1. This is an application in the form of a rating appeal referred to the Tribunal following an appeal under Section 1 (3BA) of the Lands Tribunal Act 1949. The applicants are the tenants and ratepayers of subjects comprising a unit of a modern shopping centre. The respondent is the local Assessor. The subjects are occupied and used as a fast food restaurant serving baked potatoes and fillings, etc. The respondent entered the subjects on the Valuation Roll as a shop and at a value arrived at by straightforward comparison with the adjoining shops in the centre. The applicants, relying on the 'actual state' rule of valuation, whereby subjects are to be valued in their existing physical state and in accordance with their existing use, contend that the subjects should be entered and valued as a café, at a lower value arrived at in comparison with certain open café areas in the mall at the centre, or alternatively at a value arrived at on what they described as a "quasi-turnover" basis. There is no real dispute about the principles of the actual state rule. If the subjects are to be valued as a café, the respondent argues in the alternative that they nevertheless have the same value as the adjoining shops. In summary, we have decided:-
(i) The subjects are correctly described for valuation purposes, and should be entered on the Roll, as a restaurant.
(ii) The subjects do not have the same value as the adjoining shops and should be entered at a Net Annual Value of £74,500.
2. We have therefore allowed the appeal, directed that the subjects be entered in the Roll as 'Restaurant', and substituted a Net Annual Value of £74,500.
3. The subjects, which comprise Unit U12 at the Overgate Centre which is situated in the centre of Dundee, were first entered on the Roll on 22 March 2000, upon the completion and opening of the centre, described as 'Shop', at a rateable value of £91,500.
4. Section 6(8) of the Valuation and Rating (Scotland) Act 1956 provides:-
"(8) … the net annual value of any lands and heritages shall be the rent at which the lands and heritages might reasonably be expected to let from year to year if no grassum or consideration other than the rent were payable in respect of the lease and if the tenant undertook to pay all rates and to bear the cost of the repairs and insurance and the other expenses, if any necessary, to maintain the lands and heritages in a state to command that rent."
5. Although this entry was made only a few days before the commencement of the 2000 Valuation Roll, the appeal is a "running roll" appeal in respect of the 1995 Roll and the subjects require to be valued according to the "tone of the roll", in accordance with Section 15 of the Local Government (Scotland) Act 1966, which provides inter alia:-
"15. (1) For the purpose of any new or altered entry to be made in a valuation roll after the passing of this Act, at any time the valuation roll is in force, the value or altered value to be ascribed to lands and heritages shall not exceed the value which would have been ascribed thereto in that roll if the lands and heritages to which the entry relates had for valuation purposes been subsisting throughout the year before the last year of revaluation, on the assumptions that at the time by reference to which that value would have been ascertained -
(a) the lands and heritages were in the same state as at the time of valuation and any relevant factors (as defined by subsection (2) of this section) were those subsisting at the last-mentioned time …
(2) In this section 'relevant factors' means any of the following, so far as material to the valuation of lands and heritages, namely -
(a) the mode or category of occupation of the lands and heritages …"
6. The issues are:-
(i) Category of Subjects: what is the proper description of the subjects for valuation purposes? The applicant seeks alteration of the description in the entry on the Roll from 'Shop' to 'Café'. The respondent defends the description, 'Shop'. The Tribunal has also considered the description, 'Restaurant'.
(ii) Value: what is the rateable value of the subjects? In the event that the subjects are correctly described and valued as a shop, the respondent defends a value of £87,700 and the applicants contend for a reduced value of £83,000, on the basis that some toilets which are admittedly part of the subjects should in the circumstances of the case not have any value ascribed to them.
7. If, on the other hand, the subjects should be described and valued as a café (or, possibly, restaurant) the applicants' primary contention is for a value of £42,000, on the basis of comparison with an open café area in the centre; or alternatively £59,000, on a "quasi-turnover" (as they describe it) basis. In this event, the respondent's primary position is that the subjects should still be valued at £87,700, on the basis that their value as a café is the same as the shop value; and, in any event, the respondent does not accept either of the applicants' values in the event that either comparison with cafés or the "quasi-turnover" basis is considered appropriate, and makes certain competing submissions in relation to these.
8. At the hearing the applicants were represented by Mr. Anthony D D MacIver, Advocate, who led evidence from Mr. Anthony P. Schlesinger, chairman of Spudulike Group Limited, Murray F. Rhind, BSc MRICS, a quantity surveyor, and Mr. John K McClimens MRICS, a valuation surveyor. The respondent was represented by Raymond Doherty QC, who led in evidence Mr. Richard J Michalski MRICS, principal valuer with the Tayside Valuation Joint Board. The parties also each lodged a number of productions, and helpfully entered into a Joint Minute agreeing some of the basic facts. Following the hearing, the Tribunal made site inspections at the subjects, at the Overgate Centre, and in areas of Dundee city centre and the Braehead Shopping Centre, Glasgow, where certain comparison subjects were situated.
9. We should record that at the outset of the hearing, the applicants sought leave to lodge one late production, viz. a letter dated 17 March 2000 from McDonald's Restaurants Limited to Messrs. Culverwells, who were agents acting on their behalf in negotiations to lease certain subjects at the Overgate Centre. After hearing parties, the Tribunal allowed this production to be lodged late and indicated that if the respondent was placed at a disadvantage consideration would be given to an appropriate remedy. Then, after the evidence was concluded and before submissions, the applicants requested the recall of Mr. McClimens to give further evidence in relation to one particular comparison subject referred to by Mr. Michalski, on the basis that the figures spoken to were affected by certain appeal negotiations in relation to the 2000 Revaluation entry. After hearing parties, the Tribunal refused this motion because we considered that it would open up a new and inappropriate area of enquiry in relation to figures adopted under the 2000 Revaluation.
10. There was very little real dispute on the facts, which we find to be as follows.
11. The Overgate Centre is a recently redeveloped shopping development in the centre of Dundee. It contains 67 units of varying sizes, together with 5 kiosks and 4 café areas. The units are located in a two-storey mall, which for most of its length is single sided. A third level provides service and storage accommodation. The shopping centre is 'anchored' at each end with department stores. The two-storey mall is in effect a two level 'street' linking these stores. Outside Debenhams department store at the west end of the centre there is an enclosed square at ground level. The opposite side of the mall from the shop units is glazed, with three external balconies. The Centre is open until 6.00 p.m. on Mondays, Tuesdays, Wednesdays, Fridays and Saturdays. On Thursdays it is open until 7.30 p.m. and on Sunday it closes at 5 p.m.
12. The appeal subjects are located near the middle of the upper mall, within a row of shop units. The subjects are basically physically similar to the surrounding shop units. They extend in area to 171.2 m2, and comprise a seating area (97m2), counter and kitchen (35m2), storage, and toilets and a fire exit (21.88m2), which opens to a service corridor behind the units. On a reduced area basis, the area of the subjects is 107.56m2. The main area is 7.10 metres wide and 21.06 metres deep, with a side area at the rear (in part of the adjoining unit) 5.24 metres wide and 4.37 metres deep containing the toilets and fire exit. The walls of the unit are dry lined, the floor is tiled and the suspended ceiling is clad with acoustic tiles, with recessed lighting and air handling ducts. The unit is permanently open to the mall, the front of the premises being marked by two vertical glass panels. In the case of the subjects, this is an attempt to create something of the atmosphere of an open café or food court. A few shop units, which are not associated with food, have also opened out their entrances to varying degrees.
13. Removing the tenants' fittings, including moveable items such as the chairs and tables and stripping the subjects back to shell status would cost approximately £10,000. These costs include removal of the kitchen units and associated services, removing joinery work and wall finishings and uplifting floor coverings. In the event of a change of tenancy to ordinary shop use most, but not all, of this cost would be likely to be incurred. Whether or not the unit was previously in use as a shop, it is common upon the change of occupier in a modern shopping centre for the new tenant to carry out such works and fit out the unit in accordance with his brand style and standards of finish. Overall, in the context of the rental value and other costs, this would amount to minor alteration even where the unit has previously been fitted out, as the subjects of appeal are, for use as a fast food restaurant.
14. At three locations along the glazed section of the upper mall, on the opposite side from the subjects, there are open café areas. These cafés have freestanding serveries in the mall where food and beverages are dispensed to the public who can sit at tables and chairs in the areas behind and to the side of the serveries and out on the three balconies next to which these cafés are located. On the ground floor of the centre, in the square in front of Debenhams, there is a fenced off area occupied by Café Venue and again comprising a servery with tables and chairs surrounding it. Each of these four cafés occupies a defined, but physically unenclosed, area of the upper or lower mall.
15. The Overgate Centre does not have the kind of provision for catering that is now typical of large enclosed shopping centres by means either of 'food courts' where a communal seating area is surrounded by fast food kiosks, or of separating an area of the centre devoted to catering by means of an aggregation of fast food outlets each providing dining space within its own unit.
16. As Mr Schlesinger explained to the Tribunal, the lack of catering facilities at the Overgate had presented itself to the applicants as an excellent trading opportunity. Apart from the original Spudulike outlet in Tollcross in Edinburgh the expansion of the organisation had been achieved by obtaining a presence in food courts or the like in shopping centres. Such an arrangement suited their operation which was based on the heating of potatoes in ovens. This can be done in a relatively small area, with the majority of space being taken up by seating and tables, which require to be in close vicinity. Until recently therefore the company had not considered taking standard shop units in shopping developments. However, they had taken a shop unit in the Churchill Square development in Brighton. At the Blue Water centre, in Kent, owned by Lend Lease, who are also the owners of the Overgate centre, catering is provided both in a food court and within shop units. The company was encouraged by Lend Lease to consider taking accommodation in the Overgate centre in a standard shop unit, the café areas by that time having been let. Mr. Schlesinger's preference would have been for a 'food court' type of situation.
17. Unit U12 was restricted in its area for the purposes of Spudulike. They required to be able to set out 100 covers at a minimum to make the operation viable. Allowing for the kitchen that left no space for toilet accommodation. They had not been required to provide toilet accommodation at Churchill Square. They expected that their patrons and their staff would use public facilities provided by the landlords. Dundee City Council, having regard to the number of covers, insisted on additional toilet provision being made, within a reasonable distance, as a condition of approval of the fitting out of the premises for building control purposes. The landlord declined to expand the public toilets in the development but agreed to construct a toilet block at the rear of Unit U11 and to pay for 90% of the fitting out of the toilets on condition that Spudulike accept the toilets as part of the leased premises and take responsibility for their maintenance. These toilets are effectively open to the public coming in off the mall whether or not customers of the applicants. The applicants' lease does not contain any specific obligation to allow such public use, but the applicants do in fact allow it.
18. Mr Schlesinger conducted the negotiations for the lease himself without taking any professional or local advice. He based his calculations of affordable rent on a percentage of annual turnover. He offered a turnover-based rent. At 18% (of an estimated gross turnover of £417,000), he offered a rental payment of £75,000, or such higher amount as equated to 18% of turnover. In making this calculation he anticipated that the actual rates payable would be in the region of £17,000. He would have preferred to pay rent only for a kitchen and servery area with a licence to use the rest of the shop unit as 'mall' area for the seating. The landlords would not accept an arrangement other than the whole of the unit being let on a fixed rent free of any link to turnover. That was the basis on which the tenancy was established.
19. The lease entered into provides for a rent of £90,000 per annum with a 5 month rent free period running from the commencement of the lease on 27 January 2000. The lease was for a term of 15 years with a review 5 years after 25 December 1999.
20. The lease contains a standard rent review clause. The parties, however, also agreed a special rent review capping provision personal to the applicants. This agreement is set out in a side letter from the landlords to the tenant. Mr Schlesinger had been concerned that on review the open market rent to be determined should not be that established by the demand for shop units by retailers. What was agreed was that if the open market rent calculated under the rent review clause were to be greater than a figure calculated by reference to 20% of the average yearly gross turnover for the preceding three year period (the 'reduced rent'), then the tenant could notify the landlords that it wished to terminate the lease. The landlords would then have the option to accept a continuation of the lease on the reduced rent or to terminate the lease. This arrangement was only available to Spudulike as the original tenant. The subjects opened for trading on 22 March 2000. A schedule of weekly turnover figures was produced showing actual figures for the 40 weeks from 23 March to 31 December 2000 and for the 40 weeks from 1 January 2001 to 10 October 2001. By comparing calendar weeks the respondent interpolated figures for the 12 weeks in each year and produced totals for 2000 of £354956 and for 2001 of £401156. At the hearing Mr Schlesinger was able to confirm that the actual turnover net of VAT for the year 2001 was £394,000. This was an increase of about 11% over the preceding year. This increase was at least partly attributable to improved management and cannot be guaranteed to continue. Although there would obviously be a reasonable hope of increasing turnover, there is no certainty of any level of increase in future years.
21. Production AS6 is a schedule of rental evidence and analysis, and net annual values adopted for the 1995 Roll, of (i) 14 units on the lower level of the Centre, including 'Café Venue', and (ii) 17 units, including the subjects, the three open café areas and a hairdressing salon, all on the upper level. The units vary in size from 'kiosks', very small units, to larger shops, including situations where basic units have been combined or shops are on both levels with internal stairs. Except in the cases of the four cafés, the schedule shows reduced area rental rates on the basis of areas reduced by zoning, which is the method of standardising measurements of area of shop subjects other than supermarkets and larger stores. The rates are arrived at after adjustment in respect of landlords' inducements. The rents were all struck at around the same time, i.e. when the Centre was being opened. Although the agreed Zone A rate adopted for the net annual values after negotiation is shown, the other steps necessary to arrive at that figure, namely the addition of decapitalised fitting-out costs, adjustment (if any) for quantum, and back-dating to the 'tone' date, are not shown, as they are not in dispute. For fitting-out costs, a standard rate based on (actual) area was ascertained. On the upper level, the reduced area rental rates range from £724/m2 (for the subjects, which have a reduced area of 107.56m2) to £1155/m2 for the smallest kiosk. The largest subject, Unit U01, with a reduced area of 234.27m2, has a rate of £781/m2, and the second largest, Unit U13/14 (217.03m2) has a rate of £882/m2. The average of all the upper level units shown is £906/m2. There are five subjects, including the subjects of appeal, all in the same range of units, around medium size, with reduced areas ranging from 97.36m2 to 107.56m2 (the next smallest being 79.22m2 and the next largest being 177.20m2). The reduced area rates for the other four of these five are £860, £936, £929 and £942/m2, averaging £917/m2. This, and the similar analysis of the lower level rents, shows a clear general pattern of increasing rates with decreasing size.
22. Adjustment for landlord's inducements is a common and necessary, but not always precise, step when analysing rents for comparative purposes. On AS6, there was such adjustment in most but not all cases. Landlord's inducements such as rent-free periods or capital contributions are very common in new development lettings. It is possible that in some cases the respondent was not advised of landlord's inducements which would have led to adjustment in the rental analysis. The form of inducements and the actual calculations in relation to the other units were not explored in evidence. In the case of the subjects of appeal, the inducements in question, the rent-free period and the contribution, were each of a type which is commonly accepted as requiring adjustment. It is also standard to amortise the capital value of the inducement over the period of years until either the end of the lease or any lease break, which is treated as the end of the lease commitment. The rent review capping provision in respect of the subjects provides a possible but not a certain break. The respondent in his AS6 analysis arriving at the rate of £724/m2 treated this as a break at five years. Had he analysed the effect of both inducements on the basis of 15 years, the rate would have been £788/m2. With the addition of fitting-out, the rate on the 15 year basis would have been £844/m2 but would then not have been directly comparable with the rates derived for the other units because these did not include fitting-out costs. Ignoring all inducements and including fitting out, the rate on the 15-year basis would have been £892/m2, but again would not have been directly comparable.
23. Production AS6 also shows rental rates on the basis of total areas, i.e. net internal areas rather than reduced areas, again after adjustment of the actual rent for inducements. These again show rates decreasing with increasing size. On the upper level, the rates for the largest two shop units were £313 and £364/m2, and for the smallest two £1,155 and £1027/m2. The subjects of appeal (at a rent adjusted as described above which produced the reduced area rental rate of £724/m2) had a rate on this basis of £455/m2. The four units of similar size in the vicinity had rates of £589, £623, £634 and £667/m2, an average of £628/m2.
24. The three open café areas on the upper level, and Café Venue on the lower level, were not analysed on a zoning basis, but rather on the basis of overall area. The lease of the Café Venue is related to the Debenhams lease and its agreed rental does not represent a true market rent. The upper level café areas have open market leases, which did not require adjustment for landlords' inducements. Two of the three leases had "turnover top-ups", whereby the basic rent would be increased to 13% of turnover if that produced a greater figure. The overall areas of the upper level café areas were slightly smaller than those of the subjects and the four units of similar size referred to. On an overall area basis, their rental rates were £339, £318 and £332/m2. Each, however, included a store of 22m2 situated in the service area to the rear of the shopping units, i.e. remote from café areas.
25. The appropriate Zone A rate for the upper level shop units is agreed to be £815/m2.
26. The upper level café areas were assessed on an overall area basis after taking the remote stores at £50/m2, at rates of £351/m2 (Starbucks, after appeal), £324/m2 (Millies (after appeal) and £413/m2 (Costa Coffee, which was not appealed). The respondent's proposed valuation of the subjects of appeal can be analysed on this basis at £512/m2.
27. The operation of Spudulike is similar to that of McDonald's fast food restaurants. The similarities arise from the emphasis on product quality combined with a fast service time; the fact that meals are prepared for individual customers; and, that their prices are similar with individual spend in the range of £2.50 to £3.00. Their customer profiles are complementary with McDonald's being more attractive to male customers and Spudulike being more attractive to female customers. However, McDonald's, as a world-wide brand, has considerably greater turnover. In illustration, at the White Rose centre in Leeds McDonald's are reckoned to account for 40% of the turnover in the food court there while Spudulike only account for 15%.
28. There was some negotiation between McDonald's and the landlords in relation to a possible lease of an enlarged unit effectively beside the subjects. A letter dated 17 March 2000 from McDonald's to agents acting on their behalf sets out McDonald's position at that date on the basis of one proposed layout, shown on an attached plan. That plan shows a unit with a restaurant and queuing area at the front (89m2), toilets to the side (28m2), a kitchen (52m2), office, freezer, chiller, store, circulation and wash-up (45m2). The total net internal floor area of the accommodation at this level would be 214m2. On the upper deck there would be a crew room and utilities rooms with a net internal area of 67m2. The total internal floor area of the proposed restaurant would be 281m2. The resulting reduced area, on a zoning basis, of that proposed unit was not provided. The letter indicates that the landlord sought a minimum rental of £90,000 but that McDonald's had calculated a rental level of £70,000 having regard to the viability of the business. Nevertheless McDonald's indicated to their agents that they would be prepared to pay the asking rent of £90,000 provided that certain negotiating points, involving financial concessions on annual occupation costs, were accepted. A letting was not agreed and McDonald's, who have an outlet in nearby Reform Street, withdrew their interest in locating in the centre.
29. Production AS7 provides details of a number of basic shop premises in the centre of Dundee occupied by retail and other uses including cafés and restaurants. The examples were drawn from the streets surrounding the Overgate centre and from the Murraygate, the principal shopping street in Dundee. These examples establish that at the locations shown there is no difference between the values of shops and the values of similar premises with other uses, including cafés and restaurants. That correlation of values is accepted by a wide range of professional agents representing ratepayers. There were, however, no examples of cafés or restaurants in Murraygate.
30. The Braehead Shopping Centre on the south-western outskirts of Glasgow is a large out-of-town shopping centre on two levels based on a principal shopping mall with accesses at each level from the extensive parking areas allowing equality of access to the mall. As well as extensive parking and public transport links the centre supports its attraction to customers by providing entertainment facilities on the north side to the River Clyde, where there is no parking but a riverside open area and walkway. Associated with the centre is a retail warehouse development and a drive through fast-food facility. To the north of the centre of the main mall, and connecting it with the recreational facilities, is an area occupied exclusively by fast food outlets and a public house each operating from a unit with its own seating area. This area set aside for catering and leisure use is entered directly from the main shopping mall at both levels although there are entrances to public toilets and baby changing rooms at the point of transition between the mall and the catering and leisure area. The upper level of the catering and leisure area is a cul-de-sac. The lower level has pedestrian access to the riverside area. As has been said there are no parking areas adjacent to this part of the development.
31. The food outlets at Braehead occupy physical units (as distinct from mall areas), with each providing tables and seating within its own leased area, although in some cases this extends outside the enclosed area of the unit to give a food court appearance. A schedule of tenancy details for these outlets was produced. It was not in dispute that they have generally lower values than the shops in the main mall. Their rents are subject to turnover "top-up" as proposed by Mr. Schlesinger at Overgate but not accepted by the landlords. The assessor there had applied four different schemes, with varying levels of value, to the subjects in, and next to, this aggregation of catering establishments. The schemes distinguished subjects by category taking into account size, use and location. The subjects assessed as shops were categorised as 'shop' or 'kiosk' and valued on a comparative basis at an appropriate Zone A rate. The catering establishments were categorised as 'restaurant'. These were valued on a comparative basis at a range of overall rates. They include a unit occupied by the applicants for a similar baked potato operation to that at Overgate, but trading as 'Fat Jackets'. The public house was valued with reference to its turnover on a profits basis. These categorisations, and schemes of valuation, recognise differences at that particular location although the subjects were all otherwise units within the centre.
32. Mr Schlesinger was surprised to find, after consulting the landlord's surveyors, C B Hillier Parker, and receiving a schedule of rents for other occupiers of premises in the centre, that the applicants' rent and rateable values bore no relationship to the café premises. It was then clear to him that the subjects were assessed as a shop in comparison with other shops in the centre. As the Spudulike business is essentially a 'food court' business and asince the project he undertook was to replicate a 'food court' business in a shop unit, he had hoped that the treatment of the subjects for rating purposes would be as a 'food court' unit. In England and Wales he was aware that food court units were assessed by the Valuation Office on 6.5% of net of VAT annual receipts. The rateable value for the subjects of £91,500 entered in the Roll is 23% of annual turnover in 2001.
33. The contention that the subjects were used as a café and could only afford the rent payable by café users was supported by Mr McClimens. He maintained that the subjects had been physically designed and laid out as a café. In order to be used as a shop they would have to be completely stripped-out. He referred to Mr Rhind's evidence that a stripping-out operation, to return the subjects to their 'shell' state, would cost £10,000. Such an operation would fundamentally alter the character and the nature of the subjects. That being so he was of the opinion that the actual state rule required the appeal subjects to be valued in their actual condition and use, save for minor alterations. The stripping-out work required would exceed minor alteration. The rateable value must represent the value of the beneficial occupation to the existing occupier.
34. Mr McClimens referred to the lease of the premises. He pointed to the nature of the rent review provision that made it possible that the rent could be reduced on review by reference to the turnover of the business. The lease also permitted the sale of hot and cold food and beverages for consumption on and off the premises. Although planning permission had not been necessary in the first instance this permitted use would normally require planning permission for a change of use from Class 1 (Retail) to Class 3 of the Schedule to the Town and Country Planning (Use Classes) (Scotland) Order 1997. This fact served to distinguish the appeal subjects from the Class 1 and Class 2 (Professional and Business) uses elsewhere in the centre.
35. He also thought that the provision of public toilets and access thereto by the public was significant. The landlord had met most of the capital cost. The use of the toilet accommodation was not exclusive to the occupier of Unit U12. This also meant that the subjects were practically indistinguishable from the mall cafés which did not have their own toilets, but depended on the use of the public toilets supplied by the landlord.
36. He therefore maintained that it was incorrect to value the subjects as a shop in comparison with shop rents and on a zoning basis. Mr McClimens drew support for his contention, that the proper approach to the valuation for rating of the subjects was by means of an overall rate, by referring to the scheme adopted by the assessor at Braehead, where there was a collection of premises providing catering services to the public in close proximity to the main shopping mall. They occupied physical units (as distinct from mall areas) and each provided tables and seating within its own leased area. This part of the mall was not therefore a food court based on kiosks and communal seating areas. While the units varied, as to the extent and style of fitting-out and in their particular uses, an overall rate had been applied to the catering units. Different categories of subjects, with different schemes of values, had been recognised even although the subjects were all otherwise simply units in the Centre. In Mr McClimens' view the same approach as that applied at the Braehead centre should be applied at Overgate. While he accepted that the appeal subjects were, in their physical characteristics, more similar to the adjacent shop units than to the mall cafés, he contended that the open plan restaurant layout of the subjects was similar to the Braehead units that were used and valued as catering establishments. Accordingly, they should be valued in their actual use as at Braehead, in this case at an overall rate and in comparison with the rents for space for similar use such as the mall cafés.
37. Mr. McClimens' primary valuation, on the basis that the subjects are in occupation as a café and valued in line with other cafés, was:-
171.20m2 @ £245/m2 = £42,000
38. In selecting his rate, Mr McClimens made a direct comparison with the rate applied to Café Venue which has a similar area (175.11/m2). He then reduced the rate applied there, of £285.50/m2, by the established ratio of difference between the Zone A area for the lower and upper malls (1:0.85) to reflect the respective levels of value for the alternative locations. He made no reduction in respect of any areas such as the toilet area.
39. If the Tribunal were not satisfied as to the fairness of his primary valuation, Mr. McClimens had an alternative valuation, on the basis that the subjects WERE a unique category within the Overgate centre, , as follows:-
171.20m2 @ £345/m2 = £59,000
40. Here, Mr McClimens applied an overall rate (as per Braehead) to the unit area of 171.20/m2 based on turnover figures and applying the capping percentage of 20 found in the rent review provisions. He took the average of the estimated turnover figures for the years 2000 and 2001 of £344,968 and £382,195, being £363,581. At 20% of turnover a rental figure of £72,716 results. He then discounted that rental figure to the tone date by applying the retail price index prepared by the Office of National Statistics to the period from April 2001 (173.1) to April 1993 (140.6), a reduction of 18.78%. This produced an estimated rental value of £59,063 (say £59,000) corresponding to a rate, at the tone date, of £345/m2 when divided by the 171.20/m2 agreed actual area of the subjects. Mr. McClimens described this as a 'quasi-turnover' valuation.
41. The same exercise carried out on the actual turnover figure for 2001 of £394,000 produces a rate of £374/m2, and a net annual value of £64,000.
42. On the basis that the subjects are described as a shop and are to be valued in comparison with other shops, Mr McClimens agreed with the assessor's valuation save that he further adjusted the agreed reduced area for that section of Zone C which comprised the toilets and fire escape areas. To that part of the shop he proposed a reduction factor of 6.25% instead of 25% because of the overprovision of toilet accommodation for a shop of the size of the subjects and that the fact that the toilets were provided for the public at large and not the tenants of the shop exclusively. He excluded the staff room and access corridors in the toilet area as they would not have been provided to or by a tenant of Unit U12 in normal circumstances.
43. In Mr Michalski's opinion the subjects are not physically different from the other shop units in the Overgate centre. If the appellants' fixtures and fittings were removed no structural adaptation would be required to make the premises suitable for any type of retail use. Vacant and to let the unit was no different from any other shop unit in the mall.
44. He rejected the notion that it was necessary in the case of the appeal subjects to have regard to turnover. It was not normal, and it would be impractical, to assess each occupier of shop premises on their turnover - a figure that would be different for every occupier and which would have to be re-assessed on each change of occupier. In his opinion it would only be necessary to differentiate between particular uses for shop premises if it could be demonstrated clearly that a specified use generated a level of rental value obviously distinctive from the general level of rental values for shops occupied as shops. He had not found such differentiation here while, on the other hand, he had found ample comparative evidence of the level of rents for shop premises.
45. Mr Michalski had analysed the leases of shop premises in the Overgate centre. He had adjusted the established passing rents in order to equate them with the terms set out in section 6(8) of the Valuation and Rating (Scotland) Act 1956. The factors for which adjustment was made included the length of lease, rent-free period and reverse premia. The rents were discounted from their commencement date to April 1993. The typical term of lease in the centre is fifteen years. The information available to the assessor was that rents had risen by 10% between April 1993 and April 2000. The adjusted rents produced a range of rate per square metre for reduced rental area for upper level shop units from £724 to £1,155. In Mr Michalski's opinion, the spread of rents in the Overgate centre was not due to significant differences in location but to the differing incentives offered to each tenant taking space in the new development.
46. The adjusted rent for the appeal subjects was the lowest of the range. Mr Michalski explained that in adjusting the rent for the appeal subjects he had assumed a five-year and not a fifteen-year period for the lease, in view of the nature of the rent review provisions. He had also not made any additional adjustment for the 5-month rent-free period enjoyed by the appellants that was two months more than the standard allowance for shop fitting. An allowance had been made for a £15,000 capital contribution to fitting out by the landlord in respect of the provision of the toilet area. The adjustments had therefore been favourable to the tenant. If the allowances on the applicants' lease had been calculated over a fifteen-year, rather than a five-year, period the resulting adjusted rent per square metre would have been £788. If the incentives were ignored the rate would have been £837/m2.
47. Ignoring the upper and lower quartiles, of the rates for all the shops, an average rate of £889/m2 was derived which was, after negotiation and discounting back to the tone date, reduced to the Zone A rate of £815/m2.
48. While acknowledging that, as analysed, the rent for the appeal subjects was the lowest in the range obtained from the upper mall units, he maintained that it was sufficiently close in value to the others in the range to be included with them as a group.
49. He also observed that, treated on an overall basis, the range of shop rents was from £313/m2 to £1155/m2. The extent of that range arose from variation in the incentives paid to individual tenants. The appeal subjects, with an overall rate of £455/m2, were within that range.
50. On the other hand, he was of the view that the rent actually paid for the subjects was not consistent with the level of rents found by analysing the mall cafés. Nor were the mall cafés physically similar to the shop unit occupied by the appeal subjects. He compared the relationship to a shop in a street of shops with pavement cafés in the open street. He noted that the front of the shop unit was open to the mall, but that this feature was at the option of the occupier. The shop unit had its own electrical, heating and ventilation systems, but the cafés in the mall were dependent on the mall lighting and environmental control. The cafés did not have their own toilets: clients and staff had to use the public toilets. The cafés have limited storage areas within the counter units in the mall, their secure storage areas being separate and behind the shop units. The cafés did not require the level of fitting out costs needed for a shop unit. The average cost of fitting out a shop unit in the centre, on an overall area basis, is £35/m2, or £700/m2 if capitalised at 5%. On a reduced area basis the cost is £56/m2.
51. Mr Michalski drew attention to the overall rate of £685/m2 derived from the rent paid by the tenant of O'Brian's a catering establishment in a shop unit on the ground floor of the centre. That was more than twice the rate of rent paid by the tenants of the mall café areas. The Café Venue on the ground floor paid a rent equivalent to £200/m2. He discounted that rent because it had been negotiated with Debenham's, an anchor tenant, who may have been expected to obtain concessions. The overall rates for the rent of the three upper level cafés were £318, £332 and £339/m2. That range of rents he found to be discrete and separate from the range of rents paid for shops. The distinction became more pronounced if shop-fitting costs were taken into account.
52. Mr Michalski had not attempted a valuation based on the estimated turnover figures for 2000 and 2001. However, using the same assumption as Mr McClimens, that 20% of turnover represented an affordable rent, he had measured the rate of increase in turnover between the two years at 13.02%. He had then projected to the fifth year of the lease at a rate of 10% per annum thereafter. Averaging the three projected year results he estimated that the typical annual turnover in any of these years would be £486,870, or 21.37% above the year 2001 level. Applying 20% to that figure he reckoned that an affordable rent for the subjects in their present use would be £97,374. He used this exercise to demonstrate that the rent passing therefore bore a real relationship to the turnover at present and to be expected in the near future.
53. His conclusion was that the valuation of the appeal subjects was supported by physical comparison with other shops and by economic comparison with other shops through their own rent.
54. It was agreed by both valuers that there was no direct comparison of value between the Overgate centre and the Braehead centre, nor between the Overgate centre and the surrounding commercial properties in the centre of Dundee. However, Mr Michalski referred to the evidence of properties in the city centre to demonstrate that catering establishment and other non-mainstream retail uses, such as banks, betting shops, hairdressers and travel agents that occupied shops in established shopping streets were valued in comparison with other shops.
55. Mr Michalski disagreed with the applicants' proposition that the differential found between catering establishment rents and shop unit rents at the Braehead centre should be imported to the Overgate centre. He pointed out that the ten food outlets at the Braehead centre were grouped in a separate area from the main shopping area. There are no food outlets in the main shopping area at Braehead. The deliberate provision for food outlets at the Braehead centre in a separate area, which was not a retail area, would be expected to result in a different level of value from the main mall and the retail frontage there. It was not therefore possible to suggest that the difference in value between the shops in the main mall and the food outlets in their reserved area was attributable solely to the nature of the use of the units.
56. Mr. Michalski's valuation of the subjects as a shop was as follows:-
57. This differed from the entry on the Roll only insofar as the original proposed Zone A rate was adjusted downwards in negotiation with ratepayers' agents to £815. Mr. Michalski did not accept that any of the toilet area should be excluded from valuation. The shops at the Centre had a variety of staff facilities, mostly including toilets.
58. In the event that the subjects were properly described as a café (or restaurant), Mr. Michalski's primary valuation was the same. Further, he attacked Mr. McClimens' valuations on this basis for a number of reasons. In relation to the primary valuation as a café, Mr. McClimens had, by taking the Café Venue rate and reducing it to a value for the upper level, produced a rate lower than that of any of the cafés: an average rate of £343/m2 would have been more appropriate. Further, this method made no allowance for the advantages which the subjects had over the café areas. These should bring the valuation up to his own figure, or result in an increase of at least 25%. If a turnover approach was being adopted, Mr. Michalski suggested that it would be better to use actual figures - 20% of the 2001 figure would be £78,800, and the appropriate back-dating of that would not be on a cost of living index but rather at 10%, which was a figure generally agreed in relation to the "rest of the shop units", which would produce a value of £71,000.
59. Introducing his submissions, Mr. MacIver placed the appeal in context by referring to the 'tone of the roll' provisions in Section 15 of the Local Government (Scotland) Act 1966 and to the grounds on which the Tribunal had, on appeal, accepted the reference. He said that the appeal was about the two limbs of the actual state rule: whereas the respondent, he said, considered that the question whether the subjects should be valued in comparison with shops or with other subjects was academic, the applicants contended that the actual usage of the subjects, which they maintained was as a café, was of paramount importance.
60. Mr. MacIver reviewed the evidence, highlighting certain points. He referred in particular to the way in which the rent of the subjects had been negotiated, and to the terms of the agreement with the landlord, for example in relation to toilet accommodation, as supporting the unreliability of the comparison with shops. Mr. Schlesinger had "got the level of rent very wrong". The applicants had attempted to follow a 'food court' style of operation. The evidence about the position adopted by McDonald's in relation to the level of rent in their negotiation in relation to a similar type of operation supported the view that the rental level for this type of use was lower, as did the reduced area rental rate of the subjects, £724, compared with the average of £906 for all the upper level shops. The applicants were asking for parity of approach with the approach of the assessor at Braehead, who had recognised four situations: shops, kiosks, restaurants and public houses. The applicants' own subjects there, 'Fat Jackets', were similar but had been subject to an entirely different methodology from that applied by the respondent to the appeal subjects.
61. Mr. MacIver elaborated on the differences between the lease terms of the subjects and the position of mainstream shops. Firstly, there was the rent review capping provision with its reference to the level of turnover. Secondly, reference was made to the permitted use under the lease of the subjects, which Mr. MacIver claimed was extremely restrictive, and to the principal rent review provisions of the lease (the capping provision being personal to the applicants): the assumptions to be used at rent reviews were based on the (very restricted) permitted use. Thirdly, the agreement for the provision of toilets for use by the general public as well as customers and staff, would be over-provision in the case of a shop.
62. Referring to Mr. Michalski's evidence, Mr. MacIver pointed out that Mr. Michalski had accepted that the subjects had the lowest rental rate analysis of any of the shops. His way of defining shops as including every form of retail activity could not be right when other categories such as supermarkets and public houses, each of which would fall under that definition, had been recognised. The assessor had failed to recognise the similarities between the subjects and the mall cafés. O'Brien's sandwich shop, referred to by the assessor, was an extremely small unit. On the comparison with the other city centre subjects, Mr. Michalski had failed to take account of the difference in relation to opening hours: it was legitimate to compare the values of cafés and shops provided that comparison among subjects with the same use demonstrated that the levels were the same, and Mr. MacIver accepted that there might be a basis for that view in the city centre comparisons, but the situation at the Overgate Centre was different in relation to opening hours as well as rent levels.
63. Turning to his submissions on the law, Mr. MacIver referred to authorities on the actual state rule, in particular under the current law following the Valuation and Rating (Scotland) Act 1956. Subjects must be valued in their actual physical state and according to the use to which they are devoted. He referred to the opinions of Lord Patrick in Assessor for Lanarkshire v Smith 1962 S. C. 517 and Assessor for Moray and Nairn v Elgin High Church Trs. 1962 S. C. 524 and to the opinions of Lords Patrick, Sorn and Hunter in Assessor for Stirling v Myles and Binnie 1962 S. C. 530, and to Armour at 18-01,02,03,06,10 and 14. Reference was also made to recent authoritative consideration of the rule - there generally referred to as 'Rebus Sic Stantibus' - by the Lands Tribunal and then the Court of Appeal in England, in Scottish and Newcastle Retail Limited and Another v Williams  R. A. 119, at paras. 21, 119, 140, 147-151, 155, 191, 196 and 198 ; and Williams v Scottish and Newcastle Retail Limited and Another  R. A. 41, at paras. 3, 9, 17, 21, 22, 27, 64 and 68. The rule, the second limb of which was in that case challenged by the valuation officer, had been reaffirmed, and it had been said that the rule was the same as in Scotland.
64. On the first limb of the rule, relating to physical state, the Tribunal and the court in Williams had considered that alterations which the hypothetical tenant might make could be taken into account if, taken overall, they were minor. Dealing with the application of that suggestion in this case, Mr. MacIver contrasted the stripping-down costs spoken to by Mr. Rhind in this case, at £58.60/m2, with those at the two English subjects, at £78.11 and £53.40/m2, which had been found not to be minor with the result that, even on application of the first limb, the public houses in Williams could not be compared with the shops. In the case of the subjects, Mr. MacIver argued, major refurbishment would be required for them to be used as a shop.
65. Mr. MacIver accepted that it was important that different subjects must command different rents in order for a different category to be established. That condition was satisfied here: the café subjects commanded different levels of rent from the shops; McDonalds' perception that the landlords' asking rent was not viable for them provided support; and the level of actual rent of the subjects, on which the respondent relied, was excessively high.
66. Mr. MacIver referred to views expressed by the Lands Valuation Appeal Court in Texstyle World v Assessor for Strathclyde 1995 S.C. 588. That was a dispute about categorisation of retail subjects, in which there was agreed to be a very considerable difference in values between retail warehouses and shops but counsel had been unable to specify the material differences. It had also been said that what mattered was actual use, not what use, on one possible interpretation of the lease, the premises might be restricted to. Lord Clyde had observed at page 592A-B:-
"Categorisation should not become so rigid a master of the process as to cause sight to be lost of the purposes of the process"
which purpose he had identified as the ascertainment of the fair value of the lands and heritages. If the Tribunal was not sufficiently persuaded of the correctness of Mr. McClimens' primary valuation on comparison with café areas, Mr. MacIver relied on Lord Clyde's approach in advancing the alternative, "quasi-turnover", valuation, which reflected the provisions of the lease of the subjects.
67. Mr. MacIver submitted that the actual rental, while it might be important evidence, was not conclusive as to value - Armour 17-01.
68. Finally, Mr. MacIver moved the Tribunal to alter the description of the subjects to 'Café' even if the subjects were to be valued by comparison with the other shops.
69. In answer to a question by the Tribunal as to whether the subjects might be described as 'Restaurant', Mr. MacIver said that the permitted user under the lease was for sale of hot and cold food for consumption on or off the premises and that was in some ways slightly more restricted than restaurant use, certainly licensed restaurant use.
70. Mr. Doherty started by indicating that this was not a case where there was any issue about the principles underlying the actual state rule - the question was as to its application in the circumstances of the case. The respondent's primary position was that the existing use of the subjects was properly regarded as within the range of shop uses, whereas the applicants presented café use as a separate and different category.
71. Mr. Doherty submitted that, looking at the physical circumstances, the subjects were a shop: there was nothing to take them out of that category, particularly when it was remembered that the lands and heritages were to be considered on a vacant and to let basis, i.e. without moveable fittings and furnishings such as the ovens in this case. None of the features referred to by Mr. McClimens - the kitchen and servery, the arrangement of the seating, and the toilet accommodation - prevented the subjects from being a shop.
72. As to use, this was within the broad category of shop use. Fast food restaurants were, Mr. Doherty argued, a type of shop, one of the types of retail uses carried on in shops. Reference was made to the opinion of Lord Patrick in Wood v Aberdeenshire Assessor  R. A. 101 at 103 :-
"Now it is perfectly true that heritage must be valued in its proper category, but valuation law and practice do not require that general categories of heritage should be minutely sub-divided. Shops are valued as shops, not as grocers' shops or as butchers' shops. Factories are valued as factories, not as factories for producing tweed or factories for producing wireless components. Exceptions are only carved out of general categories if it is shown that heritage of the alleged exceptional kind commands rents of a different order from heritage belonging to the general category."
73. Mr. Doherty submitted that planning use was not determinative, and referred to Williams, supra, at  R. A. 63 (para. 72). In any event, a change from Class 3 to Class 1 use was not development which required planning permission - Town and Country Planning (General Permitted Development) (Scotland) Order 1992, Schedule 1, Clause 10; and the same applied to hot food take-away use - Town and Country Planning (General Permitted Development) (Scotland) (Amendment No. 2) Order 1997.
74. Turning to the rental evidence, Mr. Doherty submitted that this did not indicate that cafés or fast food restaurants in shop premises commanded different rents from neighbouring shops. Outwith the Centre - and Mr. McClimens accepted this - shops and cafés in shopping streets did command the same rents. One type of shop use was as a café, and if it was to be suggested that this was a separate category that must be supported by rental evidence. It was clear beyond dispute that this was not the case in the city centre streets. At Overgate, the actual rent for the subjects was within the range of shop rents at the upper level, albeit at the lowest end of the range. A possible explanation for the rental rate of £724/m2 for the appeal subjects being lowest was the way in which the respondent had analysed and adjusted the rent, allocating the rent-free period and the capital contribution over 5 years although there was no guaranteed right to break: over 15 years, at £788/m2, the figure was much nearer the average. On the face of it, this rent did not indicate that within the Centre this subject should be carved out into a separate category.
75. Mr. Doherty submitted that it would not be appropriate to ignore this rent as being the result of a bad bargain. It was a bona fide rent, struck at arm's length, conditioned by the market, what the landlord would accept and the tenant would pay. Mr. Schlesinger was not naïve. In Texstyle World, supra, Lord Clyde had spoken, at page 592E, of the difficulty of ignoring the actual rent which had been found to be bona fide. The fact that it was within the range of shop rents confirmed what was to be expected, having regard to rents for cafés and fast food restaurants outwith Overgate.
76. If the subjects were correctly described and valued as a shop, there was no dispute about the Zone A rate of £815/m2 or the resultant calculations. The only dispute in that event related to the toilets. What was not in dispute was that these were part of the subjects let; there was no obligation under the lease to admit members of the public who were not customers; and there was no signage to attract such use. The toilets were clearly of benefit to the tenants, for the use of their customers and staff.
77. Turning to the position in the event that, contrary to the respondent's primary contention, the existing use of the subjects was not shop use, Mr. Doherty submitted that the candidates for appropriate comparison were the surrounding shops and the open cafés in the mall. Even on this approach, the best evidence of value was comparison with the neighbouring shops. It was the lands and heritages which were being valued, and the open mall cafés were very different physically: they were not in purpose-built shop units; there was no structural separation from the mall; they did not have their own ventilation and extraction; they had no kitchens; they had no toilets; and they had no on-site storage. The shops on the other hand were physically almost identical: with minor changes, they could be used for almost all mainstream shop uses. The rents of the open mall cafés were very much lower than the rent of the appeal subjects, indicating that the open cafés were in a different category from the appeal subjects and did not provide an appropriate comparison. The physical differences and the clear rental difference suggested very different categories.
78. Mr. Doherty had three observations about the suggestion that differences in opening hours as between Overgate and the city centre streets might affect the position: firstly, although the subjects were not open in the evenings, they were open on Sundays; secondly, on the evidence there did not appear to be much indication of evening activity in the city centre shopping streets; and thirdly, the rental evidence of the subjects, being equivalent to shop rents on the upper mall, not only did not provide support, but indicated otherwise.
79. Mr. Doherty suggested that the other factors relied on by the applicants should be rejected. At Braehead, the cafés were grouped together in an enclave which was clearly in a secondary location which would command lower levels of rent. The evidence of the McDonalds negotiation comprised one letter on one side of a transaction that did not proceed. Texstyle World, supra, was not in point - there, the agreed evidence showed very clearly that shops and retail warehouses commanded very different rents and there was no evidence before the Committee of rental values coalescing at the margins. The court's criticism was of rigidity of approach: the valuation ought to reflect the rental evidence, and if a difference in that is established - as it was not here, on the critical rental evidence - that should be reflected.
80. On the matter of the stripping-out costs relied on by the applicants, Mr. Doherty referred to Williams, supra, in the Court of Appeal, at  R. A. 46, para. 13., and pointed out that in that case the stripping-out costs amounted to 75% and 60% of the rents of the two subjects, compared with 11% in the present case.
81. Mr. Doherty also referred to the Lands Tribunal's consideration in Williams, supra, of reference to rents and assessments of subjects in different use, at  R.A. 168-170, paras. 140-143. At para. 140, they had given an example of a shopping street which contained offices as well as shops and A3 uses which reflected the respondent's approach on this issue. An assumption that one use was either more or less valuable than another was not a correct starting point in considering such an exercise, and a line had to be drawn in relation to the extent of application of the hypothesis as to use of subjects other than the subjects being valued. Similar questions were considered in Ryde on Rating at page E253, paras. , - and by Lord Gill in Assessor for Highland and Western Isles v Barratt International Resorts Limited and Others 1997 S. C. 384 at 393H-394B, referred to in Armour, 17-19A. There was also a reference to this situation in Armour, 18-11, footnote 4.
82. Finally, Mr. Doherty submitted that in any event the applicants' two valuations were each based on flawed approaches. The valuation at £42,000 in comparison with open cafés involved 'cherry-picking' of the Café Venue value, the rent for those subjects having been shown to be unreliable. Averaging the net annual values of the three upper mall café areas produced a value of £59,000, which would then require to be adjusted to make allowance for the physical advantages of the subjects - the respondent would say to the same as his value, but in any event by at least 25%, which would result in £73,500. The second, "quasi-turnover", approach was inappropriate. There was no evidence of any other subjects anywhere being valued on this basis. If this method was being adopted, the better figure for turnover would be the actual 2001 turnover of £394,000, 20% of which was £78,400. That should be back-dated at the factor used for rental growth (10%, resulting in £71,000) rather than the retail price index favoured by Mr. McClimens (which would result in £64,000). It should be remembered that each of the applicant's valuations of £42,000 and £59,000 was away out of line with the actual rent passing (£77,896, as adjusted by the respondent, which would back-date to around £70,000)
83. The principles to be applied in the particular circumstances of this case are not in doubt. In accordance with Section 6(8) of the Act of 1956, we are required to determine the hypothetical rent which would be agreed for the subjects on a year to year basis (but with a reasonable expectation of continuance) on the statutory hypothetical terms. Section 15 of the Act of 1966 requires us to adjust for 'tone of the roll', assuming in particular the same 'mode or category of occupation' as at the valuation date. Although there has been some reference to the use of a percentage of turnover as a measure of value in this case, the primary method of valuation with which we are concerned is the 'Comparative' principle, under which the annual value is estimated on a consideration of actual rents passing both in respect of the subjects and in respect of subjects comparable in size, character and situation. The actual rent of the subjects is not determinative, but if found to be bona fide concluded between two parties negotiating at arm's length may be important, the precise weight to be given to it depending on the circumstances and in particular the extent and quality of evidence of rents of comparable subjects.
84. The 'Actual State' rule, which parties are agreed we have to apply, is that "the subjects must be valued as they stand and according to the use to which they are devoted" (Assessor for Moray and Nairn v Elgin High Church, supra, per Lord Patrick at 529). It thus has two limbs : firstly, the subjects are to be valued according to their actual physical state and without reference to potential adaptation to command a higher rent ; and, secondly, they are also to be valued only on the basis of their existing use, i.e. mode or category of occupation by the present occupier, without reference to the value which they might have if used differently (unless the existing use involves arbitrary restriction or sterilisation, as to which no issue arises in the present case). It is also clear that while planning permission may be a guide in practice to how the subjects are used, the planning position is not determinative; and likewise the provisions of the lease of the subjects in relation to permitted uses does not provide the answer.
85. As to modes or categories of occupation, the well known dictum of Lord Patrick in Wood v Aberdeenshire Assessor, supra, reminds us that categories of subjects are general and not to be minutely sub-divided. It follows that application of the first limb requires to be on the common sense basis that minor physical alterations can be envisaged: one type of shop or factory may require slightly different physical fitting-out from another, and indeed the individual styles and brand identities even of occupiers in the same line of business may dictate minor alterations to the lands and heritages which are properly to be ignored. The exact formulation of this necessary qualification, if such it be, of the first limb of the rule has not been explored in the Scottish cases. Neither party, however, took issue with the way this matter was put by the Lands Tribunal, upheld by the Court of Appeal, in Williams, supra:-
"Alterations which the hypothetical tenant might make to the hereditament may be taken into account if, taken overall, they are minor. All other prospective alterations to the hereditament are to be ignored." ( R. A. 192, para.198)
86. We are happy to proceed on the same basis.
87. It also follows from the direction not to sub-divide categories minutely that, as Mr. MacIver acknowledged, and again as Lord Patrick put it in Wood, supra:-
"Exceptions are only carved out of general categories if it is shown that heritage of the alleged exceptional kind commands rents of a different order from heritage belonging to the general category."
88. In the present case, therefore, the first issue which we have to determine is whether, in the particular circumstances of these subjects and on the evidence which has been led before us, these subjects consisting of a basic shop unit fitted out and used as they are fall within the general category of shop, fall within the general category of café (or restaurant), or comprise some different, exceptional category which commands a different level of rent. The first issue thus to an extent overlaps with the second issue which involves ascertaining the value of the subjects on the basis of the category established.
89. We think, however, that the dicta, albeit obiter, of their Lordships, and particularly Lord Clyde, in Texstyle World, supra, are also pertinent. It was emphasised that over-rigidity of categories is to be avoided. The purpose is always to ascertain the fair value of the subjects. It seems to us to follow, particularly in a case where there is difficulty in categorising and a shortage of directly comparable evidence, that the valuer applying valuation skill and judgment may, as well as applying that judgment to categorisation, look to some extent at values of subjects outside the chosen category for guidance. Again, the Lands Tribunal in Williams, supra, recognised this ( R. A. at 192, para. 198). We are also reminded in Texstyle World that the rent of the actual subjects may be very important: when a bona fide rent which is at a different level from other rents is encountered, the valuer has to exercise skill and judgment to decide, on the basis of all the relevant evidence, whether the difference is significant or merely the sort of variation sometimes referred to as the "higgling of the market". The result after all the evidence has been considered may in some cases be a modification, appropriate to the subjects in their actual state, from the value level of the established category.
90. It should also be noted that the description of subjects which requires to be entered on the Valuation Roll should, we think, have regard to the use and not simply the physical description of the subjects. In Myles and Binnie, supra, Lord Sorn referred in this connection to Section 1 of the Lands Valuation (Scotland) Act 1954, which directed the Assessor to make an entry inter alia "specifying the nature of such lands and heritages", and indicated that this had always been understood to refer to the use of the subjects. Section 1 was repealed by the Local Government (Scotland) Act 1975, and the form of the Roll is now regulated by the Valuation Roll and Valuation Notice (Scotland) Order 1989. This does not use the same expression, the requirement now being for a 'Description' of the subjects. Counsel did not address us on this matter, but we think it preferable and in accordance with normal practice that the description should continue to reflect the use of the subjects, although there can be situations in which the matter is academic because the value of subjects used differently is nevertheless the same.
91. The correct description of these subjects for valuation purposes (and the description which should be entered on the Roll) is in our opinion as a restaurant and not as a shop.
92. We are of the clear view that the subjects are not a shop. It is understandable that the Assessor, in the knowledge and understanding that restaurants (or cafés) may often in fact have the same value as shops, has entered the subjects as a shop, but in our view in doing so he has concentrated unduly on the physical position. Cafés or restaurants are in our view in a different general category from shops and are not simply a sub-division of shop use. In the case of food outlets, in our view consumption on the premises to the extent found at the subjects distinguishes the use of the subjects from 'retail sale of goods or services', the dictionary definition relied on by the Assessor. We have accepted Mr. Schlesinger's evidence that the provision of sufficient 'covers' within the unit was important enough for the applicants to insist that if toilets had to be provided further space outwith the original planned unit had to be found. The major area, around two-thirds of the subjects, comprises space for tables and chairs for customers to sit and eat or drink. No doubt there is also consumption off the premises, so that some of the use of the kitchen and servery area relates to consumption off the premises, and no doubt the dividing line between premises used as 'takeaways' and premises used for consumption on the premises is not easy to draw, but in our view the present subjects are not a shop. To describe this as a shop but the café areas as cafés, as the Assessor does, in our view gives undue significance to the different physical appearances. In the same way as the Assessor in Myles, supra, was wrong to describe the subjects there as a shop although they were basic shop premises, so, in our view on the evidence, the Assessor is wrong here. For valuation purposes, a 'café (or restaurant) in a shop', or a 'shop used as a café (or restaurant)', is not , in our view, a shop.
93. Whether cafés and restaurants are one category or two, and if the latter into which the subjects here fall, are perhaps even more difficult questions. Again, we hesitate to suggest any general rule, but in our view the subjects are in the nature of a restaurant rather than a café and this again does not involve minute sub-division but rather recognition of restaurant as a general mode or category of use. We think substantial preparation and cooking of food as well as drink marks premises out as a restaurant, although undoubtedly in the case of 'fast food' the dividing line with café is a fine one. We would accept that this case is close to that dividing line. The closeness is illustrated by 'Millies', where there is an oven and therefore some use for cooking, but it seems to us that those subjects are properly considered a café, where although there is consumption on the premises the degree of fitting out of the premises for preparation and cooking is of a different order from that in premises such as the subjects where there is a substantial kitchen area for preparation and cooking of meals as well as the servery. No doubt some premises which describe themselves as cafés may on our approach fall on the side of restaurants, and possibly vice versa, but what matters is of course what is actually found not what name is used to describe it. In line with the approach suggested in the previous section, having found this case close to the dividing line with cafés, we should as one part of the valuation exercise consider what, if anything, is to be learned from the values of the café areas which are very close to the subjects and not so very different in use although quite different in physical appearance.
94. We are fortified to some extent in our view as to the description of the subjects by the evidence of what the respondent and one other Assessor has done in relation to other subjects. As already mentioned, at Overgate the respondent describes four subjects as cafés. He thus appears to recognise at least café as a separate mode or category of use even although he resists description of subjects occupying shop units as anything other than shops. Further, we note that in the city centre of Dundee the respondent describes subjects occupied by McDonald's (which we have found to be an essentially similar operation to that of the applicants), Pizza Hut, and The Pancake Place as restaurants, although of course he has - correctly, it is accepted, at these locations - valued them at the same level as shops. He, however, describes Costa Coffee in a city centre street as a shop. Then, at Braehead, the Assessor, while distinguishing public houses, apparently describes such fast food outlets as Fat Jackets and McDonald's as restaurants, but also includes cafés such as Millies and Costa Coffee under the description of restaurants, i.e. he apparently does not make the distinction between cafés and restaurants.
95. On the first limb of the actual state' rule, we find in favour of the respondent. It seems to us that the actual physical state of the subjects is substantially that of a shop and that part of the rule does not prevent comparison with shop rentals. While we can accept that most of the stripping out costs of around £10,000 would in fact be incurred if there was a change of tenant involving change of use to shop, we find that to be overall minor, and indeed it appears that it may well not be much different from costs which would be incurred on a change of tenancy even if there was no change of use.
96. It is the second limb of the rule which raises real difficulty in the present case. We have found the subjects not to be in the general category of shop, so direct comparison with shop values is not permissible unless it is found that in the circumstances at that location the value of a restaurant is at the same level as that of a shop. The difficulty of course is that at Overgate, while there are cafés, there are no other restaurants. McDonald's would have been a restaurant, but we can only look with very great care at figures referred to in a negotiation which did not result in an agreement.
97. In considering the correct valuation of the subjects as a restaurant (but whose use is close to the dividing line with cafés) in the light of the established facts and the competing opinions and submissions, we have considered five chapters: the rents of shops, and also of the café areas, at Overgate; the position in the city centre of Dundee; the position at Braehead; the McDonald's negotiation; and the rent of the subjects. We list the rent last because in a sense its significance is easier to weigh up in the light of the extent of other evidence, but we do agree with Mr. Doherty's submission that in this particular case (in which there are no comparables in the same position as the subjects) the rent is critical: the respondent places considerable reliance on the rent being in line with the shop rents, whereas the applicants argue firstly that it should be ignored as grossly excessive and secondly that in any event it can be seen to be out of line with the shop rents.
98. Reference to the analyses of upper and lower level rents reveals a general pattern of increasing rates with decreasing sizes, subject to some exceptions. At both levels, there are clusters of units of something around a standard size. We think that looking at the subjects in relation to these other units of similar size may be more instructive than looking at the overall range or the overall average. The reduced area rates for these five (which are all in the close vicinity of the subjects) on the respondent's analysis, are £860, £936, £929, £942/m2 and (the subjects) £724/m2, an average of around £878/m2 (£917/m2 excluding the subjects). Including the subjects with this group its reduced area rental rate is 17.5% less than its closest comparables. Excluding the subjects its reduced area rental rate is 21% less.
99. Of the three exceptions on the lower level to the general correlation between rental rate and size, we heard evidence about only one, Unit KL1. This was occupied by O'Brien's Sandwich Bar, and is accordingly a sixth food unit in the centre. Its reduced (and, in this case, also overall) area is 43.77m2, and its reduced area (and also overall area) rate £685/m2. The respondent correctly pointed out that this is a much higher overall rate than that for the café areas, but on the other hand it is a very much lower rate than one would expect for a shop of its very small size. It comprises a preparation area, a servery which mainly serves sandwiches, etc. to take away, and a very small seating area. Its neighbour, L28, is another very small unit with an exceptionally low rent rate considering its size. We have no difficulty with the categorisation of O'Brien's as a shop, having regard to the essentially 'take-away' character. On the limited evidence about it we think that its unusually low rental rate (as a shop) may be accounted for simply by its location and odd shape. We do not therefore think that O'Briens provides much support for either side of the argument.
100. All these figure are on the basis of the adjusted rent rates shown by the Assessor on AS6. While it seems preferable to proceed on the basis of applying the standard technique of adjusting for landlord's inducements negotiated in the open market at arm's length, it might be suggested that in the opening negotiations at the start-up of a shopping centre development inducements may in some way not necessarily reflect the hypothetical leasing situation. Even, however, ignoring inducements and looking at the actual gross rents, the rent of the subjects seems to us to be out of line. The reduced area rental rate for the subjects is on that basis £837/m2 Of the four subjects of similar size in the immediate vicinity, two show no adjustment, at rates of £942 and £929/m2. The other two have rates of £936 and £860/m2 after adjustments of 5% and 7%. The gross rents (with reduced areas) are £90,000 (97.36m2), £97,000 (98.58m2), £95,000 (102.22m2), and £97,500 (103.54m2) compared with the subjects at £90,000 (107.56m2). These figures are before consideration of the fact that the landlord of the subjects granted an exceptional rent review capping provision.
101. The rental analysis of shops at Overgate confirms that the rent of the subjects is rather lower than that of not only the average of shop rents but also rents of shops of similar size in the immediate vicinity. We think the fairest comparison between the rent of the subjects and the rent for the four nearby shops of similar size, analysed on a zoning basis, shows the rent of the subjects to be approximately 15% lower. We see no reason not to adjust the rent of the subjects for the two landlord's inducements, i.e. the rent-free period and the capital contribution in respect of the toilets: there is no suggestion that either of these is wrong, and although only two of the four nearby shops have inducements there is no indication of any error in these and we consider we should follow them. We think, however, that there is some substance in the respondent's uncertainty as to whether these adjustments should be calculated on the basis of 5 rather than 15 years' amortising, despite the fact that he himself took the former in the analysis produced. There is not a certain break at 5 years. On the other hand, there is a provision which might result in a break. It seems fairest to analyse these inducements on the basis of 10 years. We would therefore take the reduced area rental rate at £774/m2. We would add the fitting-out costs (which are on a standard area rate rather than a percentage) of £56/m2, bringing the rate to £830/m2. In respect of the four shops, which are marginally smaller, we would again add the fitting-out costs at £56/m2 increasing the average reduced area rate from £917 to £973/m2. £830 is approximately 15% less than £973.
102. The question which has to be addressed is whether this difference results from the occupation of the subjects as a restaurant or is simply the type of difference which one would expect to be encountered in a range of rents. Overgate of course involves one landlord, from whom one might expect a consistent approach to the level of rent. However, there are a variety of tenants and the rents are all first rents at a new centre and therefore may reflect a variety of negotiating situations unrelated to the characteristics of the units themselves: although the respondent has adjusted for inducements of which he was made aware, it is a very different situation from the review situation. The difference between the rent and the subjects round about does not of itself necessarily reflect the different use of the subjects.
103. Looking to the rents of the four café areas, Café Venue, although of a similar size on an overall basis to the subjects of appeal, appears to be of little assistance because it was apparently negotiated along with the Debenhams lease. The café areas are not susceptible to analysis on a zoning basis. The rental rates, on an overall area basis, for the three café areas on the upper level, close to the subjects of appeal, are within a close range, at £339, £318 and £332/m2, an average of £329/m2 (Café Venue : £200/m2). The corresponding figures, i.e. the overall area rental rate after adjusting for inducements and before adding for fitting-out, for the subjects of appeal is £455/m2 and for the four shop units around the same size at the same upper level location as the subjects £589, £623, £634 and £667/m2, an average of £628/m2.
104. In considering what assistance is to be derived from café rents at the same location as the subjects, we first note that although we find the subjects of appeal to be a restaurant there is a fairly narrow dividing line between that and café, and the subjects are close to that line. It seems to us that the use is quite similar. We accept Mr. Schlesinger's evidence that he would have been interested in one of the café areas for the applicants' operation and in the actual operation of the subjects was trying to re-create a 'food court' style. In the situation where we do not have another restaurant rent, it seems to us that the café rents show that an occupation of a similar kind attracts a substantially lower level of rental value than shops in one of the main malls in the centre.
105. On the other hand, there are considerable physical differences between the subjects and the café areas. Do these differences rule out any comparison? If not, how is the difference to be assessed? We are first of all clear that the differences are such as to rule out direct comparison. The subjects of appeal have substantial kitchen and preparation areas, and also toilets, which the café areas do not have. The subjects of appeal have direct access to their store area, whereas the café area occupiers have to walk round to their stores in the service corridor behind the shops. These are definitely advantages which the subjects enjoy over the café areas. The subjects also have their own heating and ventilation. This we think must be accepted as an advantage also, although we note that the applicants could have operated in one of the café areas and they presumably have the expense and upkeep of their own systems whereas the café areas simply get the benefit of the centre systems of heating and ventilation.
106. What is more difficult to assess is the general comparison. The respondent considers the subjects to be clearly superior because they have their own walls. This we can understand if the subjects are looked on as a shop, but they are not a shop and their occupier in effect has tried to get away from the shop appearance towards an open appearance. Certainly, there is little security advantage: not only is the entrance not capable of being secured, but the servery and kitchen areas also cannot be (although of course, stores, etc. can be locked.) The security for the subjects is the overall security of the centre and is in that respect similar to that of the café areas, although it may be noted that one or two of the shops, and the Bank of Scotland who might be expected to have a particular concern about security, have similarly opened up their frontage to the malls. No doubt control over subjects configured like a shop may be easier than the open areas of the cafés. The café areas are more immediately visible to potential customers than the subjects, although cafés may be more susceptible to impulse visits making visibility more important than for restaurants. Generally, apart from the particular advantages which we have noted, we are not at all sure that the fact of operating in a shop unit would be regarded by a hypothetical occupier of a restaurant in that mall as a particularly valuable advantage over the café area style.
107. There was no serious dispute about the position in the city centre streets, relied on by the respondent as showing that café and other uses of shop premises command the same level of rents as shops. In particular, Mr. McClimens accepted that it was so in the locations referred to by the respondent. We accept that AS7 demonstrates this. The rental basis in relation to cafés and restaurants seems very thin, particularly as such few rents as there are in relation to such subjects are, by contrast with the Overgate rents, spread over a period of about ten years, but the respondent is entitled to rely on general acceptance by professional agents such as Mr. McClimens. Mr. McClimens does not, however, accept that it follows that the same is to be found inside a shopping centre such as Overgate. He suggested that there is an important difference in that in the open streets food subjects may be open at night when shops are closed. We did note in our inspection of the area that some of the food subjects on AS7 do open until quite late at night, while others do not.
108. Whether or not the difference in relation to opening hours is significant, we are not persuaded that the values of food subjects within Overgate necessarily equate with the values of neighbouring shops just because they are in similar premises. We note that the highest Zone A rate at which AS7 demonstrates that equivalence is £345, the rate at which McDonald's and Costa Coffee subjects in Reform Street are assessed. The Zone A rate at the upper level at Overgate is £815. AS7 does demonstrate the correlation between the value of a bank and neighbouring shops, in Murraygate, which we take to be the main shopping street, at a Zone A rate of £875. We find this matched within Overgate, where the Bank of Scotland in Unit U17, one of the subjects close to and similar in size to the subjects of appeal, pays rent at an adjusted reduced area rate of £929, very much in line with the shop rents. That does not, however, assist in the question whether restaurants (or cafés) match that level of shop rent.
109. In a row of similar premises with different owners, it might not be surprising to find each owner looking as landlord for the highest market rent available. It does not necessarily follow that tenants requiring premises for a different use will pay that level of rent. The hypothetical tenancy requires both. In a shopping centre, the landlord of the whole row is the same, which at least admits of the possibility that in looking to his overall return, he might be prepared to differentiate among different types of use. In the present case, we think it is worthy of note that we were not provided with any evidence as to the position within the Wellgate Centre. That, we noted during our inspection of the area, is another modern shopping centre on the other side of the city centre, indeed right beside some of the subjects to which the respondent referred.
110. In concluding that we are not persuaded that the respondent's position as regards the subjects is demonstrated by the city centre rents, we should be careful to, and do, avoid reaching any conclusion the other way from this evidence. In particular, supposition about the Overgate landlord's position and motives, as to which we heard no direct evidence, is not sufficient. Equally, the applicants could have sought to introduce evidence about Wellgate, but did not. We have to attempt, on weighing up all the evidence which has been laid before us, to reach a view in relation to the particular subjects
111. Braehead differs from Overgate in that it is not a city centre location, and also that it is built on a new site and therefore designed from scratch, whereas Overgate was developed on a restricted city centre site of a particular shape. Our site visit confirmed the respondent's contention that the food units at each of the two levels are in a separate side mall, in effect an enclave. At each level there is one wide main shopping mall with shops on each side, the "high street", with a side mall, the "side street", which, after one or two shops merges into the food and leisure area. Thus, the differences in value levels between the shops in the main mall and the food subjects, which are undisputed although not quantified, and differing methods of valuation, are to be expected. There is similarity in this respect that the food subjects, whether public house, cafés or restaurants occupy their own seating areas, but the food and leisure areas do nevertheless convey a general food court appearance. There are no food units in amongst the shops in the main malls.
112. We think that the most that can be learnt from Braehead is that in that particular situation food subjects like the subjects of appeal are in a different location which for shop use would attract a lower level of value and they are not in the high value shop locations. This might be thought to reflect the position in the Dundee city centre streets and support the contention that these subjects match shop rents in the less valuable side streets but not necessarily in the prime streets. On the other hand, it might simply be a difference between the two different shopping centres.
113. The rent of similar subjects leased by McDonald's, the same category of use, in the immediate vicinity of the subjects of appeal, would provide important evidence. However, the respondent is right to point to the very limited value of the evidence of an unsuccessful negotiation which has been placed before us. One letter has been spoken to, by a witness who was not involved in the negotiation (although his firm was). We are not prepared to accept on that evidence that the reason why the transaction did not proceed was that the parties were unable to agree on rental terms.
114. That may be the explanation, but there are other possibilities. We are also not prepared to accept the figure of £70,000 which McDonald's instructed was their basic figure for rent as a rental figure on which any reliance can be placed. That may well simply have been a negotiating figure which might have been increased
115. However, we think that some slight reliance can be placed on the landlords' apparent negotiating figure of £90,000, which one would not expect to be increased. This did appear to relate to the layout plans enclosed with the letter. There is no zoning analysis of these plans and an overall area analysis would require to make considerable allowance for the service deck store area. Taking that at £50/m2 (the same rate as for the remote stores of the café areas) would suggest an overall rate of £405/m2 in respect of the 214m2 of the proposed enlarged Unit U10. Making some allowance perhaps for the larger size, that would appear to be in a similar range to the rent of the subjects of appeal (£455/m2), and also rather lower than the rents of the shops in the immediate vicinity (£628/m2). That is, however, only a snapshot of a negotiating position on a particular date in March 2000.
116. We have already noted the figures derived from analysis of the rent of the subjects, on a zoning and on an overall area basis. We now consider the applicants' contentions that the agreed rent is excessive and not a reliable figure even after adjustment, and also that there are other features of the lease agreement which are significant.
117. There is no doubt that this was an arms' length commercial agreement. The landlords are experienced developers, and Mr. Schlesinger, although not himself a qualified surveyor, is an experienced negotiator of leases for premises operated by the applicants. Like all prospective tenants, he would do his calculations of the rent which would make the premises viable for the applicants. There is no doubt from his evidence that he did that on the same basis as the statutory hypothesis that the tenant would be liable for rates, although we can accept that he may have miscalculated the likely level of that liability. On one view, if he was anticipating lower rates payments, it might be suggested that there was scope for a higher rent, but we appreciate that that is not the way Mr. Schlesinger looks at it - he rather considers that the sum which he could afford to pay included a lower rates liability and suggests that if he had known that the rates liability was to be higher he would have offered less rent. Tenants have to take a view on all financial aspects and arrive at their rental bid. Again, there is nothing to indicate that the landlords would have agreed any lower figure. Further, Mr. Schlesinger indicated that the applicants were keen to take space at Overgate. We are not prepared to discount the actual rent on this basis.
118. There are, however, other features of this lease agreement which we think may be relevant. Firstly, the landlords were prepared to carve out an area from another unit for toilet areas for the applicant's operation. We are not referring here simply to the capital inducement, which it is accepted affects the rental analysis, but to the landlords' agreement to take space out of Unit U11, a unit in a main (albeit upper) shopping mall, which unit has in fact remained vacant and indeed, if the McDonald's proposal had proceeded would have effectively have been lost altogether with some waste of space. This is not completely inconsistent with the landlord simply being willing to negotiate with a shop tenant, but might also be an indication of a landlord for whatever reason looking particularly to the applicant's non-shopping use. Secondly, there is the particular rent review capping provision, which seems to indicate a willingness of the landlord to at least view this unit as possibly in the future giving him a lower return than as a shop. The fact that this provision was personal to the applicants, so that if the y were for example to assign the lease to a shop occupier a shop rent would be payable at the next review, perhaps supports the view that these subjects as a restaurant may have been viewed as commanding a different level of rent. We of course require to be concerned not with the applicants individually but with a hypothetical tenant, so this can only be looked on as a slight indication rather than a clear demonstration of a different rental value for the subjects as a restaurant. As far as the use provisions of the lease are concerned, we do not think we require to consider these in detail, but it is sufficient to note that the agreement was on the basis of use for the sale of hot and cold food and beverages for consumption on and off the premises. We do not ignore that the lease at least envisages the possibility of a change in the permitted use (which we accept would not require planning permission), and indeed the rent review capping provision does not appear to provide that it only applies on the basis of the original permitted use.
119. On a consideration of all of this evidence, we have to decide whether the subjects would command under the statutory hypothetical lease the same level of rent as the surrounding shops, or whether on the hypothesis which includes their different category of use they would command a lower rent despite being located in premises which with only minor alteration could be occupied and used as a shop. It is important to emphasise that we are considering the position of these particular subjects at this particular location on the basis of the particular facts laid before us in this case.
120. None of the factors considered in the foregoing discussion, taken individually, in our view establishes the position one way or another.
121. The evidence of the position regarding cafés and restaurants in Dundee city centre streets carries some weight, particularly as there appears to be a substantial body of acceptance on behalf of ratepayers that the position there is as the Assessor contends, but we do not feel it is conclusive of the situation within Overgate. At the only other modern shopping mall to which we have been referred, there are no cafés or restaurants which have main mall shop values and the similar subjects there are in an area which would be expected to command a lower level of value. Thus, neither in Dundee city centre nor at Braehead are there any examples of cafés or restaurants having the same level of rent as prime shops.
122. Both sides recognise that in this particular case the actual rent of the subjects is of importance, and we agree. In our view, it is shown to be out of line, by around 15%, with the rents of shops in the immediate vicinity. Further, there is some indication in the rent review capping provisions of a different approach to the rental level when the subjects are occupied not as a shop but as a restaurant. This is suggestive of a concession related to use.
123. While we accept that the café areas are subjects which command a different, substantially lower level of rent than the subjects, their similarities with restaurant use appear to us to be significant albeit restaurant use encompasses more types of restaurant than fast-food restaurants. Taking into account the physical differences and the different expectations between the mall café tenants and the applicants as to the percentage of turnover they regarded as affordable as rent, the overall rate for the subjects of around £455/m2 after adjustment is justified on the basis of that type of use. This again suggests a lower rental level for the subjects related to their use.
124. There is also evidence of the Overgate landlords looking in negotiation with McDonalds for a lower rent level for comparable subjects with the same use as that of the applicants. There, the landlords appear to have been prepared to make a concession of around 25% or more on the gross rent which would have been expected for a shop unit
125. We are of the view that the evidence of the relationship between turnover and the capping formula, the apparent willingness of the landlord to make considerable concessions in gross rent, and the comparison of the rents of the mall cafés in respect of turnover for a fast food type of use all supports the factual evidence of a concessionary gross rent paid for the subjects which is manifestly out of line with, and below, comparable shops. We conclude that the evidence, taken together, shows that the gross rent, as adjusted, reflects a lower level of hypothetical rent for the subjects used as a restaurant in their particular location than for the shops in the immediate vicinity. It is sufficiently lower than comparable shop rents in the immediate vicinity to justify categorisation of the subjects at a different level of rental value.
126. The parties' submissions on valuation on the basis of use as a café (or, as we have in fact decided, restaurant) leave open three bases of valuation, viz. an overall area basis, a turnover basis (applicants' valuations) and the zoning basis (respondent's valuation). In the particular circumstances, where we have found in effect a concessionary rent at a unit which would otherwise be a shop, we think it most realistic to use the zoning method to arrive at the appropriate level of reduction from the shop value. While it would be possible to compare with the shop units on an overall basis, we are not sure that that is how the hypothetical agreement would proceed in these particular circumstances.
127. We also do not consider that we have a basis for reaching the primary valuation as a percentage of turnover, because there is no actual current rental evidence of comparable subjects valued on that basis. As far as the assessments of the cafés are concerned, although the rents of three of the four café areas have a turnover element, the respondent has not referred to turnover in his comparative principle valuations. It would of course have been difficult for him to do so because he would not have turnover figures, but we mention it because it casts doubt on the appropriateness of a turnover approach to valuation in this appeal. Although by the passage of time there are before us some figures for turnover at the subjects - sufficient perhaps to make a reasonable assessment of that - there is no comparative basis for any figure of percentage of turnover to be used in arriving at an assessed rental figure. The analyses on AS6 indicate that the rents of the café areas where there is a turnover element in the agreement are apparently all taken to be at the base level as no doubt they would be bound to be initially. The respondent has applied area rates to the café areas which it is not possible to compare directly with his assessments of the subjects or the shops. Nor can they be easily compared with the rental rates of the café areas themselves, in the case of Café Venue because the rent is not a true rent of the subjects themselves, in the other three cases because the respondent in fact applied a substantially reduced rate to the remote stores, and in all four cases because of back-dating. However, two at least of them, Starbucks and Millies, were settled following appeals and, with the rent levels of the three on the upper level being consistent, they may be taken as establishing a reasonably reliable level of value for these subjects.
128. On the basis of valuing on an area basis, we require to consider the applicants' argument that the toilets (21.87m2 actual; 5.45m2 at Zone C) should be valued at nil. We reject that argument. The tenant could not operate without providing the toilets. The toilets are part of the subjects that the hypothetical tenant would require to maintain. They are occupied and used by the applicants. There is no provision in the lease which requires the applicants to admit the public, and even if there were it would not alter the fact that the toilets are a part of the occupied subjects and have some value. Under the zoning method, they are taken at 25%. We see no reason to adjust the respondent's calculation of reduced area.
129. On all the evidence before us in this particular case, and in particular in the absence of any direct comparison subjects, we consider that the actual rent is the best indicator of the extent of the concession from shop values and the resultant rent which the hypothetical landlords and tenant would agree. As we have already seen, on a zoning basis this would bring about a reduction of 15% on the Zone A rate. We have also, however, considered by way of checks, the following figures:-
(a) Overall basis. The total area rental rate for the subjects is £455/m2. The average total area rental rate for the four shops of similar size in the immediate vicinity is £628/m2. On that basis, the rent of the subjects is 27.5% less, a figure which would be reduced slightly by allowing in the adjustment process for a notional 10 year rather than a 5 year break and also by adding fitting-out costs. It may also be noted that the total area rental rate of the subjects on a gross basis, i.e. without adjustment in respect of inducements, is, at £526/m2, 19% less than the average of the four shops (£649/m2).
(b) Turnover. Two of the three upper mall open café leases were on the basis of turnover 'top-ups' on the basis of 13% of turnover. Mr. Schlesinger sought, but did not obtain, such an agreement, on the basis of 18%, from the landlords. The rent review capping provision is based on 20%. 20% of the 2001 turnover (£394,000) is £78,800. That is 12.5% less than the rent agreed.
(c) Comparison with cafés. It is not possible to compare the subjects with the open café areas on a zoning basis, nor is there any figure available to measure the extent of the physical advantages which the subjects enjoy over the cafés. The three upper mall cafés have an average overall rental rate of £330/m2. If the proportion of café turnover rent level to the subjects' rent capping provision level, i.e. 13 to 20, is taken, that would produce an overall rate for the subjects of about £507/m2. This compares with the actual rate derived by the respondent after adjustment, and before fitting-out costs, of £455/m2 for the subjects and an average of £628 for the four nearby shops, and suggests that an affordable rent for this type of use is some 19% below the rents paid for otherwise comparable properties.
(d) McDonald's negotiation. The landlords were apparently willing to rent comparable subjects to McDonald's at an overall rate of around £405, which compares with the average for the four shops of £628/m2. In each case, fitting-out costs would have to be added, and it should also be remembered that the proposed McDonald's unit was, at 214m2, at least slightly larger than the subjects.
130. On all the evidence available, we consider that the valuation of the subjects should be carried out on a zoning basis with a reduction of 15% in the Zone A rate.
131. We would therefore educe the Zone A rate from £815 to £693/m2, i.e. approximately 15%, which results in a net annual value of £74,500.
132. The Tribunal's valuation is accordingly as follows:-
133. It will be evident that had we found in the respondent's favour, either that the subjects are properly described as a shop, or that, although in different use, they have the same level of value, we would have upheld the respondent's valuation of £87,700, because we have rejected the applicants' argument in relation to the toilets.
134. Had we decided that the correct description was café, as the applicants contended, we would still have given effect to the respondent's argument that the value of the subjects could not simply be arrived at by direct comparison with the café areas. We would also for the same reasons as above have rejected turnover and overall area rates as bases for our valuation. We would again, of course, have had the actual rent of the subjects, and we would have arrived at the same valuation of £74,500.
135. The appeal is accordingly allowed to the extent of directing that the description of the subjects on the Valuation Roll should be altered to 'Restaurant' and the Net Annual Value fixed at £74,500.