op. cit. page 42 K-L. There might be circumstances in which, as a matter of convenience, it would be appropriate to allow for this by using a subsequent year's actual figures rather than attempting to use hypothetical projected figures.
Where demand and, therefore, output are not guaranteed it can be accepted that a landlord's initial approach to the matter of rent based on royalties would be to accept that the average over five years was a reasonable guide. However, where the pattern of demand had in fact shown steady growth and there was no evidence to suggest that this was attributable to factors which were liable to change adversely, we consider that the hypothetical landlord would seek, and the hypothetical tenant concede, some weighting to reflect that pattern. We accept the evidence of Mr Wilson that there is no established practice relative to such subjects and the submissions of Mr Clarke that, even if there was such a practice, it might require to be varied to take account of the facts and circumstances of the particular subjects.
In short, we consider that the net effect of the evidence was to demonstrate, first, the reasonableness of a five year period as a prima facie approach to assessment of rental value based on royalties; but, second, the need for some mechanism to reflect in the rent, the pattern of steady growth apparent in the present case. The evidence, however, stopped short of demonstrating any established way of reflecting that growth. We must, therefore, assess the whole evidence and take advantage of our status as an expert tribunal to use that evidence to determine an appropriate figure in this case.
We must first, however, deal with Mr Clarke's submission that it is appropriate to allow for that growth by treating it as an aspect of the physical circumstances of the properties as at 1 January 1995. In terms of the said Schedule "valuations [are] to be made on the basis of the physical circumstances of properties as at 1 January in the year preceding a year of revaluation". We consider that the plain meaning of this provision is to have regard to physical characteristics capable of determination by physical inspection. There is no doubt that inspection at the relevant date would have revealed the presence of the boreholes with their associated facilities for drawing water. On the evidence it is clear that there was a capacity to supply water in excess of any of the figures determined by reference to the water bottled. It was not suggested that there had been any change in the potential capacity at any relevant time.
Mr Wilson relied on the theory that the increase of use made of the water supply was itself a "physical characteristic" of the subjects to justify taking account of the increased pattern of use up to the end of 1994. He accepted that this meant that he was basing his assessment of the physical characteristics of the subjects at 1 January 1995 by reference to the pattern of use made of the subjects in the preceding five year period. We can find no warrant for this in the language of the Order. It may be noted that Mr Wilson, in course of cross-examination, said that he accepted there was no change in the "physical features" of the subjects and also said that what was normally understood by the terms of the Order was the "physical attributes".
It is important to have regard to the nature of what is being assessed. The royalty payment based on water bottled has been agreed, in this case, to be an appropriate basis for assessment of rental value. It is, however, also a matter of agreement that the moving water which is the source of the bottled water is not, itself, heritable property. In the present context it is unnecessary to determine precisely when such water acquires the status of moveable property. It is not suggested that, at any stage, it acquires the status of heritable property. It is accordingly difficult to see how the physical characteristics of the land and heritages can be thought to change depending solely on the volume of water. The agreed heritable element is the right to take water. We are satisfied that in determining the physical characteristics of the lands and heritages it is sufficient to make a basic finding that, at all relevant times, they carried with them a right to take water and had the capacity to meet all the tenant's likely demands for water at such times. The royalties are a means of valuation of that right. They are not based on any change in the physical characteristics of the lands and heritages.
We return to the question of how allowance should be made for the pattern of increasing use, demonstrated by the increasing volume of water bottled, which would have been clearly apparent to hypothetical parties on 1 April 1993. As we have indicated, we get little direct guidance from the evidence. Mr Wilson's first approach to assessment sought to allow for the increase by treating it as part of the physical circumstances: an argument which we have rejected. His second approach was to look simply at the rents passing at the tone date. He did this by using the figures which were available from the ratepayers and which allowed him to calculate a total for the year to 30 June 1993, being the year closest to the tone date for which figures could readily be calculated. These figures were, of course, directly based on the volume bottled in the year to 30 June 1993. This, of course, was directly based on the volume bottled at that time.
As we accept that a landlord and tenant would normally start consideration of rental by having regard to a five year period we do not think that assessment based simply on the second approach is justified, although, as discussed further below, we accept that the possibility of such a basis might have been explored by the hypothetical parties.
Mr Wilson's third approach was, on the face of it, a straightforward one. He described it in the following terms: "I considered it more appropriate to attempt to achieve a figure which would be fixed for the quinquennium and would reflect a fair maintainable rent based on the actual volumes of water extracted and the rentals paid over the preceding full five year period". As the relevant date for assessment of rent for the purposes of the Order was 1 April 1993, it might have been thought that this approach simply reflected what we have accepted as a normal starting position. Indeed that would have produced a figure lower than that of the ratepayers who accepted a period to the end of the year of the tone date. However Mr Wilson went on to refer to the detail of his calculation which immediately demonstrated that he was taking five years prior to the date of valuation, 1 April 1995 and, as we have seen, sought to justify this by reference to the physical circumstances as revealed by the trend over the five year period. For the reasons set out above we cannot accept that approach and we do not accept that the 1994 figures can be taken into account as a direct basis for assessment of a hypothetical rent at 1 April 1993.
In his evidence Mr Wilson set out a fourth approach based on an interpretation of the Order which we did not understand to be advanced as a submission by Mr Clarke. This took the rental income for a single year spanning 1 April 1994. In any event we consider this inconsistent with the evidence that a normal approach would be to take a five year period as a starting point.
Looking at the whole evidence it seems to us that at 1 April 1993 the discussions of the hypothetical landlord and tenant would have turned on the question of how the rising trend should be reflected. The landlord might well have argued that as there had been a steady increase it was fair to base the rent at 1 April 1993 solely on the last year rather than by reference to the older, lower years. The tenant would, however, have pointed to the fact that the income was not guaranteed. There was no certainty that it would remain at the same level far less increase. He would have stressed the practice of basing assessment on a five year period. We think it probable that a compromise would have been reached by taking a figure somewhere between a five year period and a single year. In practice it is unlikely that the hypothetical parties would have simply split the matter in half, settling for three years. No doubt their discussions would in fact have turned on discussion of the reasons for the growth and the business prospects. However we do not have evidence to do this and consider that on a broad basis a period of three years represents a suitable compromise between the interests of the landlord and tenant in the circumstances disclosed by the figures. The average of the figures for 1991, 1992, and 1993, adjusted to 1993 levels by application of the RPI produces a figure which the hypothetical parties would probably have accepted as £70,000.
Finally, we turn to consider the contention that there should be a reduction of 15% to reflect the fact that the exclusive right granted by the lease is in fact an element for which payment would be made and which is not properly an element of rent. We have no difficulty in accepting the principle that allowance should be made by way of adjustment to reflect any such element which can be identified as having a significant part to play in determination of the payments to be made. However on the evidence available in this case we are not satisfied of this.
It is first to be noted that Mr Conway sought to justify the contention in respect of this element by saying simply that it was a provision included in the lease in order to ensure that there was no interference with his supply. However his evidence was that the water taken by his company represented only a fraction of the total available on the estate. There was, in any event, an obligation on the landlord at common law not to act in such a way as to reduce the supply. He could not derogate from his own grant. Mr Doherty said that this was a matter of express provision in Clause 11 of the lease. However that clause relates only to interference with the pipeline routes and not the fundamental question of supply of water. This evidence of Mr Conway must be assessed in light of the provision of the lease that the right conferred on the tenant did not extinguish the landlord's right to draw and use spring water for any other purpose including commercial purposes other than for the purposes of bottling and marketing said spring water. This does tend to suggest that in 1984 the parties were aware that the supply of water was likely to be adequate for all relevant purposes. On the face of it, it might be thought that the provision was related to avoidance of competition. However, Mr Conway did not attempt to attribute any value to that.
We did not find the evidence of Mr Pollock on this matter to be persuasive. He sought to justify an allowance of 15% on the basis of his judgement and experience as a valuer. He was, however, unable to point to any relevant experience. It was clear from his evidence that he had not taken account of any specific factors bearing on the question. For example, he had not considered whether there was, in fact, any likelihood of competition had the agreement not been reached. There is no evidence that the risk of such competition was of any significance whatever in 1985 when the lease was entered into.
We recognise that the initial lease related to only six defined small plots of land. The tenants had an exclusive right to draw water from Glorat for bottling and marketing, but any additional wells required in exercise of that right would be subject to such conditions as might be agreed. They were not necessarily subject to the conditions of the existing lease. The subjects of the present appeal extended well beyond the initial six plots. There had been further developments since 1997. Agreement had in fact been reached in respect of all these additional boreholes that they should be treated as governed by the terms and conditions of the original lease. One effect of the exclusive right under the lease would be that the ratepayers could negotiate for additional water sources without fear of competition.
When considering whether it is appropriate to make any adjustment under this head it is necessary to have regard to the position in 1985. Mr Doherty stressed that, in making allowance for factors extraneous to rent, it was essential to have regard to the whole scheme of payment made under the lease. Payment was by way of royalties. There was no grassum or initial payment. Accordingly it had to be recognised that any such extraneous element was part of the annual figure even where that figure was based directly on the water taken. While we see the force of that argument it is not in our view persuasive. Plainly a significant part of the water now taken comes from boreholes governed by agreements reached subsequent to the lease. If payment under the lease had included a significant element in respect of the exclusive right - in other words the landlord's acceptance of a restriction on her use of the remaining subjects - the appropriate element would require to be identified in the sums fixed at that time. The scheme was of an increasing set of minimum payments over the first three years. From 1987 there would be a minimum payment of £10,000. Accordingly even if it could be accepted that the parties had in mind an element of payment attributable to the exclusive right, it would have to be assessed by reference to that figure. We are not satisfied on the evidence as to what, if any, proportion of the initial figure was attributable to that right. Current figures are greatly in excess of the original and are demonstrably dependent upon the volume of water taken rather than on any initial grant of exclusive right.
In the whole circumstances we are not satisfied that any significant element of the annual payment has been established as being attributable to something other than rent. Accordingly as the parties accept that the passing royalties are an appropriate measure of rent for the purposes of the present case, no deduction falls to be made from the figure calculated by reference to these royalties. We therefore refuse the appeal.