Lands Tribunal for Scotland

OPINION

W H Smith plc
v
Assessor for the City of Glasgow and
Assessor for Renfrewshire Valuation Joint Board

Summary

This is an application in the form of two appeals referred to the Tribunal under Section 1(3A) of the Lands Tribunal Act 1949. The applicants are the tenants and ratepayers of subjects comprising a shop made up of units on two levels within a modern two-level shopping centre. There were two appeals because the shop was divided by a local authority boundary. The respondent assessors contended that the subjects should be valued by comparison with the ‘standard’ units in the centre and the application of the Zone A rates applicable at each level (‘two level zoning’), with an allowance for quantum but not for any other factor. The applicants contended that the net annual value should be related to the passing rent for the subjects, which, they argued, was an open market rental which could be explained by certain physical and economic factors specific to the subjects.

In summary, we have decided:-

  1. that although the rent of the subjects was arrived at in a bona fide arm’s length transaction it was not an open market rent;
  2. that the subjects should be valued by comparison with ‘standard’ units in the centre, particularly other two-level shops;
  3. but that in addition to a quantum allowance further allowance should be made in respect of disadvantages inherent in the configuration and location of the subjects.

We have accordingly allowed the appeal to the extent of fixing a valuation, on the basis of the assessors’ zoning method, of £556,500.

The Issue

The appeals are against entries in the Valuation Roll for Renfrewshire of a Rateable Value of £20,900 (3% of £702,900) and an entry in the Valuation Roll for Glasgow of a Rateable Value of £682,000 (97%) both with effect from 1st April 2000. The appeals were each referred to the Tribunal in terms of the Valuation Appeal Committee (Procedure in Appeals under the Valuation Acts) (Scotland) Regulations 1995 Regulations 4(1) and 5(1)(e) on the grounds that the subjects were part of larger subjects situated in more than one valuation area and the valuation was under appeal in more than one area.

In their grounds of appeal the applicants proposed a cumulo net annual value of £480,000, and at the hearing contended for £495,000. The assessors contended for a valuation of £660,000. The tribunal accordingly had to decide on the correct application of Section 6(8) of the Rating and Valuation (Scotland) Act 1956 to the subjects. The basic Zone A rates, and the amount of the quantum allowance made by the assessors, if the zoning method was used, were not in dispute.

Procedure

At the hearing the applicants were represented by Christopher Haddow QC, who led evidence from William J P Muir MRICS, a rating surveyor employed by G L Hearn, Michael C Simpson, director of Campbell and Company, a firm of retail property consultants, and Kevin P Glanville FRICS, senior development surveyor of W H Smith plc. An affidavit was lodged of the evidence of Marcus A Kilby FRICS, a director of Lunson Mitchenall, a firm of retail property consultants and advisers to the developers of the shopping centre, Capital Shopping Centres.

The respondent was represented by Geoffrey J Clarke, Advocate, who led in evidence John Morrison FRICS, a valuer with the Renfrewshire Valuation Joint Board. Following changes to the boundaries of the local authority areas the whole of the shopping centre, and consequently the whole of the subjects, have in fact been within the valuation area of the Renfrewshire Joint Valuation Board since June 2002. In that situation, the Assessor for the Renfrewshire Joint Valuation Board alone has been responsible for presentation of the case made by the respondents jointly.

The parties lodged joint productions, including lease documentation, and helpfully agreed some of the basic facts; and also each lodged a number of productions. The agreed facts included a schedule of rents, gross areas and reduced areas (on a zoning basis) for all the shops in the centre except for large stores, and plans showing the layout of the centre and adjacent car parking at both levels. The assessors produced their valuations of the subjects and certain other comparison subjects at the centre; further schedules showing how the rents in the centre had been analysed; summaries of the application of Zone A rates and the scheme for making allowances for quantum; and certain correspondence with the applicants’ surveyors. They also produced plans showing the location of units with agreed rateable values and photographs taken within the centre. The applicants produced photographs, a schedule of rents and proposed or agreed rateable values at Braehead, and three alternative valuations of the subjects; and photographs, valuations and layout plans of double level units in Scotland and England.

Following the hearing, the Tribunal made site inspections at the subjects at the Braehead Shopping Centre, and also at the St Enoch’s Centre and Buchanan Galleries in Glasgow, where certain comparison subjects were situated.

The Facts

On the basis of the agreed facts, the oral and documentary evidence, and our site inspection, we made the following findings of fact.

Braehead Centre

The subjects are located within the Braehead Shopping Centre situated to the west of Glasgow. The centre opened to the public in September 1999. A retail park and a business park have been developed adjacent to it. The centre has 55,000 m2 of retail space, a covered arena, ice and curling rinks, and 6,500 car parking spaces, together with a coach park, bus station, and taxi stance. It is the only regional out-of-town shopping centre in Scotland. It is unlikely that there will be any others of this scale. Over 25% of Scotland’s population lives within 20 minutes driving distance and 50% within 45 minutes driving time.

The retail centre has been designed as a ‘dumbbell’ with large ‘anchor’ stores located at the ends of a spine lined with shop units. The spine comprises the main mall at two levels on an east-west axis. The centre is unique in Scotland in that the lower and upper mall levels were carefully designed so as to be each 100% prime. The site has been levelled and the centre constructed such that the main car parking is at the same levels as the malls allowing natural access to either shopping level. Slightly over 50% of the total car parking spaces directly serves the upper mall. There are three principal entrances from the car parks, two at the lower level and one at the centre of the upper level. One of these, at the lower level, also serves the bus station and taxi rank. The lower and upper malls have roughly equal levels of pedestrian flow.

At the centre of the mid point of the main mall it widens out to form a ‘square’ (at both levels) off which there are short malls leading north to food courts and recreational areas and (at the upper level) south to one of the principal entrances.

At the east end of the main mall there is a large two level store occupied by Marks and Spencer. The flank wall of Marks and Spencer’s, at the lower level, forms one side of a secondary mall linking the main mall to the principal entrance at that end. The shops on the other side of that stretch of mall face either a blank wall or display cases. On the upper level above these units there is another anchor store, occupied originally by C & A and now by Primark.

At the west end of the main mall there is a large Sainsbury’s supermarket, at the lower level only. Also on the lower level there is a Woolworths store and a Boots store. At the upper level there is a BHS store above the Boots store, but there are no shops above Sainsbury’s or Woolworth’s at this level. There is, however, an escalator connection from the upper level into Sainsbury’s. There is another entrance at the west end, at the upper level, from a blank passageway leading to another, multi-level, car park which primarily serves the arena.

Marks and Spencer (at both levels), BHS and Boots have entrances directly from the car parks so that members of the public can enter the malls via these stores without having to pass through any of the principal mall entrances.

Within the units facing the mall there is a variety of tenant mix comprising the leading fashion and other stores to be found in High Street locations. There are also a number of ‘main space users’ (“MSUs”) being retailers, including the applicants, occupying particularly large areas of retail floor space. Many of the shop units at the lower level are larger and deeper than the units at the upper level. There are escalators, stairwells and lifts for public use to transfer between levels. At the entrance to Marks and Spencer at the eastern end of the main mall, and also at the western end, there are courts with escalators.

The Subjects

The subjects are located at the western end of the main mall. They occupy about 1200m2 (12,917ft2) of retail floor space on two levels including staff accommodation and storage space at a third level. The two trading floors are for all practical purposes of the same size, having the same overall width and depth. The frontage width is 15 metres at each level and the depth is 34 metres. The two trading floors have access for the public from the main mall at each level. There is internal access for the public between the sales floors by means of an escalator, stairs and lift. There are stairs at the rear for use only by the staff.

The subjects are the last of the units at either level on the north side of the main mall at the west end. At the lower level, they face the Boots store on the south side of the mall and Clinton Cards (now the Bear Factory), the last unit at that level. They are separated from the entrances to, first, Woolworths and then Sainsbury’s, by a narrow blank corridor, which provides a pedestrian link from the court at this end of the main mall to a public lift. The housing for the lift is set into the side of the subjects. In the court between Boots and the subjects there is an escalator. At the upper level, the subjects face BHS. There is a well in the court between those units where the structure of the escalator rises from the lower level. The blank passageway immediately to the west leads to the public lift and, further away, to the escalator down to Sainsbury’s. Further on, and some distance away, is the multi-level car park serving the arena.

Leasing Arrangements

The centre was a joint venture between Marks and Spencer and Sainsbury’s, with Capital Shopping Centres as the selected developer. Mr Kilby’s and Mr Simpson’s firms were joint letting agents. Pre-letting was carefully planned, in relation to the ‘main space units’ as well as the anchor shops. Correct positioning of the ‘MSUs’ in terms of tenant mix and configuration was viewed as a vital pre-cursor to successful pre-letting of the standard retail units. The approach of Lunson Mitchenall, who are recognised as pre-eminent in this field, was to ‘direct’ tenants to units. The subjects of appeal were ‘MSU 1’. As there was to be no main anchor on two levels at the west end, ‘MSU 1’ was planned as a two-level shop with internal connectivity to improve access from one level to the other.

The agents also pursued a plan to recruit a ‘CTN’ (Confectionery/tobacco/newsagent) tenant, in order to improve footfall at that end. It was not absolutely essential to have such a tenant, having regard to what Sainsbury’s and other shops would offer, but the only serious negotiation in relation to ‘MSU 1’ was with two leading ‘CTN’ operators, the applicants and John Menzies. The applicants were very keen to have a shop at Braehead, to the exclusion of John Menzies, with whom they were at that time in keen competition. John Menzies were also interested. The applicants indicated their wish for a unit in excess of 10,000 square feet on one level more central in the mall, but were directed to this unit, as were John Menzies. Although a fashion retailer had been approached as a fall-back, the applicants were informed that only they and John Menzies were being invited to bid for this unit. These parties were informed that £350,000 p.a. would be the minimum acceptable rent and each given until 29th October 1996 to submit best bids. The applicants’ financial appraisal, which reflected the additional costs for the two sales floors, including customer lift and escalator, and also the double shop front, indicated that there was no scope for paying a basic rent over £350,000 but they could offer a turnover top-up. The applicants were aware of keen competition for other ‘MSU’ units. The applicants’ offer was successful, and in due course they entered into detailed lease agreements.

The applicants have two leases (one for each level or unit). Each lease is for a period of 15 years at a total initial rent of £350,000 per annum, subject to a top up provision in the event that 9% of sales exceed that rent, and subject to a rent free period. The applicants commenced trading on 21 September 1999. Rent became due and payable on 18 April 2000. The two leases are, however, conjoined by a ‘Combining Agreement’. A back letter provides that the zoning method of valuation is not to be adopted at rent review so long as the two units were retained as a single trading unit.

Rents for units in excess of about 10,000 square feet (929m2) at shopping centres are normally arrived at using an ‘overall’ rate rather than the ‘zoning’ method of valuation.

Substantially higher overall rent rates were secured, at this pre-letting stage, on other units in excess of 10,000 square feet in the main mall. There was a strong demand for units at Braehead, particularly as it was known that the supply of new regional shopping centres was to dry up. All but one of the units at the centre were let by the time of its opening in September 1999. Most of the leases were on the ‘turnover top-up’ basis.

Basis of Assessments

The Renfrewshire Assessor accepted the Glasgow Assessor’s scheme of valuation based on an analysis of rental evidence.

With only a few exceptions rents in the centre were fixed at a base rent at 80% of estimated full rental value, the difference being accounted for by the anticipated turnover uplifts. The analysed base rent was therefore increased by 25% to obtain a full rental value. Rents were then analysed on a zoning basis with each zone being 9 metres deep. A standard percentage to reflect shopfitting was added. In the lower mall there was a range of full rental value per square metre of reduced area of £968 to £2,265, with an average of £1,658. The comparable figures for the upper mall were £552 to £2,193, with an average of £1,521. From this analysis a Zone A Rate of £1,600/m2 was fixed for the lower level and a corresponding rate of £1,450/m2 for the upper level. These rates were applied to all the units in the main mall. Quantum allowances were deducted where appropriate on a graduated scale of percentage reduction relative to reduced area, commencing at 185m2 (1%) and concluding at 800m2 (15%).

In the secondary mall at the east end at the lower level, where the frontages of the four units nearest to the entrance face the mainly blank side wall of Marks and Spencer, the assessors accepted that the rents reflected that inferior position relative to the main mall and made further allowances ranging from 12.5% at the point nearest the main mall to 25% at the point beside the entrance. They also adopted differing Zone A rates for some of the units in the wings running off from the centre court, at both levels, where a maximum allowance of 30% was made.

The assessors valued the four two-level units (including the subjects of appeal but not including Marks and Spencer) on the same zoning basis, zoning each level separately at the Zone A rate appropriate to the level and making no allowance either for internal communications or for the fact that the units were on two levels. The gross internal areas of these units ranged from about 1043m2 to about 1930m2. The assessors made quantum allowances on the basis of the total of the reduced areas at the two levels. The largest of these units, tenanted by the Arcadia Group, in fact traded basically as four shops but were treated as a single unit because of internal communication in the form of a stair for staff only at the rear of the four shops. The net annual values, and the full rental values arrived at in the agreed analysis, of these four two-level units, were as follows:-

FRVNAV
Units 2, 101(Subjects of appeal)£437,500£660,000
Units 42a,b, 144, 145(Arcadia)£1,150,000£1,000,000
Units 61, 166(Principles, now Sports Soccer)£578,750£525,750
Units 62, 167(Next)£512,171£514,000

All these valuations, apart from the subjects of appeal, were agreed. Virtually all of these agreements were entered into by professional agents acting for the ratepayers. Mr Muir’s firm agreed 11 other values, including Next and a number of single level shops of a similar shape and size to the subjects of appeal. When negotiating the value of the subjects of appeal, he initially understood the rent of the subjects to be a concessionary rent and agreed, subject to his clients’ instructions, the valuation of the subjects at £660,000.

Other ‘Multi-level’ subjects in Scotland

Buchanan Galleries, Glasgow, is a modern city centre shopping centre, which opened at around the same time as Braehead. It has main malls on two levels. At one end there is a very large anchor store, John Lewis, and also (on one level) access to the car parking. At the other end, there is a wing with four levels, a street level below that of the main mall, the two main mall levels and an upper ‘Food Gallery’ level. Next occupies part of this wing at the two main malls and the Food Gallery levels, with entrances at each of these three levels and internal communication for customers. Next is physically separated from the main malls by a complex of escalators although it does its best to display its presence to mall users with carefully positioned large signs. Its agreed assessment of £611,000 (compared with a passing rent of £686,250) has been arrived at by ‘single level’ zoning, i.e. taking its ground floor on a traditional zoning basis, using the Zone A rate for ground floor shops in the centre and the upper floors overall at reduction factors of 8.25% and 6.5%. This is a method used to value multi-level shops without upper floor entrances, and end additions of 5% have been made to each upper floor to reflect the direct public access to sales areas from the upper mall and the Food Gallery.

St. Enoch Centre, Glasgow is also a city centre shopping centre, in this case several years old. The shops are on two levels, and the building includes car parks at higher levels, access to which is awkward. One side wing of the upper level of shops is largely vacant. The design of the centre now appears somewhat dated. Two double level units, both on the side of the mall with narrower walkways, each with public access at both shopping levels and also internal communication, have been assessed using the same, ‘single level’ zoning, method as at Buchanan Galleries. The passing rents are in line with these assessments.

The Overgate Centre, Dundee, is a modern city centre shopping centre developed on a very constricted site. There is some access to the upper level shops from a multi-storey car park. Two two level shops there have been assessed on the ‘two level’ zoning method, in line with the assessors’ approach at Braehead, but with end allowances, of 20% in one case and 8% in the other, for multi-floor occupancy. The passing rents are in line with these assessments. One of these shops is occupied by the applicants, who needed a large space which could only be provided by a ‘two level’ unit. The landlords did not seek a full rent based on double zoning and gave a discount of 35% from such a figure.

Treatment of ‘multi-level’ subjects in England

At the Arndale Shopping Centre, Doncaster, a two level shop has been valued on the ‘two level’ zoning basis with an end allowance of 10% to reflect double zoning. Two such shops at the Victoria Centre, Nottingham, have been similarly treated as has one shop at the Metro Centre, Gateshead. One shop in Churchill Square, Brighton, has been treated on the single zoning basis, with zoning on the upper floor, whose public entrance is from an open air square, with the lower level taken at a reduction factor of 10% and an end addition to reflect direct access from the mall at that level. The passing rents are in line with these assessments.

At Bluewater Shopping Centre, Kent, agreement has been reached between the Valuation Office Agency and the British Retail Consortium that all multi-floor properties there will be granted an end allowance of 15% to reflect double zoning.

The Competing Valuations

The assessor’s estimate of the rateable value of the subjects was as follows:-

Assessor’s Valuation

m2m2m2££
Lower LevelZone A 135.32 @ 100%135.32
Zone B 131.79 @ 50%65.90
Zone C 123.19 @ 25%30.80
Zone D 80.12 @ 12.5%10.02242.04@ 1600387,264
Upper LevelZone A 135.32 @ 100%135.32
Zone B 131.79 @ 50%65.90
Zone C 121.46 @ 25%30.37
Zone D 104.03 @ 12.5%13.00244.59@ 1450354,656
Mezz/2nd Floor238.11 @ 10%23.8123.81@ 145034,525
776,445
Quantum allowance-15%116,467
659,978
NAV say660,000

The applicants dispute this estimate of net annual value. They do not seek a figure equivalent to the full rental value of £437,000 but instead contend for and suggest a figure of £495,000 which they justify by reference to three alternative means of estimation as follows:-

Ratepayer’s Valuation 1 (‘Two level’ Zoning, with Allowance)

m2m2m2££
Lower LevelZone A 135.32 @ 100%135.32
Zone B 131.79 @ 50%65.90
Zone C 123.19 @ 25%30.80
Zone D 80.12 @ 12.5%10.02242.04@ 1600387,264
Upper LevelZone A 135.32 @ 100%135.32
Zone B 131.79 @ 50%65.90
Zone C 121.46 @ 25%30.37
Zone D 104.03 @ 12.5%13.00244.59@ 1450354,656
Mezz/2nd Floor238.11 @ 10%23.8123.81@ 145034,525
776,445
Quantum allowance-15%116,467
Multi-floor allowance-25%164,995
494,983
NAV say495,000

Ratepayer’s Valuation 2 (‘Single level’ Zoning)

m2m2m2££
Lower LevelZone A 135.32 @ 100%135.32
Zone B 131.79 @ 50%65.90
Zone C 123.19 @ 25%30.80
Zone D 80.12 @ 12.5%10.02242.04@ 1600387,264
Upper Level492.6 @ 20%98.5298.52@ 1600157,632
Mezz/2nd Floor238.11 @ 10%23.8123.81@ 160038,096
582,992
Quantum allowance-15%87,449
495,543
NAV say495,000

Ratepayer’s Valuation 3 (‘Overall’ Method)

m2m2££
Lower LevelTotal gross area470.42
Upper LevelTotal gross area492.60
Mezz/2nd FloorTotal gross area238.111,201.13@ 415498,469
NAV say(412)495,000

Opinion Evidence

Mr Muir

Mr Muir is an experienced rating surveyor who does not have experience in other areas such as agency or rent review.

Mr Muir’s position essentially was that, having originally assumed that the rent of the appeal subjects must be concessionary, the information which he subsequently obtained from his clients, that this was an open market arm’s length rent, had to be taken into account. Prior to receiving that information, he had not raised any specific disadvantages at the subjects, although in cross-examination he said that he recalled mentioning at one stage that the rent was low and that the reason might have been quantum or the position at the end of the mall. Mr Muir used a number of different expressions in evidence: ‘open market arm’s length’, ‘true open market’, ‘bona fide’, ‘arm’s length’ and ‘genuine arm’s length’. If the landlord in an arm’s length transaction was prepared to accept a rent substantially lower than that for other subjects at the centre, that allowance should be recognised and adopted in the assessment.

Mr Muir said that the subjects could be regarded as inferior to other units within the centre, as had been recognised at the other end of the mall. He referred to the subjects’ size, large frontage, double deck occupation and lower arm’s length rent. The landlord must have regarded it as inferior. He did not agree that at the other end the entrance to Marks and Spencer marked the end of the main mall or that the secondary mall there had an inferior appearance.

Mr Muir agreed that the rentals of the other two level shops suggested no reduction. However, he distinguished the situation of the Arcadia multiple occupation - in effect four leases - and pointed out that Next and Sports Soccer were more centrally located within the main mall.

He spoke to his comparisons and his analysis of rental values which showed allowances ranging from 8-20% in respect of multi-floor occupation.

Mr Simpson

Mr Simpson’s experience is in retail property consultancy, including retail agency. He has been involved in the development and letting of major retail developments, and has also acted for tenants. He was involved jointly with Mr Kilby in agreeing and implementing the letting strategy for Braehead.

Mr Simpson explained why attention was concentrated on the ‘main space users’ in the early pre-letting stage, in 1996, after the ‘anchors’ were in place. In relation to ‘MSU 1’, which became the subjects of appeal, there were two aims, firstly to improve interconnectivity between floors and secondly to attract an operator who could be expected to generate high levels of footfall at that end of the mall. That was why a ‘CTN’ use was identified and the two potential CTN retailers targeted. Another reason for such careful attention to tenant mix was the adoption of the system of turnover leases with a base rent of 80% of rack rental topped up on the basis of turnover percentages. Correct positioning of the major space users was vital to successful pre-letting of the standard units processed over the subsequent three years before the centre opened. A landlord, looking to tenant mix, may resist the temptation to let to the highest bidder.

In 1996, however, the landlords were not offering concessionary rents and the lease to the applicants had no element of subsidy but reflected the limitations of the location of the subjects. Demand for space at this centre outstripped supply and the landlord was able to require the subjects to be accepted in their configuration. CTN trades did not command concessionary rents. Although the preference was for a CTN trader, this was not essential. Offering to another type of trader would have been of marginal benefit at best: although there was a potentially slightly higher rent, there would have been no benefit to the centre in terms of tenant mix or disposition. Towards the end of the letting stage, certain retailers were targeted and offered inducements but these were selected to round off the quality of the tenant mix and on the expectation that high turnovers would produce a full rental value in excess of the headline rent. The pre-letting process at Braehead was very successful, with only one unit remaining unlet when the centre opened.

Mr Simpson considered that the shape of the subjects, the extent of the frontages and the need to provide internal connectivity were disadvantages to a tenant (whatever type of retailer), in comparison with, for example, Next which he said was a more normal shape of unit. There was no particular benefit to a retailer in having a frontage greater than about 12 metres. The frontage to depth ratios would not assist in calculating rent on the zoning basis. Retailers required significant stock areas. Deeper and wider subjects were generally more valuable. Square units were unusual in themselves. Configuration of the type found at the subjects, on two levels, was highly unusual. The developers had explored the possibility of making this unit deeper to improve its configuration, but had been unable to do so because of planning difficulties.

Mr Kilby

Mr Kilby also has substantial experience of marketing, at pre-letting, major shopping centres and had advised the developers on the design, layout and letting of Braehead. His evidence, given by affidavit, was broadly similar to that of Mr Simpson.

Mr Kilby’s evidence was that the anchor stores – C & A, HMV, Boots and BHS in addition to the two development partners, Marks and Spencer and Sainsbury’s – become additional destinations providing a significant draw along the malls. There was a deliberate policy to try to ensure that the anchors and the ‘main space users’ created a draw to the ends of the mall, with mainly the fashion retailers, in more conventional units, in the middle sections. As there was strong interest from both the applicants and John Menzies in ‘MSU 1’, it was decided to invite their best offers. The exposure of this unit to both lower and upper levels was a requirement of the landlords, rather than a preference of the tenants. Letting to a CTN retailer was not, however, a pre-requisite.

Mr Kilby confirmed that the rent for the subjects was adopted on the basis of an overall rate. 10,000 square feet (929m2) was often the size beyond which the method of valuing, for letting purposes, changed from a zoning to an overall method. Double level zoning would, in his opinion, produce a disproportionately high rent which the retailer would not be able to afford, particularly as this space offered a considerable frontage on both levels. That was why it was agreed that the property would be let on two separate leases but with a combining agreement and back-letter to ensure that the overall method of valuation would be used at rent review.

Mr Kilby concluded that the transaction with the applicants did not represent ‘unduly concessionary terms’.

Mr Glanville

Mr Glanville’s evidence was primarily factual, in relation to the leasing arrangements narrated in our findings. He is, however, an experienced development surveyor. In his opinion, the negotiations to acquire the leases represented an arm’s length transaction and the final rent fully reflected the market value, having regard to the size of the unit, its excessive frontage, its frontage onto both malls and its location within the centre. In relation to the applicants’ shop at the Overgate Centre, Dundee, he considered that the same factors, of obtaining a required area of floorspace at two levels, would apply to most retailers.

W H Smith’s first preference at Braehead was for a store with a minimum of 10,000 square feet (929m2) of sales area plus 30% back-up accommodation all on one level with a 40-45 foot (12– 3.5 metre) frontage, and had sought to obtain an MSU in the centre of the main mall. They were given no choice but to take the subjects.

Mr Morrison

Mr Morrison spoke to the assessors’ valuation of the subjects which he confirmed had been derived from comparison with other similar subjects in the main mall where net annual values had been agreed with professional agents. He did not consider the rent to be at arm’s length. It was completely out of line with other rents in the mall for no discernible reason. He noted that Mr Kilby had referred to the passing rent not being ‘unduly concessionary’.

He saw no disadvantage in the configuration of the subjects and compared them with Unit 44 on the lower level, occupied by Dixon’s. It was the same as the subjects in respect of frontage and depth. It had a return to a walkway, it was similar in location and had an escalator in front of it. Apart from being on one level only it was a ‘mirror image’ of the subjects. That unit had been valued on a zoning basis with no allowance other than for quantum.

He was satisfied that the zoning method could be relied on to deal with any aspect of frontage to depth ratios. He maintained that traders liked frontage although he said that in circumstances where depth was less than width it might be appropriate to make some allowance.

Submissions

Applicants

Mr Haddow referred to the evidence from other two-level shopping centres that showed that units trading on two levels had rents passing lower than the norm for the particular centre and that allowances of up to 25% were given when calculating net annual value. Such allowances brought the value otherwise determined by the local scheme for valuation down to a level approximating to the passing rent. The admitted difficulty for the rating valuer was that the reasons for such allowances might be arcane. In contrast the reason for the allowances given for the units in the secondary mall at Braehead, where they faced a blank wall, was obvious.

It was only after Mr Muir had carried out further investigation into the valuation for rating of units trading on two levels that he established that the disadvantages were readily recognised by landlords and tenants and were reflected in the rents. Allowance was made either by an end reduction or by the adoption of the ‘single level’ method, employing a percentage reduction to one of the floors. The assessors had proceeded only on the limited evidence available at Braehead, despite the Glasgow Assessor having accepted net annual values closer to full rental value at Buchanan Galleries and the St Enoch’s Centre. That was also evident at the Overgate Centre in Dundee and at various shopping centres in England where valuation officers had recognised the problem. The need for an allowance was also accepted by the Retail Forum. Such allowance was made regardless of the relationship between the Zone A values on each level and regardless of the type of trade.

Those witnesses who were themselves involved in the actual rental deal were able to point to the factors at the subjects which explained why the rent was lower than for single level units. Size was one criterion: main space users (> 929m2) had their rents calculated on an overall basis and not on a zoning basis. Another was the landlord’s insistence on interconnectivity at the subjects in the interests of the centre as a whole. The shape of each floor was poor having a low ratio of depth relative to frontage. The mall escalator obscured the subjects at lower level and led away from them to Boots at the upper level. The applicants preferred a single level store for reasons of operational effectiveness and efficiency with reference to staffing, security, impact on the customer, fitting-out costs and flexibility of layout. The rent had been based on an overall rate which reflected the disabilities of the property. Mr Morrison had not been able to recognise the evidence which explained the lower rent level.

Mr Morrison’s belief that the rent was concessionary, because the landlord wanted to get a confectioner/tobacconist/newsagent into the centre and into that space, was unfounded. The evidence was that it was not essential to get such a trader into the centre or into that space. The hypothesis put to witnesses in cross examination, that a large space using fashion trader in the main mall could swap its unit with that of the applicants and each would continue to pay the same rent as at present, was therefore false. The evidence of Mr Kilby was that when terms were agreed with the applicants they were felt to be a fair reflection of the market value for a main space user given its size, location, frontage to depth proportions, trading at two levels and the style and use of the occupier. Mr Simpson’s evidence was that a bid from a fashion retailer at a marginally higher figure was a possibility, but unlikely. The landlord had preferred a CTN type of retailer but Mr Simpson was of the opinion that such a user would be a competitive bidder for a mid-mall unit. Therefore a CTN user was expecting to pay an open market rent not a concessionary one.

This situation could be contrasted with the later letting of a unit to Dune where the evidence was that the landlord was prepared to offer a concessionary rent in the interests of the centre as a whole. Dixons was not a ‘mirror image’ of the subjects, because Dixons were located immediately opposite Marks and Spencer’s entrances.

Mr Haddow criticised the approach of the assessors as an unquestioning application of the zoning method. The evidence from Mr Glanville was that stores over 10,000 square feet (929m2) were let on rents calculated on an overall basis.

There was evidence from elsewhere to explain the level of the open market rent at the subjects. Mr Glanville had explained that a 35% discount in rental had been agreed at the Overgate for a shop comprising upper and lower units that would otherwise have been separately zoned. Such a reduction was not specific to one type of retailer as witnessed by the 8% allowance given to River Island in the Overgate. In each case the NAV approximated to the rent, and the difference in allowances could be explained by the difference in size between the two stores.

Mr Haddow referred to the following authorities: Armour, 19-12; Post Office Counters Ltd v Assessor for Grampian Region 1990 S.C. 130; Debenham’s plc v Assessor for Grampian Region 1992 SLT Reports 309 ; and Marks and Spencer Leamington Spa v I P Sanderson (VO) 15 February 1992 LVC/242/90.

Mr Haddow submitted that the assessors’ valuation produced an absurdity. Mr Glanville’s evidence was that W H Smith had paid a very full rent for the lease of the subjects. The base rent of £350,000 had been calculated by reference to estimated turnover. Turnover had only now reached a level which produced rent of £528,000, some 20% less than the assessors’ figure of £650,000 for rateable value.

The Respondents

Mr Clarke submitted that the passing rent was only an adminicle and not the starting point or best evidence of rateable value (Armour, 19-19 to 21; John Honeyman and Company Limited and Others v Assessor for Fife 1962 SLT Reports 201).

At Braehead two prime malls had been created and there was no evidence that occupying units on two levels gave rise to a lower rent than occupying the same units separately. Shops occupying two levels such as Next, Sports Soccer and Arcadia were paying rents without any reduction for double occupancy, although he conceded that Arcadia was comprised of four shops trading within separate leases. The applicants’ witnesses had not pointed to any material difference between the subjects and these other two-level subjects. Mr Muir said the only difference was the rent although he also suggested that the subjects were poorly configured. Mr Simpson mentioned a problem with the frontage to depth ratio, but there were a number of shops in the centre which had adverse frontage to depth ratios, albeit on one level. A complaint about length of frontage relative to depth went to the very heart of zoning as a method of analysing and assessing rental value. The zoning method had been accepted by ratepayers and their agents throughout the centre. No adjustment should be made on account of the location of the subjects. The applicants’ witnesses had agreed that the secondary mall to the west, beyond Marks and Spencer, was a poorer location. There was no basis for any allowance at subjects which were in the main mall, where there was uniform application of the Zone A rate at each level and only a little adjustment between the upper and lower level malls.

Considering the rent in that context Mr Clarke submitted that it was appreciated that the question of tenant mix was important to the landlord of a shopping centre, particularly where turnover rents were involved. The assessors were correct to treat the passing rent with caution where it did not fit into the general pattern of rents. It was not right to slavishly adopt rent as an indication of rateable value simply because it was low. There have to be physical reasons for which adjustment may be made to an established level of rent. Where, as here, there were no features which were not found elsewhere in the mall (or where found elsewhere had not caused a reduction in rent), the assessor was entitled to give the passing rent less weight.

In his submission it was possible to go further and say that it appeared that the leasing of the subjects to the applicants, as a type of trader, was a deliberate policy on the part of the landlord. That admitted the possibility that the level of bids made by that class of retailer would be less than that which would have been made by other retailers. There was support for that possibility in the statement by Mr Kilby that the terms of the lease entered into had not been ‘unduly concessionary’.

Regarding the back letter to the lease which required the application of an overall rate to determine rental value for the purpose of rent review, Mr Clarke pointed out that that agreement was specific to W H Smith, and not therefore to the unit.

Regarding the comparisons spoken to by Mr Muir, Mr Clarke said that the assessors had no difficulty with the concepts of making allowances for, or treating differently, a second level of a store on two levels, where local evidence supported that approach. These comparisons provided no basis for adjustment here. Here the uniform approach to rental level supported the contrary view and only the passing rent supported it. The uniform approach was consistent with the shopping centre having been designed to have a prime mall at each level.

Mr Clarke referred to Debenhams, supra per, Lord Clyde at 312E and Lord Prosser at 313 (at 313 C), That case involved subjects which were a different class of shop justifying a departure from the pattern of rental evidence applicable to the standard shops in the centre. Here, there was an impeccable pattern which did relate to the subjects of appeal.

Tribunal’s Consideration

The applicants led evidence vouching their claim that the actual rent of the appeal subjects was reached in an arm’s length transaction and also pointed to a number of disadvantages from which they say the subjects suffers and which would account for the lower level of rent than other subjects in the main mall including the three other two-level shops where the rents support the assessors’ valuations. The assessors do not accept, as they did at some secondary locations within the centre, that the rent reflects disadvantages of the subjects. They suggest that the rent may have been a concessionary rent, and they have an apparently strong level of support from the rents of the other two-level shops and also the fact that the other rents towards the west end, at both levels, offer no support for any ‘tailing off’ of value at that end of the main malls.

Although the valuation may be shown in one of three possible ways – ‘double level zoning’, ‘single level zoning’ or the ‘overall’ basis – the fact that the applicants arrive at the same figure on each of these bases demonstrates that the issue is not what method of analysis should be used. Rather, the issue is whether the subjects of appeal should be valued in line with the actual rent or in line with the agreed values of the shops round about and the other two-level shops.

It appears to the Tribunal, however, that the problem may be slightly more complicated than that, in so far as the evidence given about alleged disadvantages of the shop calls into question the reliability of comparison with the other two-level shops on a zoning basis. Because the subjects of appeal are a different shape from these other shops, comparison between them on the zoning method, which is based on the idea that the floor space nearest the entrance is most valuable, does not simply produce the equivalent rate on an overall basis but actually produces a higher rate for the subjects of appeal, which sits uncomfortably with the evidence, which we accept, that in locations like this retailers in fact prefer longer and deeper units. Although Mr Morrison was doubtful about this, we have accepted the evidence from the applicants’ witnesses who are actually involved in making such agreements that in the case of shops over 10,000 square feet (929m2) rents are usually calculated on an overall basis and it is clear that that is what happened in the cases of the subjects of appeal and the other two-level MSUs at Braehead.

The correct approach under the modern legislation to evidence of actual rents has been considered by the Lands Valuation Appeal Court in a number of cases and we did not understand the parties to take issue about the approach in principle. The actual rent is one item of evidence, an important one in many cases. It is not, however, conclusive even if it does result from a genuine arm’s length transaction. A pattern of rents or agreed values for comparable subjects may be a better guide. What we have to do, therefore, is look at the actual rent along with all the other evidence and reach a conclusion as to whether it is established to be the open market rental of the subjects or whether, standing beside the rents and valuations of other subjects claimed to be comparable, it can be seen not to be the best evidence of the rent at which the subjects could reasonably be expected to be let on the statutory hypothesis.

We are satisfied on the evidence we heard that the rent of the subjects was arrived at in a bona fide arm’s length transaction. That, however, is not necessarily the same as an open market rent. If a landlord invites only one bidder, the resultant agreement may be a perfectly genuine arm’s length transaction but, particularly if the bidder knows there is no-one else, may very well not represent a market value. In the present case, the landlord, who was controlling the process in the early pre-letting stages, invited two bidders in the same retail class to compete in the knowledge that they were the only two bidders. It was undoubtedly a genuine competition, but did it produce an open market rent? The statutory hypothesis would not restrict bidders to the same retail class. Moreover, the landlords had a reason to restrict the class of bidder, because they wished to attract a retailer of a class who would bring footfall to that end of the mall. If a landlord deliberately creates a unit of such a size, location and configuration that it will only let at a lower rate, that is one situation. If, however, a landlord takes a unit which, if fully advertised, would attract one level of rent but then in his wider interest restricts the market, that is another. The fact that it is not essential to the landlord so to restrict the market and he might open it up if his minimum figure is not reached, does not in our view show that the rent has reached the open market level. Looking, therefore, at the circumstances of the letting of the subjects of appeal, there is at least reason to wonder whether the resultant rent is at the same level as an open market rent – it may be, but it may not be. The independent expert opinion evidence before us is divided: Mr Simpson admitted the possibility of a higher rent from, say, a fashion retailer, but thought it unlikely and pointed to disadvantages at the subjects; Mr Kilby’s affidavit does not directly address the question – he tells us that the terms were felt to be a fair reflection of the market value, but he also said that he did not feel that the transaction represented ‘unduly concessionary terms’; Mr Morrison, on the other hand, looking to the comparison with other subjects, does not accept that the level of rent represents a full open market rent or that the circumstances of the letting met all the requirements needed to establish an open market rent.

The other factor to be borne in mind is that we have to determine the valuation on the basis of the physical circumstances as at 1 January 2000. By that time, the centre was open and clearly a considerable success. This is not to say that pre-lettings cannot produce open market rents. Clearly they can, but the suggestion that the subjects would be expected at that date to rent at a considerably lower rate than similar subjects nearer the centre of the mall in the situation which was to be found at that date needs to be viewed with care. In Debenhams, supra, Lord Prosser recognised the possible difference of the situation after the centre was opened when he said at page 313:-

“It may be that once the subjects were built, and other shops occupied, the class of hypothetical tenant must be seen as somewhat wider than the original category of ‘anchor’ tenants”

We must next consider the disadvantages which the applicants claim explain the lower rent level.

We derive little assistance from the evidence of rents and valuations of two-level shops at other centres. The location plans and our inspections of the situations at the Buchanan Galleries and St. Enoch’s centres in Glasgow, and the location plans of the Overgate Centre, Dundee, suggest to us that there may be real differences both in relation to the centres as a whole and the situations of the particular subjects which the applicants sought to compare. Braehead is a centre which was very carefully and successfully designed on a fresh site so as to produce two very well balanced main malls. The others have been fitted into city centre sites where there is less opportunity of equality of access. Next, at Buchanan Galleries, appeared to us to be possibly quite disadvantaged by its particular location, being separated and to an extent obscured from the view of the main malls. In the case of the English comparisons, we were provided with photographs of the subjects but no further evidence about the centres or the locations of the shops within the centres.

The fact that there are a number of examples of rents for two-level subjects in other centres demonstrating that double zoning without adjustment does not give the correct answer does not mean that that must be the position at Braehead. The evidence from other centres shows a range of allowances (where there was double zoning) and reduction factors (where there was single zoning), even within one centre, for example at Overgate. The possibility that the range extends upwards from nil, i.e. there is a spectrum with two-level shops whose value level is unaffected at one end and two-level shops whose value level is very much lower (perhaps because of additional factors) at the other, is not in our view excluded by this evidence and is of course supported by the evidence at Braehead itself. We also note that the reduction claimed at Braehead, under whichever method, is larger than at any of the other examples. Looking at the two-level configuration in itself, therefore, we are not persuaded that at Braehead this has an adverse effect on value.

However, we do accept that the subjects suffer from material disadvantages in two respects. Firstly, we are persuaded that the combination of the shape and size of the subjects, taken along with the fact that they are on two levels, does produce a total frontage which retail tenants would regard as excessive. Secondly, accepting that there is no general ‘tailing off’ of value at this end of the mall, we do think that the subjects’ particular location puts them at a slight disadvantage. We accept that retailers do not like gaps such as those created by the blank corridors adjacent to the subjects at both levels, and at the upper level there is then the blank wall which contrasts with the upper level of Marks and Spencer at the other end. There is, therefore, some disadvantage which we would expect to see reflected in the rent. However, we think that this would be relatively modest. We would not expect to see a reduction of a similar order to those discernible in the rents of the four subjects in the secondary mall at the east end lower level – these are separated by a blank corridor, they face a blank wall (the side of Marks and Spencer), they do not have the appearance of being in the main mall, and they may be ‘by-passed’ by shoppers using either of the entrances through Marks and Spencer. The subjects of appeal are clearly part of the main mall and do at both levels face the display frontages of other shops.

With these considerations in mind, we look at the actual comparison of the rents of the subjects and the others in the centre, particularly the other two-level shops. On the double level zoning basis, the agreed ‘full rental value’ of the subjects analyses at £857 per m2 reduced area. The corresponding rates for the Arcadia unit, Next and Sports Soccer are respectively £1482, £1306 and £1458. On an overall basis, the rent of the subjects analyses (without any adjustment for quantum) at £364 per m2; Arcadia, Next and Sports Soccer respectively at £596, £490 and £555. Next and Sports Soccer appear to us to be better comparisons than the Arcadia unit, the rent of which may, we think, be influenced by the tenants’ opportunity to operate in effect four shops. As far as the single level shops are concerned, there is quite a range of rents but, as we have already noted, there is at the west end of the malls no discernible reduction at any of the other shops in the vicinity of the subjects.

Having considered the evidence and inspected the subjects we are of the view that the large difference (of 35-40%) between the rent of the subjects and those of the other two-level shops is not fully explained by the disadvantages which we have found established.

However, we have considered another possibility, which is that the subjects in effect have some of the characteristics of an ‘anchor’ and that this might explain the lower rental level, as at other major stores at the centre such as BHS and Boots. As we have indicated, the statutory hypothesis does not allow restriction to one class of retailer, but there is another possibility that in the hypothetical rental market this unit would be likely to be let only to a retailer who would attract footfall and who for that reason would reasonably be expected to negotiate a lower level of rent. The assessment we have to make here is in effect whether the subjects are in the class of anchor – perhaps ‘secondary’ anchor – along with BHS, Boots and others, or whether they are rather to be seen as one of the ordinary, although large, units in the mall like Arcadia, Next and Sports Soccer albeit they suffer from some slight disadvantage in comparison with these others.

Having given careful consideration to this question, our conclusion is that the subjects are basically an ordinary unit in the main mall. In that situation, we consider that the rents of the other two-level shops are better guides to the basic level of hypothetical rent of the subjects on the statutory basis than the actual rent of the subjects. On a consideration of all the evidence, we do not find the actual rent to be an open market rent which satisfies the statutory hypothesis. It is in our view some way below the rent at which the subjects could reasonably be expected to let, and the assessors were entitled to leave it out of account.

We have therefore rejected the applicants’ main argument based on the level of the actual rent of the subjects. As discussed above, however, we have found that there is a problem (which does not arise in relation to any of the other subjects in the mall) in the configuration of the subjects and the application of the zoning method, and, further, that the subjects suffer a slight but material disadvantage from their location. We think that these matters have been sufficiently canvassed in evidence and submission to make it appropriate and fair for us to adjust the assessors’ proposed valuation.

Before doing so we consider what assistance is available from the evidence to permit some quantification of these disadvantages.

On an overall basis, the assessors’ valuation of the subjects of appeal (before applying quantum) analyses at a rate of £646 per m2. The agreed values of Sports Soccer and Next (which are, as a matter of agreement, materially smaller analyse on the same basis at £583 and £576 per m2. The different shape of the subjects apparently produces a rate of around 11.5% higher, although witnesses experienced in the leasing of retail subjects at locations like this considered the shapes of Next and Sports Soccer to be superior.

The problem lies in the size of these MSUs relative to the four zone rates adopted, over a depth of 36 metres. After that depth no further reduction in rate occurs and additional floor area can accrue at the cheapest rate. That is the situation at Next and Sports Soccer which enjoy more favourable shape in retailing terms in respect of depth relative to width. On the other hand the subjects lie entirely within the four zone depth, and mainly within the first three zones. Therefore an equivalent area of floor space is only obtainable at the higher zone rates.

That might be wholly acceptable if the additional frontage and width to depth ratio carried the benefits which the zoning method automatically credits. But given the evidence that a frontage, or width, of more than 12 metres carries little retailing benefit, and given that the subjects have excessive frontages on two levels, then the expense of the additional space accruing from width rather than depth, does not seem justified.

While the zoning method of analysis and valuation is clearly acceptable for most purposes the factor of scale may cause the system to break down. The fact that quantum allowances are a normal feature in the application of the system shows that at large scale it may be insensitive and in need of modification. We note that Mr Morrison perceived that difficulties could also arise in the application of the zoning method at the small scale, i.e at a ratio of less than 1:1 where the system is not sensitive to any disadvantages regarding the shape of shops, and that some allowance for disadvantage may be required. We also note that the assessors have allowed specifically for the disadvantage of shape in Unit 44, occupied by HMV.

In the present case, where there is excessive frontage on two levels combined with a lack of depth, we are of the opinion that the zoning method is not sensitive to the disadvantages involved in that configuration. It can be affirmed that the assessors’ reliance on zoning, normally of course very appropriate, calls for adjustment.

One solution would be for the Tribunal to fix a valuation calculated on an overall basis. But we think it preferable to adhere to the assessors’ method, making such allowance as is appropriate, so as to maintain consistency. We consider that this should be dealt with, in a valuation on the assessors’ double zoning basis, by an allowance for shape of 10%.

We have also found some slight disadvantage in the location of the subjects of appeal in comparison with other subjects in the main mall. A further small allowance for this is appropriate. We think it applies more on the upper level. Bearing in mind the level of allowances considered appropriate on the basis of the rental evidence in the secondary mall, we think that this should be at the rate of 5% of the lower floor reduced area (242.04 m2) and 7.5% of the upper floor reduced area (244.59 m2). We have applied the same rate to the mezzanine floor.

We adopt the method employed by the assessors in valuing the units in the secondary mall where allowance for locational disadvantage is made by adjustment to the zone A rate. The allowance for the disadvantage of configuration is an additional allowance applied to the figure arrived at by zoning and before applying the agreed allowance for quantum.

The Tribunal’s valuation is therefore as follows:-

RA (m2)££
Lower level242.04@ 1520 (5%)367901
Upper level244.59@ 1341 (7.5%)327995
Mezzanine23.81@ 134131929
727825
less configuration @ 10%72783
655042
less quantum @ 15%98256
556786
called556500

We note that our valuation analyses, on an overall basis, at £463/m2, compares with the rateable values of Next and Sports Soccer at £492 and £504 respectively, at about 7% less. This appears to us to reflect the comparisons with these subjects better than the assessors’ proposed £549, or the appellants’ proposed £412, or the full rental value £364. We accordingly allow these appeals to the extent of substituting a net annual value of and rateable value of £556,500 in the Renfrewshire Valuation Roll.