Lands Tribunal for Scotland

OPINION

Roxburghe Estates
v
Assessor for Scottish Borders Council

This is an application in the form of an appeal referred to the Tribunal under Section 1(3A) of the Lands Tribunal Act 1949. The subjects of appeal are Exhibition Rooms within Floors Castle, together with an adjacent gift shop and restaurant and a separate coffee shop. The subjects also include certain parts of the castle grounds. The castle can be described as a "stately home". It is one of the most important historic houses of Scotland. The appeal was against the rateable value proposed by the Assessor for the 2000 Revaluation at a net annual value/rateable value of £16,400 with effect from 1 April 2000.

Three issues were identified. First, whether the coffee shop was part of the unum quid, or should be entered separately in the Roll. Second, whether the assessor’s method of valuation by taking a percentage of gross turnover was to be preferred to straight application of the revenue principle. Third, if the subjects were to be assessed on the assessor’s scheme, whether any specific allowance should be made to reflect the part played by moveables in generating the gross income.

Procedure

The appeal was heard on 30 April and 1 May 2003. The appellants were represented by Mr J R Doherty, QC who led in evidence Mr Calum J Innes, a rating surveyor and a partner in the firm of CKD Galbraith, and Mr Roderick E Jackson, factor of the estate. Mr G J Clarke, advocate, represented the assessor and led in evidence Mr Richard E Lillico, a divisional assessor in the department of the assessor and registration officer of Scottish Borders Council

At the conclusion of the hearing we advised parties of our preliminary view that the issues raised were unlikely to require formal site inspection. We indicated that we might visit the subjects as paying tourists. There was no demur. In the event, one member visited the subjects in that capacity on 19 May and, indeed, returned to the coffee shop for lunch on 27 May. As expected nothing turned on these visits.

Statutory basis of valuation

The subjects require to be valued in accordance with Section 6(8) of the Valuation and Rating (Scotland) Act 1956, which is in the following terms:-

“6(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.”

In terms of the Valuation Timetable (Scotland) Order 1995, as amended, the valuations are required to be made on the basis of the level of rents prevailing as at 1 April 1998 and on the basis of the physical circumstances of the properties as at 1 January 2000. It was not suggested that there had been any relevant change in the period from 1997 and the appeal was presented on the basis of accounts for the year ending in September1997.

Cases referred to:-

Hoare V.O. v National Trust; National Trust v Spratling V.O. 1998 RA 391 (CA)
Hoare V.O. v National Trust; National Trust v Spratling V.O. 1997 RA 295 (LT)
Maxwell Scott v Roxburgh Assessor (1890) 17 R. 833

Publications referred to:-

Armour on Valuation for Rating
Scottish Assessors’Association Report No. 24: Revaluation 2000: Valuation of Stately Homes, Historic Buildings Etc. January 2000
Valuation Office Agency Rating Manual – Volume 5, Section 1000: Historic Properties (undated)

The Subjects

Floors Castle is a stately home of considerable proportions built on a natural terrace overlooking the River Tweed and with extensive policies around it. The house was designed by William Adam and remodelled by Playfair. It has a roofscape of turrets, pinnacles and cupolas. In its principal rooms it houses furniture, fine art and tapestries of the finest quality. Certain parts of the house, together with the gift shop, restaurant and parts of the gardens and grounds are open to the public daily from 1 April (or Easter if earlier) to end October. The Duke of Roxburghe occupies both the domestic and non-domestic parts of Floors Castle. The residential part is entered in the valuation list for Council Tax. Three staff flats within the Castle are entered separately in the valuation list for Council Tax. Part of the east wing is occupied as an estate office. This is entered separately on the Roll.

The rooms open to the public - the "Exhibition Rooms" - include the Entrance Hall, Ante Room, Sitting Room, Drawing Room, Needle Room, Ballroom, Billiard Room and Bird Room. These contiguous apartments occupy part of the ground floor of the east wing of the house. Certain display rooms and toilets are located on the (basement) floor below. A gift shop is located within the basement floor, giving access to a formal garden. In separate buildings off the formal garden are the restaurant and toilets.

Surrounding the house are areas of terrace, lawns and woodlands, parts of which are also open to the public. The western part of those areas is a formal, walled garden. The house and gardens are accessed by a private road from Kelso. This leads to a parking area to the east of the house. There is a pay booth at the end of the road, before the parking areas. The admission charges in 1998 were £4.50 (including VAT) for the exhibition rooms and grounds and £2.50 (including VAT) for the grounds only.

The coffee shop is part of a range of buildings forming the north side of the walled garden. This is situated some distance to the west of the Castle and screened by woods from public areas at or around the Castle itself. Part of the walled garden operates as a garden centre. The garden centre is in separate occupation and appears on the Roll as a separate subject. The main access to the garden centre and the coffee shop is by a private road leading off a minor road running along the northwest wall of the policies. There are no charges for members of the public visiting the garden centre or coffee shop by this access. The coffee shop and garden centre are open all the year round.

It is possible to walk or drive, from the Castle or the part of the grounds open to the public on payment, to the garden centre and coffee shop. Sign-posting within the grounds gives adequate directions and there is no restriction other than unlocked gates on one of the pedestrian routes. Travelling in the other direction, however, signs make it very clear that there is a pay zone. The marked exit route from the car park serving the garden centre and coffee shop leads away from the Castle and out to the public road. Members of the public who chose to ignore the signs would, in practice, be free to walk in the public parts of the grounds but would not have access to the Castle. The distance between the Castle and the coffee shop and the screen of trees may have the effect of inhibiting visitors to the Castle from going on to visit the coffee shop and garden centre. The coffee shop derives most of its trade from people who have not also been visiting the Castle.

The coffee shop provides light cooked meals and, for example fresh cold meat sandwiches. The kitchen facility for both the restaurant and the coffee shop is situated within the domestic parts of the Castle.

Castle Opening Operation

The apartments in the house open to the public, the gift shop, restaurant, the garden area around the house, and the coffee shop are managed by the estate as the "castle opening operation".

The main purpose of the Opening Operation is to generate revenue to help to defray the substantial costs of maintaining the house, its contents and policies. It also allows implementation of certain undertakings in respect of capital taxation. The evidence on this matter was not clear. However, Mr Jackson gave us to understand that the Opening Operation meets the requirements of the Capital Taxes Office that the public should be able to have access to valuable artistic works during the summer months. We understood that this arrangement was an alternative to payment of tax. The amount of tax saved by the arrangement was not disclosed.

The house was first opened to the public in 1977. The Opening Operation is one sector of the management of the whole estate. We heard nothing of the financial detail of the running of the estate as a whole.

The Opening Operation was set up to be a profit making exercise. In the accounts, the expenses of the castle and grounds were apportioned between the private and the Operation. It was not disputed that without the allocated share of the expenditure for the maintenance of the house and gardens the Operation would be profitable. Even carrying that expenditure it was initially profitable - at least when the income from the coffee shop was included. However, 1993, was the last year when a modest profit was made. Visitor numbers have been falling over the years. In 1996 there were 57,300 admissions but by the year 2000 that had dropped to 46,102, a fall of some 20%.

The subjects were said to be unprofitable because of the contribution made by them to the overall costs the castle. This was based on a production being a statement of income and expenditure for the years ending 29 September 1997, 1998 and 1999. These accounts were not audited. They include apportioned amounts of expenditure on items such as household costs, heating and lighting, upkeep of grounds, maintenance of property and furnishings. Mr Jackson has been the factor on the estate since 1993. He said that the accounts had been produced exclusively for the Opening Operation. The accounts for the remainder of the estate were completely separate. The apportionment of costs of use of the castle and grounds had therefore been made between the private and Opening Operation only.

The proportions allocated were specific to each item. For example, costs of kitchen and household staff were allocated at only 19% to the Opening Operation, but 51% of the costs of lighting and heating was so allocated. The various apportionments were agreed with the Inland Revenue when the Opening Operation commenced. Mr Jackson said that care had been taken in making them. He considered these apportionments to be "reasonable in the circumstances". However, he said that he was unable to explain the purpose or basis of the apportionment.

Mr Innes was to the same effect. He understood that the apportionments had been made after consideration of the actual costs by the estate factor advised by the estate’s accountants. The apportionments had been intended to provide a "true and fair picture" and he considered them to be reasonable.

In the year ending September 1997 the losses assessed by reference to these allocated amounts of expenditure amounted to £85,855. For the two subsequent years the losses have been £79,379 and £74,259 respectively. The figure for 1997 included a positive contribution from the coffee shop of £17,628.

Without attempting to identify specific figures, Mr Innes agreed that if the expenditure which would necessarily be incurred by the owner, whether or not the subjects were used commercially, was excluded from the calculation there would always be a reasonable profit. That was the whole point of the Opening Operation. It produced an income to set against inevitable expenditure.

Expert Evidence

As we have seen the Tribunal was provided with a range of productions giving information on the nature and operation of the subjects including accounts for the years ending September 1997, 1998 and 1999. Information was also provided on the guidance given to Valuation Officers in England and Assessors in Scotland for the assessment of annual value of subjects of this type, and on the characteristics of such subjects and valuations proposed or agreed for them.

Mr Innes and Mr Lillico set out their contentions as to whether or not the coffee shop was a unum quid with the exhibition rooms and castle gardens. It is unnecessary to repeat the contentions on this issue. However it is helpful to understand the competing contentions in relation to the method of valuation. Broadly speaking the dispute was whether the subjects should be valued by the receipts and expenditure method of valuation as an enterprise operated to make a profit. If so, it was contended that it should be entered in the Roll at a nil annual rental value because it was making a loss at the relevant date. Alternatively, should the subjects be valued using a scheme devised by the Scottish Assessors’ Association which based the annual value of subjects such as stately homes on the basis of a percentage of gross turnover?

Methods of Valuation

Mr Innes explained that the preferred method of valuation for rating is comparative. Given a sufficient body of evidence this method will reveal the value of a particular genus of subject. The difficulty was that historic houses, or those parts of them open to the public, are not generally let. The contractor’s method may be used where the value can be assessed relative to the cost of supplying the fabric of the heritage but it was agreed that the contractor’s method was not suitable for properties of this type. It followed that the revenue method, whereby the value is derived from the divisible balance remaining after analysing receipts and expenditure, was appropriate to this type of subject. He understood this to be the approach favoured in England by the Valuation Office Agency for historic properties occupied with a view to profit. (He referred to Paragraph 6.1 of Rating Manual – Vol. 5.).

The application of the revenue principle produced trading losses, and accordingly, a nil valuation for rating purposes. These losses were largely attributable to the high repair, insurance and other expenses which were necessary to maintain the premises. These were costs which, in terms of the statutory tenancy, the hypothetical tenant would incur. In Mr Innes’ opinion the hypothetical tenant would not be prepared to pay a positive rent over and above these onerous financial liabilities. Equally the landlord would be glad to be himself relieved of these outgoings and would not demand rent in addition.

Mr Innes referred to cases where a nil or nominal rent had been agreed on condition that the tenant maintained the fabric of the subjects while retaining any income. These included Kisimul Castle, Castle Campbell, Threave Castle, Dirleton Castle and Gosford House. He observed that various loss-making stately and historic homes in England and Wales had been entered in the valuation list at nil rateable value.

Mr Innes was critical of the assessor’s approach, which had been rejected by the Court of Appeal in Hoare. It resulted in significant disparity in the valuations of similar properties. He gave the examples of Thirlestane Castle, Bowhill and Mellerstain, which were all substantial historic properties open to the public for admission charges, but which had rateable values of only a small fraction of the Exhibition Rooms. Bowhill was similar in scale to Floors Castle but open for only one month in the year. As a result its rateable value based on gross receipts was £875 as against the £16,400 for the Exhibition Rooms. That was neither equitable nor correct.

As to the assessor’s reliance on agreements with, and acquiescence by, other historic homeowners and their agents, he suggested that very little weight should be attached to that evidence. The values of most of the subjects were low and certain of them enjoyed charitable relief in respect of rates payable. This encouraged many to settle as the costs incurred in pursuing appeals would outweigh any potential saving in cash terms. He believed that others had been concerned that resisting these assessments might result in tea-rooms, gift shops and the like being valued separately. It was convenient for many owners just to accept the assessors’ scheme.

Mr Lillico concurred that there was no open market rental evidence for this type of property in Scotland. That excluded the application of the traditional comparative method. He agreed that the contractor’s method was inappropriate. He considered the revenue method to be inapplicable in its pure form. In considering the appropriate method of valuation the assessor had to have regard to the motivation for the particular type of operation. The motives varied from that of preserving buildings and providing benefit to the community to the generation of income to mitigate the cost of operation. As these motives manifested themselves in different combinations and degrees within this genus of subjects the assessor considered it necessary to adopt a method of valuation which would provide uniformity of approach.

Accordingly he had adopted the method recommended in the Scottish Assessors’ Association Report No.24 ‘Valuation of Stately Homes, Historic Buildings etc’. The annual rental value was determined by reference to 3% of the gross receipts generated at the subjects. This was a ‘comparative’ method because it derived from comparison with the percentages applied to subjects which could be valued on turnover. He could also rely on comparison with subjects where the scheme had been accepted. He agreed that the scheme of valuation proposed by this report could be described as the application of a quasi revenue method of valuation. Assessors throughout Scotland had adopted this approach to the valuation of stately homes and historic buildings.

Using income or receipts as the unit of comparison was an accepted method, used for the determination of annual rental value in other types of subject, such as hotels and licensed premises. The percentage adopted in the scheme had been determined as an exercise of valuation judgement by the members of the committee that had recommended it. He maintained that the very low percentage provided a fair assessment of the annual value reflecting the range of benefits of occupation for subjects which generally showed no profit. The same percentage was applied, without modification, to a range of subjects some of which were ruinous and some of which contained notable collections of chattels. The validity of this approach was supported by the fact that it had been widely accepted. He did not agree that such acceptance could be disregarded on the basis that that figure had only been accepted because amounts were small or because certain ratepayers enjoyed rating relief and had no incentive to appeal. The fact was that the figures had been accepted. He pointed out that, contrary to written evidence relied on by the appellants, Historic Scotland as owners or occupiers of a large number of the comparable subjects, did not have any charitable exemption from rates. Because of the number of properties involved they had an incentive to appeal if they did not accept that the scheme was reasonable.

Mr Lillico accepted that in relation to subjects such as hotels and public houses sufficient rental evidence was available to establish a correlation with the amount derived from the application of the percentage of turnover. He agreed that there was no such evidence available in relation to historic properties. The assessment of 3% was however reasonable as being at the low end of the range of figures agreed in other contexts.

Mr Lillico appeared to suggest that the subjects might be able to generate a larger profit if opened for a longer period or for longer hours. He referred to statistics of visitor numbers to the Scottish Borders which showed that a high proportion of visits were made between October and Christmas. This suggested that, if profit maximisation were the only motive of an occupier of the subjects, then they would remain open for longer. He readily agreed, however, that he did not have sufficient knowledge of the tourist industry to say whether this would be economically viable and he agreed that the opening times and period of opening were similar to those in subjects operated by the National Trust and others. He accepted that the Opening Operation was probably run efficiently and with the object of profit. The Duke of Roxburghe had a motive to open up the subjects to the public because he had repairing liabilities which he wished to defray. However, Mr Lillico expressed the view that motives other than commercial could be attributed to its occupation. The Duke had the benefit of preserving his ancestral family home and of occupying the exhibition rooms for his own private purposes outside the daily opening hours and completely for five months of the year.

Moveables

Mr Innes contended that if the assessor’s quasi revenue method was adopted then an adjustment should be made to the amount of the gross receipts to reflect the proportion of the receipts attributable to the moveable contents of the exhibition rooms. At Floors Castle these included antique furniture, paintings, tapestries and other valuable works of art. These contents were an attraction in their own right. Accordingly a proportion of the revenues received from visitors should be attributable to these chattels as distinct from the heritage which alone was the subject of the hypothetical tenancy. He submitted that it was necessary in principle to make a deduction for income attributable to such moveables. He noted that, in the 1995 revaluation, assessors had allowed a deduction of up to 50% from admission charges to reflect visitors coming to see moveables at historic homes. In his opinion the deduction should be made from the whole income, including receipts from the restaurant and gift shop, for the reason that a proportion of the income generated there could logically be said to derive from the proportion of visitors coming to see the chattels as distinct from the exhibition rooms themselves.

In Mr Lillico’s opinion no allowance should be made for moveables, for the reason that most stately homes are furnished and valuations have been agreed on the basis of the scheme under which there was no reduction for chattels. He admitted that such an allowance had previously been made by assessors in the past. But a new revaluation allowed a fresh approach. In considering this issue the Assessors’ Association had decided to adopt the view expressed by Sir Richard Scott in Hoare that, generally, visitors would pay entrance fees to see a house and its contents together and that no allowance should be made unless it could be shown that income was specifically attributable to chattels.

He observed that a figure higher than 3% had been applied at the last revaluation and the deduction for chattels at Floors Castle then had effectively meant that the rateable value was 2.5% of the gross receipts in 1995. Since that was not significantly different from 3% it suggested that the approach taken now was fair.

Expenditure

We have set out above the broad nature of the evidence bearing on the expenditure items of the accounts. Mr Lillico did not accept these figures as a sound basis for assessment of value for rating purposes. He argued that, having regard to the wording of section 6(8) of the 1956 Act, repairs ‘necessary’ for the maintenance of the exhibition rooms excluded the kind of unavoidable expenditure, recurrent at a historic building of this type, such as works of renewal or improvement. For example, the restaurant, in a separate and simple building, should not bear any element of the cost of repairs to the main roof of the castle. The garden and grounds should only be maintained, in the sense of being kept in order, and should not bear the cost of new planting or other new development. In his opinion the hypothetical tenant would only be responsible for the care and maintenance of the walls and other surfaces, to the extent only of painting and pointing. If the tenant was to contribute to the maintenance of the main roof of the castle this would only be to the extent of replacing loose tiles and the like.

In any event the method and basis of apportionment of expenses was not properly established. Some of the agreed proportions appeared to him to be odd. Although the exhibition rooms only occupied about 18% of the gross area of the castle they were allocated 27% of the costs in respect of ‘maintenance of property and furnishings’. It was, on any view, inappropriate to use such a figure for a building such as that occupied by the restaurant since it was free standing.

Mr Lillico did not himself attempt an estimate of the costs of repairs and maintenance attributable to the subjects. He accepted that the bundle of printed computer-generated material might include figures which would allow relevant costs to be determined. He could not say. It was up to the appellant to carry out such an exercise.

Submissions

Submission for the Appellants

The Unit of Assessment

For the appellants Mr Doherty submitted that the coffee shop should be treated on its own. It satisfied the geographic test for separate treatment since it was outside the pay boundary of the exhibition rooms including the Queen’s Garden. It was not contiguous with the Queen’s Garden. It had its own vehicular and pedestrian access. It was physically capable of being separately let. It also satisfied the functional test in that it was separate from the castle and its gardens. It traded all the year round. It was popular with local residents. A large proportion of visitors to the coffee shop were not visitors to the castle. It met the requirements for separate assessment set out in the Valuation Office Agency’s Rating Manual – Volume 5.

There should therefore be separate entry for the coffee shop at the value agreed.

The Method of Valuation

Mr Doherty submitted that it was critical to retain in view the statutory hypothesis for the determination of rental value. That required an estimation of the rent at which subjects would be let given the obligation on the tenant to repair. The let subjects here were the Exhibition Rooms. It could not be assumed that the expenses of maintaining these subjects in repair would be borne by any person other than the hypothetical tenant. That position would be different from the real world, in which the Duke of Roxburghe would bear some of these expenses. In the real world the Duke’s motivation would be to mitigate the expenses of maintenance, but under the hypothetical tenancy the tenant alone was assumed to bear all these and other relevant expenses.

On the evidence the burden of repairs and other necessary maintenance expenses was of such magnitude that the hypothetical tenant would not be prepared to pay rent over and above these obligations. That pointed to a nil rent.

Regarding the correct valuation method to be applied Mr Doherty submitted that the revenue method was preferable. He noted that both parties had adopted a revenue approach, the difference being that in the quasi revenue method adopted by the assessor there was a built in assumption of profitability. Floors Castle was particularly suitable for valuation by reference to receipts and expenditure. It had a monopoly of place and was unique in quality. There was no possibility of substitute premises. There was no reason not to use that method.

The evidence revealed that the Exhibition Rooms operated at a loss, and would do so in the hands of a hypothetical tenant, despite optimum use being made of them. There was no evidence of any restriction inhibiting optimum use of these subjects. Despite there having been a small surplus, of a few thousand pounds, in 1993 the evidence was of a deficit being incurred over many years.

Regarding the items of expenditure in the accounts, their apportionment had been approved by the Inland Revenue and was considered by both Mr Jackson and Mr Innes to be fair. The evidence was that the figures were bona fide and could be relied on. Mr Lillico accepted that they had been prepared in good faith; and no alternative apportionments were provided.

Mr Doherty submitted that the appellants’ approach had some support from the approach taken in England. In Hoare v National Trust a receipts and expenditure based method had been approved, and the lists of comparisons showed subjects entered in the List at nil value. The Valuation Office Agency had applied a receipts and expenditure method in a number of cases. There was no general rejection of the method.

Turning to the method adopted by the assessor Mr Doherty criticised it for the reason that it rested on the assumption that, in all circumstances where there were receipts, rent would be paid for historic buildings. But there was no rental evidence to support that assumption. There was no correlation between established receipts and rent. It was wrong to look to rents of subjects that were completely unrelated. Mr Doherty referred to the criticism of this approach made by Schiemann L.J. in Hoare (at pp 411-412 and 418-419). The weakness of the method was that there was no linkage between earnings and rent, there was no distinction between the different types of historic house with different obligations affecting them; there was no allowance for chattels and no scope for differentiation on any other grounds.

In Mr Doherty’s submission the assessor’s justification of his method relied entirely on valuations which were now in the Roll. But that was an insufficient basis given the common-sense observation that where a historic property had very onerous obligations for repairs the hypothetical tenant was unlikely to be prepared to pay a positive rent. In such a situation the landlord would be content to have these obligations met by the tenant without also expecting rent. In any case the agreed entries in the Roll were, for the most part, small. They had not been tested at appeal, because it was not economically worth challenging them and there was a fear of change of treatment of unum quid status.

The assessor’s approach, based on an assumption of a positive rental value, on the evidence did not provide the correct answer to the question of what rent the hypothetical tenant would pay for these subjects.

Mr Doherty submitted that, in any event, since the terms of the statutory tenancy were framed to arrive at the rent for the lands and heritages, receipts generated by the contents of a building should not be taken into account. Therefore, when the assessor, using his quasi revenue method, took a percentage of gross receipts as a surrogate for rent he had fallen into error. Counsel gave the example of furnished accommodation. When houses had been entered into the Roll the assessor would have made a deduction from the rent to arrive at a figure for the heritage. Typically such a deduction had been 50%. He referred to the dicta of Lord Trayner in Maxwell Scott which supported the view that a property must be looked at for rating purposes as an heritable subject apart from what it contained. He sought support from the opinion of Peter Gibson L.J. in Hoare.

Accordingly Mr Doherty submitted that, to accord with the statutory hypothesis, it was necessary to carve out those receipts occasioned by the moveables. It was right in principle to do so. It would not be necessary to be specific; an apportionment would suffice if it were reasonable. He submitted that the tribunal should give effect to such an allowance.

Submission for the Assessor

Unit of assessment

For the assessor Mr Clarke submitted that the coffee shop was a unum quid with the exhibition rooms. The coffee shop was occupied by the appellants with the same purpose of minimising the great expense of maintaining a stately home. Physically it was within the policies of the castle, and it did not require separation.

He submitted that the revenue principle was never appropriate in circumstances where there was a competing interest between commercial gain and private enjoyment. If money were the only motive then the Duke would not live in Floors Castle. It was accepted that the Opening Operation was an attempt to defray the costs of maintaining a great house, but the purpose of the occupier of Floors Castle was enjoyment of it coupled with a sense of ancestral duty to preserve it. The circumstances in Hoare were fundamentally different because the National Trust there was found to be the only possible hypothetical tenant. Here the owner of the subjects was an individual. There were opportunities here for the appellant to increase the profitability of the enterprise. He could open the entire castle or run it as a hotel. He could have a caravan park in the grounds. He did not seek to do that because he sought an acceptable balance between receiving a contribution towards the upkeep of the castle and his own quiet enjoyment of it. He was not therefore acting in a manner that would be adopted by a hypothetical tenant. Since benefits other than financial returns come into play, then the receipts and expenditure method of valuation was not appropriate.

In construing the statutory provisions in relation to repairing obligations, he said that the word ‘necessary’ should bear a real world interpretation. In the real world, the tenant would not be expected to contribute to fixed expenses which would be required in any case. The appellant in reality chose to accept the burden of living in a great house; and chose to carry out a business which, apart from paying for repairs, would be profitable and would pay rates. But because the repairing burdens were offset against the profits from the business he would be free from the payment of rates, and the burden of paying for local facilities would be passed to other ratepayers. This was particularly unfair when the payments for repairing obligations included for maintenance elsewhere in the castle that had no relationship with the let subjects.

Mr Clarke submitted that the fact that the apportionment of the maintenance and other overheads had been agreed with the Inland Revenue was of no consequence. It was not clear what relationship there was with the rest of the estate. The reason for carrying out the apportionment was not known. It was a matter of logic or common sense that a potential tenant would not contemplate accepting the repairing obligations resulting from the apportionments. Relief from the present extent of repairing obligations left room for a profitable business that could afford to pay rent.

There was simply insufficient evidence to proceed with a receipts and expenditure method of valuation. Audited accounts had not been provided. No accounting evidence had been given and there was no adequate evidence as to how the apportionments between the private and commercial parts of the castle were carried out. For example, the factor of daily and seasonal times appeared not to have been an element considered in the allocation although the Duke would enjoy the subjects when the public were not admitted.

For all these reasons he considered the revenue method to be inappropriate for the determination of rateable value in this case.

On the other hand the assessor’s method was appropriate whether it was referred to as a comparative method or a quasi receipts method. Given the nature of the type of subject it was not surprising that there was no rental information available. Faced with that reality the assessor had to seek a fair approach to the determination of rateable value. A committee of the Assessor’s Association had recommended the scheme adopted by the assessor. That committee had come to a judgement. Whether that was a pure valuation judgement based on intuition or whether it also had regard to the rates paid by other properties was not entirely clear on the evidence but there was an element of exercise of expert judgement. Many ratepayers, some of whose rateable values were comparable with the present subjects, had accepted the application of the scheme. Very few assessments were left in dispute. The weight of evidence in respect of these agreements should not be discounted because of the small amounts involved or the prospect of rating relief. The National Trust did enjoy relief but it had a large portfolio that suggested that it would not simply acquiesce in the scheme if it was inherently unfair. He submitted that it was correct to be cautious when seeking support from other agreed valuations, but given the absence of rents and the competing interests between the private and commercial in the subjects it was impossible to use the receipts and expenditure method as an alternative. The assessor’s approach should therefore be upheld.

In respect of an allowance for moveables Mr Clarke observed that the Court of Appeal did not carry through the clear advice from the Lands Tribunal, as an expert tribunal. He submitted that the opinion of Sir Richard Scott in Hoare was to be preferred. Allowance should be made only where specific income could be attributed to chattels. Chattels in a hereditament of this type should be seen as a landscape or a setting for the hereditament, and not something separate.

He accepted that there was an apparent anomaly between the treatment of ruinous subjects and well-equipped stately homes in the application of the assessor’s scheme. If it was necessary to make some allowance for moveables even where no specific income could be attributed to chattels, the tribunal should be very cautious in its approach.

Discussion

Unit of assessment

We are satisfied that the coffee shop should enter the Roll as a separate unit. It is physically quite separate from the Castle and it is capable of being let as a separate unit. Although run as part of the Opening Operation for accounting purposes, it has no necessary connection with that Operation. It opens at different times and has a different base clientele. In practical terms its operation is much more closely connected with the Garden Centre than with the Castle. The Garden Centre is in separate occupation.

It is fair to say that despite the separate let of the Garden Centre, it does contrive to give the appearance of being part of the Estate walled garden. Similarly, the signs and guidance in the brochure give an impression to visitors that the coffee shop and adjacent gardens are simply part of the area they have paid to enter. It would seem that this led Mr Lillico to the view that the coffee shop was within the Castle pay boundary. We accept that this would have been an important element in determining whether the shop was part of the Castle unit.

However, we have no doubt that the coffee shop is, in fact, outside the effective pay boundary. Most customers will get access to it freely from the north and without going near the Castle. Signs make it clear that access in the reverse direction – from the Coffee Shop to the Castle grounds – is restricted to paying visitors. Even if such signs are occasionally disregarded - and we heard no evidence of this – it is plain that access to the Coffee Shop could not permit access to the Castle itself. Both Castle and Coffee Shop are within the Castle "policies" but it is plain that this itself is not a definitive factor. The assessor has not attempted to treat the policies as one unit.

The issue is a question of fact. We prefer the submissions of the ratepayer on this point.

Method of valuation

It is clear that valuation for rating purposes of historic subjects such as stately homes, castles and the like, presents significant difficulty. There are no open market lets. It is agreed that the contractor’s basis is inappropriate. However, where they are in beneficial occupation, it must be assumed for the purposes of the legislation that they would find a tenant. We did not understand this to be disputed.

In Hoare v National Trust it was accepted that as a matter of common sense a subject which is in rateable occupation and is of some value and benefit to the occupier must normally have a rental value which can only be reduced to nil in exceptional circumstances: Schiemann L.J. at page 396; Peter Gibson L.J. page 417. The former stressed that the circumstances of the two properties in issue in that case were exceptional "when compared to most of the hereditaments which need to be valued, in each … the owner paid huge sums in cash or in kind to the National Trust in order to be shot of them" (p396).

Lack of profitability is not necessarily a pointer to a nil rental. We have no difficulty in accepting that it can lead to a nil assessment where it is clear that the benefit of occupation is to be measured purely by the commercial profit it can produce or, as in Hoare, where it is coupled with clear evidence of an identified tenant who would not under any circumstances agree to pay rent. However, Hoare was unusual if not unique in the latter respect. In the usual case, it seems to us that application of a receipts and expenditure test for assessment of rental must depend on being satisfied that the tenant’s motive in taking occupation is purely to derive a profit. We are not satisfied of this in the instant case.

Although stately homes, historic subjects and the like have certain similarities our concern is with the particular circumstances of Floors. Like the Court of Appeal in Hoare we recognise that it would be helpful to be able to identify principles of general guidance, but that is not our primary task. However, it does appear to us that one common feature in relation to such subjects is that the motivation for occupancy is unlikely to be purely commercial. The difficulty arises because of the lack of reliable guidance as to levels of rent which a hypothetical landlord and tenant might agree when the commercial motive is not dominant or is properly to be regarded as entirely absent.

In the present case, it was contended that there was no justification for any assumption that a tenant would be prepared to pay more by way of rent than acceptance of liability for the cost of repairs. This had the merit of simplicity. It relied on the apparent common sense of the proposition that no one would pay rent for the privilege of occupying subjects at a loss. But, of course, people do take tenancies in circumstances where they do not expect to make a financial gain. It is clear that motivation is not always commercial. This applies not only to subjects of historical importance but to a range of subjects such as dwellings, hospitals, museums, schools and so on. The fact that alternative methods of assessment have been found for such subjects - by reference to capital value or cost - should not obscure the point. In the present case, for example, the evidence from the accounts indicates that the appellant is prepared to pay very substantial annual sums for his enjoyment of the purely domestic part of the Castle. His motivation in enjoying beneficial occupation is not commercial.

Further and in any event, it can be observed that we heard nothing to justify an assumption that a tenant who was prepared to take a tenancy of subjects which ran at a commercial loss, would not pay more than the cost of repairs. If a tenant, for his own purposes would be prepared to occupy subjects at an annual net cost of £80,000, there is no firm basis for saying that he would not be prepared to occupy at a higher cost if this was necessary to secure the tenancy.

It was suggested that a landlord would be glad to have a tenant who would relieve him of the cost of repairs and would not seek any payment of rent in addition. This, however, begs the question. Landlords do not habitually treat acceptance of liability for repairs as adequate return from their tenants. The proposition depends on an assumption that the cost of repairs is in the particular circumstances equal to or in excess of, the amount which a tenant might be expected to pay for the benefit of occupation. It does not seem to us that the problem of assessment is assisted by an unquestioning acceptance of the division into categories such as the cost of repairs; liability for a proportion of expenditure; or the expense of rent. These are all payments by the tenant in exchange for the benefit of occupation. They provide little guidance as to the total figure a hypothetical tenant would agree to pay for that benefit in the whole circumstances.

Although Mr Doherty did not suggest that his submission was in any way based upon the decision in Hoare it was clear that he took comfort and support from that decision. The Court of Appeal emphatically rejected an assessment based on 3% of gross turnover. However, to understand their reasons it is necessary to look at the detail of the case.

In fact, two cases were heard together. They concerned two substantial buildings in the category of stately homes in England; Petworth and Castle Drogo. Both were occupied by the National Trust and derived revenue from being open, in part, to the public. Petworth was described as one of the greatest British country houses. It is of some antiquity. It was agreed that Petworth House contained the finest collections of pictures and sculpture in the care of the National Trust with a major art collection on display. The collection was thought to be worth in excess of £100,000,000. The house and the park had been given to the National Trust with a substantial endowment to assist in maintenance. It was in need of major repair when taken over.

Castle Drogo, described as a country house in the form of a Castle, was built between 1911 and 1930. It was given to the National Trust with a substantial cash endowment. The gift comprised the appeal subjects and other land and buildings. The National Trust sold much of the other land. Castle Drogo was also in need of substantial repair when acquired by the National Trust.

We have mentioned one difference between that case and the present. The owners of both subjects had to pay very substantial sums to the National Trust to induce it to take over the properties. Another obvious difference between these cases and the present is that the subjects of appeal are only part of the Castle and the occupier of that other part can be taken to have a special interest in obtaining the tenancy. The more significant difference is that in Hoare the parties had accepted that in the hypothetical market there would only be one hypothetical bidder, and that this would the National Trust. It was agreed that the Trust’s policy of not taking an annual tenancy of premises such as the appeal subjects did not prevent it from being considered a bidder. The Lands Tribunal had held that in attempting to determine the level which hypothetical parties would agree, it was necessary to ignore the known policies of the Trust.

The appeal was allowed on the basis that there was no evidence before the Tribunal from which it could be deduced that the Trust would ever, in the real world, spend money on rent. There was clear evidence of their policy not to do so. Further the Tribunal had failed to take into account the fact that all the evidence suggested that the hypothetical landlords would be delighted to be relieved of the task of meeting the net deficit for each of the properties while retaining the freehold and an obligation by the tenant to keep them in repair. The Court of Appeal considered that if the Lands Tribunal had taken these points into account it would have found no reason to suppose that the hypothetical landlord would have been in a position where he would have been able to drive the Trust to accept rental as well as repairing responsibilities. It must be stressed that the case was dealt with on the basis that the Tribunal had found that there would be no other bidders for the tenancy. The hypothetical landlord would, accordingly, be faced with a situation in which there was no possibility of competition. These all pointed to a nominal hypothetical rent.

We think it is important to note that the decision turned on its facts and in particular on the finding that the National Trust had been identified as the hypothetical tenant. Both Peter Gibson L.J. and Scott V.C. expressed doubt as to whether that was an appropriate approach. The Court did not reject the concept of a hypothetical tenant who would be prepared to pay more for the tenancy than would be justified on the basis of potential earnings or profits.

We think, however, that where the motivation is not commercial, the reference to "paying more" may be misleading. The Court's observations must be taken in context. Although the discussion proceeded, for convenience, in terms of an “overbid”, we think it is clear that the Court recognised that this was not, in itself, a wholly accurate term. Its precise significance may be well understood in the context of English law and valuation practice. But we do consider it a potentially misleading expression. As defined by the Lands Tribunal, it was used to refer to “a rent above that which can be justified by the income and expenditure" (page 330). However, if the motive of the tenant is not commercial gain, it seems illogical to view the issue as having at its base any assessment of commercial profit. The task is not to identify any “enhanced” value. The task is to determine the rent which would be agreed between the hypothetical landlord and hypothetical tenant having regard to the subjects and their particular motivation. One would not attempt to assess the rental value of residential accommodation in terms of “overbid”. The fact that a particular property is capable of generating receipts or gross income is only a factor to be taken into account. Where profit is not the reason for occupation, profit (or loss) should not be given the status implicit in the word “overbid”.

As we have seen, the Court in Hoare had to proceed on the basis that the National Trust was the only possible hypothetical tenant. That had been the basis upon which the Lands Tribunal had assessed matters. The Tribunal had felt free to consider the motivation of the National Trust and the sources of funds available to it. The Court of Appeal did not criticise the Tribunal in principle for having regard to evidence of the funding of the National Trust. It held however that the Tribunal should have gone further. It should have accepted the clear evidence that the Trust would not pay a positive rent for such subjects. There was no evidence to the contrary.

Gibson L J, at page 415, referred to the "principle of reality", which he expressed as, “the necessity to adhere to reality subject only to giving full effect to the statutory hypothesis, so that the hypothetical lessor and lessee act as a prudent lessor and lessee.” The application of the principle in that case enabled the Court to look at the specific circumstances of the identified tenant. In the present, we need not make the assumption that the Duke is the only hypothetical tenant but accept that it is proper to proceed on the basis that the Duke could be a tenant and, indeed, that he would be likely to be the tenant. We see no reason not to look closely at the particular circumstances of the Duke as hypothetical tenant, provided full effect is given to the terms of the Act and the hypotheses upon which assessment of rent is to proceed.

Clearly, some basis must be found for assessment of the total sum which the hypothetical tenant might be prepared to pay for the privilege of occupation. It is not an easy task but it must be faced. The applicants’ selection of a receipts and expenditure method of valuation had the merit of apparent simplicity. It proceeded upon an assumption that there were only three possible methods and sought to persuade us that the other two were inapplicable. However, the conventional methods have no statutory basis. Although sanctified by long usage, it is plain that their application is not a mechanical exercise. Valuation judgement is necessary. The reasons for rejection of the contractor's method were not explained although the difficulties of applying it to the subjects are self-evident. It is, however, a well-established principle of application to subjects which are not occupied for profit. It may be noted that it would always produce a positive figure whatever the difficulty of determining the capital element.

As discussed below, we are not satisfied that the motive of the ratepayer in occupation of the subjects of appeal is commercial. Where the tenant's motive is not primarily commercial we consider that there is no justification for treating receipts and expenditure as the starting point and a real danger in doing so. However, it is necessary to comment on the material presented under reference to the revenue principle in this case and convenient to do so at this point.

Analysis was not assisted by the absence of hard detail of elements of expenditure. The appellants presented a set of figures which we understood to cover total expenditure on the whole castle. The figures were then apportioned among "domestic", "castle opening" and "coffee shop". The various bases of apportionment of expenditure between "domestic" and "castle opening", (which for that purpose included the coffee shop), had been agreed by the Inland Revenue. It is a matter of comment only that we heard no evidence that the Estate Office bore any share of the overall castle expenditure. (It was entered as a separate item in the Roll and, no doubt, assessed as an office on comparative principles.). No witness could say what the basis or purpose of the Inland Revenue assessment might have been.

We had been led to understand that the detailed figures were all available in a bundle of printed computer sheets lodged by the appellants. However, these were not explored to any extent in evidence. Our own examination of them did not prove fruitful. We noted, for example that although one abstract for 1997 showed "£26,149" under the heading of "maintenance of property", another abstract for that period showed that same total under "maintenance of property and furnishings". Perusal of the detailed figures available in support of that entry showed that it included many items relating to routine expenses at the public toilets, including significant expenditure on toilet paper and towels. Another significant figure (of about £4000) covered "restoration and repair work to 31 framed pictures" and supply of quantities of fabric. "Insurance" appears as a lump sum with no further detail available in the itemised figures. Oddly, there is no indication that this is an apportioned figure. It is likely that the castle buildings would be treated as a whole for assessment of insurance, and the absence of evidence of its being an apportioned figure suggests that it did not relate to the buildings. We identified no other figure in the accounts relating to insurance of contents. Some, of course, may not be insurable. However, we think it a reasonable inference that the specific figure was for insurance of some part of the contents rather than the heritable subjects of appeal.

The figure for "upkeep of grounds " is apportioned at £40,000 to the appeal subjects and £45,000 to "domestic". The occupier of the Castle plainly benefits from the whole expenditure as providing an appropriate setting for the Castle. It is not possible to say whether that figure is an inevitable cost of repair and maintenance or one which arises largely from use of the subjects for the Opening Operation.

We need not set out further examples. It is sufficient to say that it is not possible from the documentary material to determine what are inevitable costs of maintenance of heritable subjects and what should be treated as the running costs of the Operation. That is not of significance if it is clear that a receipts and expenditure basis is appropriate but it does make it impossible to determine from the accounts to what extent the Operation contributes to the Castle as a whole as opposed to simply meeting proper costs incurred by a statutory tenant of the subjects of appeal.

For the assessor, a deliberate decision was taken that it was unnecessary to explore the detail of the expenditure because of the contention that the onus was wholly on the appellant. We return to this issue but start by looking at the problem in the broader terms discussed with Mr Innes. Without attempting to identify particular figures he agreed that three elements could be identified: gross income; the cost of "repairs" which would have to be incurred by the owner of the subjects even if the subjects were not used for the purposes of the Opening Operation; and expenditure which was due to the occupation of the subjects by that Operation. We can label these: income, costs, and Opening costs, - noting that these labels might be misleading out of the present context. As we have seen, income has not exceeded the total of costs plus Opening costs, since 1993. However, Mr Innes accepted that income always comfortably exceeded Opening costs. That was the whole point of the Operation. The excess of income over Opening costs produced a worthwhile surplus to set against costs. We accept this evidence despite the fact that it was not demonstrated by reference to accounts and, as we have observed, the material provided did not allow us to satisfy ourselves on such matters

In the present case the landlord chooses to occupy the appeal subjects and to run the Opening Operation. It can readily be seen however that the operation would be perfectly viable if a commercial operator came in to run the appeal subjects, paying a share of the surplus (income minus Opening costs) to the landlord in name of rent and keeping the rest as profit.

If we were applying a classic receipts and expenditure method to the matter, two distinct questions might arise: the first to determine how the "reality " principle might sit with the statutory allocation of responsibility for expenses; the second being the evidential problem which has arisen in the present case as to the level of expenditure properly to be taken into account for statutory purposes.

In relation to the first, we proceed on the view that the owner can be taken to be the potential notional tenant. As tenant he may have to accept liability to pay for certain of the inevitable repairs, the costs. But he is a tenant who comes to the transaction with the special feature that he has an existing liability to pay for all these costs in any event. If that real world liability can relevantly be taken into account it can be seen that as hypothetical tenant he has an incentive to pay a rent for the opportunity of making beneficial use of the subjects. Without the right to occupy and use the subjects, he would have nothing to set against his inevitable outlay. However, Mr Clarke did not present his argument in quite that way. Plainly any contention that the hypothetical landlord could be taken to negotiate with the tenant on the basis that that tenant had a pre-existing liability for cost of repairs might be difficult to reconcile with the effect of the statutory hypothesis. Accordingly, although there may be scope for that contention by application of a principle of reality, we proceed, for present purposes, on the view that any such argument is precluded by the terms of the section 6(8).

Turning to the second question, the assessor's contention is, in essence, that the "costs" referred to by the appellants cannot properly be accepted as equivalent to the elements for which the statutory tenant must accept responsibility. It was contended that the figure as agreed with the Inland Revenue as a measure of the cost of overheads for some unspecified purpose was not secure for rating purposes. It was accepted that the agreed figures might well include some elements falling within the statutory test. However, it was thought likely to include elements of expenditure which, while acceptable to the Inland Revenue, would be excluded from the definition. He suggested that a tenant from year to year would not be concerned with major structural renewal. He would have no concern with improvement. His concern with roof repairs would relate to replacing the odd slate rather than re-roofing. Mr Lillico contended that if the proper figures were substituted it had not been established that income was necessarily less than costs plus Opening costs.

We think there is some substance in Mr Lillico's assertions although there was no attempt to cite authority dealing with the matter. However, it is unfortunate that the matter was approached on the basis of an assumed onus. The cross-examination of the witnesses, Mr Innes and Mr Jackson who spoke to the accounts, did not attempt to establish any particular aspect in which the apportionment was wrong. Mr Clarke simply took from the witnesses that they did not know the reasoning of the Inland Revenue. However, both had said that they considered the apportionments to be fair and reasonable. We must assume that they meant this to be in a rating context. They did not know anything of any other context. On the other hand, the term "reasonable" is often used without attempting to identify any context. We have real doubts as to whether assessment of reasonableness in a rating context could properly be made if it relied on the accounts which were made available to us. It was not suggested that Mr Innes had any other material and no apparent reason why he would have. It is, no doubt, possible that Mr Jackson had an understanding of the make-up of the lump sums shown in the accounts but no express evidence was led of this.

Despite these criticisms, however, we conclude that if it had been appropriate to use a receipts and expenditure method in this case, we would have had to proceed on the basis of the oral evidence of Mr Innes and Mr Jackson. We consider that where information was available to the assessor to challenge these witnesses in detail, the challenge made in the present case was inadequate. These witnesses were, on the face of it, well placed to comment on the suggestion that, for example, the apportionment was probably based on a share of liability for roof repairs whereas the owner of the subjects would have no responsibility for most of these repairs. We have commented on certain omissions from, or peculiarities in, the accounts. The witnesses might well have been able to cast light on these matters. In our system it is for parties to test the evidence of witnesses. This is not the responsibility of the Court or Tribunal. Accordingly, for the limited purposes of this stage in the case, we accept that costs plus Opening costs can be taken to exceed income. That would be even clearer if the profits of the coffee shop are excluded. The limited evidence must be taken as adequate to establish that, applying the statutory hypothesis as to liability for repairs etc., there would be no justification for any positive rent to pass assessed on the revenue principle.

The ratepayer’s approach in the present case proceeded on the basis that the “Castle Opening Operation” was the real reason for occupation of the subjects of appeal. As the reason for that Operation was to generate as much money as possible, it could be said that the purpose of occupation of the subjects by the hypothetical tenant was with a view to profit. The revenue basis was the proper basis for valuation of subjects occupied with a view to profit, where there was no comparative available. The revenue basis of assessment was accordingly the correct basis in the present case.

However, the Opening Operation is not the only use made of the subjects. They continue to function as an integral part of the castle. We think it misleading to treat the subjects and the Opening Operation as if they were one and the same. The Operation is simply a means to the end of occupying and maintaining the whole castle and its contents. As it is put by the Duke in the brochure: “The maintenance of the house and its contents is a costly and continuing process. The proceeds from opening the Castle make a vital contribution towards its upkeep and help in the preservation of part of Scotland’s heritage for the future. I hope you enjoy your visit and share the enormous pleasure we derive from Floors and its surroundings”.

In short, the purpose of the Operation is to alleviate some of the expense of maintaining the castle and grounds and thus preserve the stately and ancestral home for the benefit of the current Duke. It seems to us that the fallacy in the ratepayers’ approach is that it ignores the fact that the latter element is the true object of the exercise. The benefit of use and preservation of the Castle as a whole is the real reason for occupation of the subjects.

That benefit would include use and enjoyment of the apartments at the subjects outside opening times and enjoyment of the whole grounds as part of the setting of the castle. It would include the value of the heritable subjects as an appropriate vehicle for display of the artistic collection. In that connection particular mention can be made of the benefit to the owner of the tapestries in having them displayed in subjects designed specifically for the purpose. This was not relied on in submission but emerges clearly from the brochure which gives details of the work done in 1930 to accommodate the set of tapestries in the Drawing Room. In Hoare (p414) reference was made to value to the hypothetical tenant of subjects which "provide a superb setting for artefacts of which some hypothetical tenants are possessed."

A purpose identified in the brochure was to preserve part of Scotland's heritage for the future. That can be taken to be a purpose in the public interest. In addition availability of the subjects allowed the owner of the many items of artistic value to implement his obligations to the Inland Revenue of making them available to the public. That can be seen as a mixed motive combining the interests of the public in having access to the items in question and the occupier in saving of taxation.

There is plainly a range of motivation for opening an historic building to the public. The physical circumstances may also vary greatly. We are concerned only with the circumstances of the present case as disclosed in evidence. In considering the overall issue of motivation it may be borne in mind that on the evidence presented to us, the Duke is at present prepared to accept an annual excess of expenditure over income in relation to his purely domestic enjoyment of the main part of the Castle. That figure in 1997 was in excess of a quarter of a million pounds. In relation to the Exhibition Rooms the cost of enjoyment was, as a result of the Opening scheme, only £80000. This simplistic comparison tells us little but it does not support the equally simplistic view that the value of occupation of the latter would not exceed the cost of repairs.

We are not persuaded that dicta in Hoare have a direct bearing on the issues and material before us. The Court had to deal with the specific circumstances of the National Trust. It had received a positive inducement to occupy. It had an established policy. There was express recognition of the difficulty of identifying principles of positive guidance on the critical issue of fact: what rent would be agreed between the hypothetical landlord and hypothetical tenant having regard to the whole evidence bearing on the actual subjects. Scott V.C.. identified as a particular difficulty the fact that the prospective tenant was not treated as a hypothetical but as a specific identifiable individual or corporation. “It is the mix of hypothesis with reality which produces the difficulty” (at 423).

In the present case the hypothetical landlord of the subjects of appeal would have no responsibility for overall upkeep of the Castle. Apart from the modern restaurant and toilet addition, the ballroom was the only part of the subjects carrying any liability for roof repairs. The landlord would enter negotiations with the hypothetical tenant having these factors in mind. The hypothetical landlord would have no concern with the maintenance of moveables. If the tenant made reference to the high cost of maintaining and insuring such moveables as part of the submission that the use of the subjects would not be profitable, the landlord would, no doubt, point out that this was a matter of the tenant’s choice. He would point to the subjects of appeal as providing a secure and uniquely suited venue for the keeping, enjoyment and display of these moveables. If he recognised the owner of the remaining part of the Castle as prospective tenant he would point to the additional benefits secured by the tenancy that the owner would be able to maintain complete control of the Castle. He would be able to make convenient use of the subjects either to derive an income to assist with his existing liabilities or to increase the pleasure he derived from occupation of Floors. His right to control the use of the grounds surrounding the Castle would be a valuable benefit to him as would his right to enjoy the splendid entrance hall as a means of access to his residential premises. Occupation would provide a convenient means of mitigating a tax liability. It would allow him to be a public benefactor.

When these matters are kept in mind it is, in our view, plain that the attempt to rely on a receipts and expenditure method is misconceived. The fact that the present occupier is prepared to accept substantial losses tells us no more than that occupation has a significant value for him over and above its commercial potential. It offers no guide to quantification of that value.

In any event, where it is plain, in light of recent history, that there is no prospect whatever of making a profit on the operation it is, in our view, incorrect to describe the Operation as being run "with a view to profit". Without the Coffee Shop it may be doubted whether it would ever have been thought likely to make a profit. Accordingly, use of the revenue principle is not appropriate.

Although we reject the appellants’ approach to assessment in this case it does not follow that the assessor’s approach must automatically be supported. It can be attacked on several fronts. A similar scheme was, of course, rejected in the context of the National Trust case. However, it is necessary to see whether there is anything in the assessor’s scheme which can be used as a guide to the process of determining rental value even if that scheme is not perceived to provide a secure basis in itself.

The assessor’s scheme has two elements: selection of gross turnover as the base factor and selection of 3% as an appropriate yield. Both elements were criticised by the Court of Appeal.

Assessment of rental value based on gross turnover is common in relation to several types of subjects including hotels and public houses. However, we are satisfied that this is used only as a convenient shorthand method of identifying appropriate rental. Schemes based on gross turnover will be based on analysis of actual rental figures. Once sufficient evidence of an identifiable correlation between passing rent and gross turnover has been demonstrated, it is reasonable to use that correlation as the basis of assessment of rent based on turnover. Rent fixed in that way can properly be described as assessed on a comparative basis. However, where there is no evidence of rental levels related to turnover, some other justification for reference to turnover must be found if it is to be taken into consideration.

In relation to the use of gross turnover, the criticism in Hoare was expressed in terms of the absence of any apparent logic in the choice of this figure. Any evidence presented in support of it was not discussed in detail. However, we can readily accept that it is impossible to see a theoretical justification for an "overbid" by starting at gross receipts instead of a profit figure: Schiemann L.J. p412. However, for reasons discussed above, we consider that the present case must be determined without reference to any "overbid". In assessing the value of an asset the gross turnover it generates would be a relevant matter to take into consideration. More would be paid - all else being equal - for an asset attracting a large turnover than for one which did not. If the break from commercial motivation is clear, the use of gross turnover, can be justified as a crude measure of value. It can be justified as a measure of overall public interest. Indeed, had the matter been expressed in terms of visitor numbers the misleading financial element would have been less apparent. Where the motive of the tenant can be treated as including a significant element of public interest, assessment based on the number of visitors attracted can be seen to have at least some basis in logic. Plainly, turnover could be used as a guide to visitor numbers although it would be necessary to have the figures broken down to distinguish in the first instance between ticket sales and other income.

However, when public interest is being considered, sheer numbers may be a less satisfactory basis of assessment than the amount they are prepared to spend. Accordingly, while the guidance provided by reference to turnover is not entirely satisfactory, we do not reject it entirely in the present context.

We recognise that the assessor’s scheme was intended to satisfy the principles of uniformity and equality. However, these principles cannot supersede the statutory test and, in any event, it seems clear that the assessor's use of gross turnover does not in fact lead to consistent results. This can be illustrated by reference to Bowhill which was presented as being a similar and broadly comparable type of Opening Operation. The evidence suggested that the proprietor of Bowhill sought an income by opening part of the house to the public but, to limit the intrusion and the impact on his own use of the house as a home, the public were only admitted for one month of the year. Thus, subjects ostensibly very similar to the appeal subjects and capable, it must be assumed, of separate letting to an annual tenant on the statutory basis, are valued on the basis of figures derived from only one month of trading. The beneficial use enjoyed by the landlord which is prayed in aid by the assessor in the present case does not appear to enter the equation. Similarly, the argument advanced by Mr Lillico that more use could be made of the appeal subjects by extending the opening hours, does not seem to have been applied to Bowhill. The scheme produces figures in inverse proportion to the beneficial occupation of the subjects if it is assumed that owner might be the hypothetical tenant. In other words, although Bowhill and Floors were said to be broadly similar heritable subjects capable of use in much the same way, the assessed value of one is, on the assessor’s scheme, only some twentieth of the other.

It may be arguable that this reflects the value which the occupier puts on the public benefit of maintenance and preservation of the subjects. If his interest is largely domestic it may be worth much less. However, this is not a satisfactory explanation and it appears to us that if total gross turnover is to have any relevant bearing on assessment of hypothetical rental value, this must be limited to cases where there is evidence that the subjects are operated efficiently in a way which would be expected to produce a reasonably full turnover. The market is limited and visitors who wish to see the subjects can be expected to go when they are open - provided that a realistic period is available. Assuming efficient operation in that sense, turnover as an indication of visitor interest can be seen to have some justification as a crude measure of overall "value" and to be a tolerable basis for comparison.

Turnover in the present case is based not only on ticket sales but to a substantial extent on sales of moveables and food. There is no difficulty in distinguishing the two elements in the accounts. However, there is a separate basis upon which figures derived from such sales can properly be taken into account. They reflect the value of the heritable subjects as uniquely adapted to sell such items in connection with the Castle visit.

The other factor in the assessor's scheme is the percentage selected. We did not find the evidence relied on by the assessors in promulgating their scheme to be a persuasive justification for selection of three per cent as opposed, say to two per cent or one per cent (or less). When it is recognised that the assessment is not based on commercial return, comparison with figures derived from such returns cannot provide direct guidance. At best such figure might provide a ceiling. A landlord negotiating with a tenant whose motivation is overtly commercial will usually be able to negotiate a higher rent than a landlord negotiating with a tenant whose motives are personal.

The assessors were thought to be exercising a joint valuation judgement and if we had had proper evidence they had been addressing the question of what rent might be negotiated by a hypothetical landlord and tenant where motives were not commercial, the figure they arrived at might be given some weight. However, that was not the effect of the evidence as we understood it. The percentage was said to derive from comparison with businesses operated commercially.

The lack of a demonstrably sound basis for selection of the percentage figure was not seriously disputed by Mr Lillico. There was no comparative rental evidence to support it. The various subjects referred to by way of comparison were cases where there was thought to be a positive return. We were told that the figure of three per cent was taken to be the lowest of any comparison. The intention, apparently, was to reflect the fact that the subjects did not run at a profit and would not be as attractive to tenants as subjects which did.

However, we do have evidence that this basis of assessment has been accepted in relation to a variety of other subjects. Although we are satisfied that this evidence is not entitled to any great weight, we accept the submission that it is entitled to some weight. In absence of any other relevant evidence it comes to be of considerable significance. This can be justified by the consideration that occupiers of such subjects will each have a view of the value of the subjects to them. They must be taken to be aware of the statutory test and also of the difficulties of assessment. We do not consider that the reasons advanced by the appellant as a basis for total disregard of acceptance by other occupiers have been established. In particular, we find that the specific reason advanced in writing on behalf of Historic Scotland has been disproved by the direct evidence of Mr Lillico. We consider that the fact that so many assessments have been accepted cannot simply be ignored. In all the circumstances acceptance justifies the inference that other proprietors recognised the figure produced by the scheme to be tolerably realistic as a measure of the rent that might have been agreed in the circumstances. The ratepayer's case has not displaced this inference.

We accept that the effect of this evidence is that the 3% figure must be viewed as a ceiling. However, it has been accepted in a range of circumstances and reduction from it needs specific justification.

It is no part of our function to attempt to identify any general principles upon which the scheme might be modified to provide "fairer" results. We have made some observations in respect of part-time operations, such as Bowhill. In the main, however, our comments are intended to deal only with the present subjects and factors which might justify some modification of assessment by comparison with other subjects where figures have been accepted.

Where subjects do run at a commercial loss, it is clear that the total turnover may be a measure not only of value but of cost. The bargaining parties might see some justification for an allowance based on scale to reflect that fact. The comparative figures produced showed the gross receipts at Floors to be twice the level of the next highest and well in excess of the majority. A prospective tenant would point to the greater risk involved in an operation of that size.

In the present case the parties might also have regard to the evidence of figures derived from the coffee shop. The gross turnover of the coffee shop was £132,787. Accordingly, the share of the assessed value attributable to it on the 3% basis, if it was part of the overall loss making unit, would be about £4,000. However, it is plainly capable of being operated as a commercial enterprise. Assessed as a separate unit in the normal way by comparison with open market rental values appropriate to a coffee shop in that particular location, the appropriate figure was agreed to be £1,850. Although, of course, a coffee shop could not be relied on as a valid comparative to a stately home, these figures might be relied on by the prospective tenant at Floors. He would, no doubt, point out that when the part of the business which is capable of competing on the open market as an attractive unit, open all the year round, is valued by a secure comparative method, the resultant figure is admittedly less than one half of the level selected by the assessor.

Moveables

Before returning to consider what is to be made of the totality of evidence available in this case, we turn to look at the question of the role of the moveables; in particular, the part played by the artistic treasures, of one sort or another, contained within the subjects. Parties’ submissions were based essentially on the assumption that the assessor’s approach was an attempt to identify a rent which reflected a commercial use of the subjects. If the issue was truly one of assessment of the commercial value of the subjects measured by its attractiveness to the paying public, some clear recognition of the moveable element would, in our view, be required. However, we do not accept this as such a case. Where the very existence of the moveables and the need to accommodate them can be seen to be one element which might motivate the hypothetical tenant in bidding for the tenancy, the gross turnover figure may well remain relevant as a crude indicator of potential value to the tenant.

The dicta in Hoare must be read in their context. The Court had found no possible justification for use of a gross turnover and, accordingly, discussion of yield was plainly obiter. The question of discount from that yield was at a further remove. If the concept of assessment by reference to income was taken to have no identifiable basis, it is not easy to see what weight should now be attached to these comments on related questions of yield.

In any event, as the use of gross profits and the selection of 3% as measure is not, in our view, justifiable on any revenue basis, it is unnecessary to become involved in the dispute as to whether adjustment should be made to the gross figure of turnover or to the percentage figure. In Hoare, Schiemann L.J. and the Lands Tribunal, itself, appear to have favoured the latter, while Peter Gibson L.J. favoured the former.

We do accept that a distinction must be drawn between the attraction of the rateable subjects and any revenue attracted only by the contents. In the present case, Mr Innes expressed the view that the contents of the subjects were an attraction in their own right. But we heard no direct evidence in support of this. Plainly they are an attractive part of the visit. Indeed, it might plausibly be contended that the memorable elements of a visit are the impact of the Castle, in its particular setting, and the interest and splendour of its contents. To some visitors the appeal subjects, as such, might be of less significance. However, there was no evidence that any visitors based their decision to visit solely on account of the contents.

We accepted that if the evidence demonstrated acceptance of 3% of turnover as appropriate only in relation to empty heritable subjects, we would have to attempt some adjustment to recognise that contents played a special part at Floors. However, as we proceed on the basis that the 3% can be justified by reference to unchallenged acceptance of that figure in relation to a range of other properties, furnished and unfurnished, it is not, in our view, possible to apply a broad reduction to the figure for Floors just because its contents are of special value.

Decision

As discussed above, we are not persuaded that a receipts and expenditure approach can be applied here. It follows that we do not accept the appellants’ justification for a nil assessment. We consider the Duke of Roxburghe is to be accepted as the most likely hypothetical tenant and that his real world interests and motives are relevantly to be taken into account in considering what rent he would pay.

We consider that the reasons given by Mr Lillico for the bases of the scheme are unsatisfactory but we have to make the best of the limited material available. We can see that the total turnover derived from subjects operated efficiently to maximise turnover can for a variety of different reasons provide a crude guide to a tenant's perception of the value of possession. In so far as dependent on ticket sales it provides a measure of public interest both in the heritable subjects as such and in these subjects as a place for display of valuable artistic treasures. In so far as derived from sales, the figure derives from the heritable subjects as a uniquely adapted point of sale.

In short, we accept that, gross turnover may be a relevant guide, if crude, to the value that might be placed upon occupation. Dicta in Hoare and references to the authorities cited therein, show the necessity of having regard to the bargaining elements available to the landlord and tenant. However, the cases recognise that there is little guidance available as to the outcome of such negotiations. It may ultimately be a matter of impression. The crude guide may be all that is available leaving open the question of how that guide is to be translated into a rental figure.

The only material bearing directly on that question is the evidence that application of a factor of 3% has been accepted in relation to a variety of other subjects. We accept that regard can be had to this. It justifies an inference that the figure produced by this method is tolerably realistic.

We have to consider what adjustment, if any, would be justified in the circumstances of the hypothetical landlord and tenant in relation to the present subjects. We have discussed the difficulty in making any explicit allowance for the fact that the contents play an attractive part. However, we do not consider that this element must be ignored. Similarly, although the Coffee Shop taken as a separate unit cannot be regarded, in any sense, as comparable with the subjects, the contrast between the value from figures derived from that element of the business as assessed by the assessor and the separate value as agreed, would also be a factor which a hypothetical tenant might pray in aid. Further, for the reasons discussed above, we consider that the scale of expenditure in the present case ought to receive some allowance. Doing the best we can with the whole figures, we consider that downward adjustment of the 3% should be made. Although we are not entirely persuaded that a one third reduction is justified, we recognise that the matter has to be approached very broadly. Accordingly, we have concluded that it is appropriate, in the circumstances of the present case, to substitute the figure of 2%.

The gross turnover for the year to September 1997 was accepted by both parties as a basis for assessment of relevant turnover. The turnover from the Coffee Shop must now be excluded. In addition, a minor adjustment is required to deduct a royalty figure which was agreed to have nothing to do with the occupation of the heritable subjects. Making these adjustments, the net figure is £375,698. At 2% the resultant figure is £7,514 which can be rounded to £7,500.

The appeal is accordingly allowed to the extent of ordering that the Coffee Shop be entered separately in the Roll at Net Annual Value £1,850 and fixing the Net Annual Value of the Exhibition Rooms at £7,500.