Lands Tribunal for Scotland

OPINION

Foster Yeoman Limited
v
Assessor for Highland and Western Isles
Valuation Joint Board

This is an appeal by the ratepayers, Foster Yeoman, against the entry in the Valuation Roll for the subjects known as Glensanda Quarry, Morvern, Lochaber, at a NAV of £1,500,000 effective from the revaluation date, 1 April 2000. It was referred to the Tribunal by the valuation Appeal Committee at Inverness in accordance with the provisions of the Valuation Appeal Committee (Procedure in Appeals under the Valuation Acts) (Scotland) Regulations 1995.

The entry reflected normal practice for quarries in being based on two separate elements: land, buildings, plant and machinery, assessed in accordance with the contractor’s principle, and minerals based on reducing royalty rates for increasing volume output. After discussion, the Assessor proposed the reduced level of assessment set out as follows:

Item NAV £ RV £
Land, Buildings, Plant & Machinery £575,000 £575,000
Minerals
1 million tonnes @ 18 pence £180,000 £90,000
1 million tonnes @ 15.5 pence £155,000 £77,500
3 million tonnes @ 13 pence £390,000 £195,000
TOTAL £1,300,000 £937,000

The figure for land was insignificant. The parties appeared to have agreed a base figure for buildings, plant and machinery (“BPM”) subject to submissions. It was agreed that the Assessor’s royalty rate was based on rates applied to the applicant’s English quarry at Torr, Somerset. Further detail of the agreement is discussed below. The appellants sought to have a substantial end allowance applied to the BPM figure and contended for significantly lower rates of royalty to produce a resultant RV of £497,850.

At the hearing the appellants were represented by Mr Christopher Haddow, QC, who led evidence from Mr Hugh Stewart Lucas, FRICS, the appellants’ Land and Planning Manager and from William J Voaden, FRICS, a surveyor with extensive experience in the minerals industry. The Assessor was represented by Mr Raymond Doherty, QC, and gave evidence himself.

Authorities

Assessor for Lothian Region v British Airports Authority 1981 SC 141
Civil Aviation Authority v Assessor for Strathclyde Region 1990 SLT 378
Colville & Sons v Assessor for Lanarkshire 1922 SC 460
Heart of Midlothian Football Club Limited v Assessor for Lothian Region 1988 SLT (Lands Tr) 61
Hoare (VO) v National Trust [1998] RA 391
Scottish Exhibition Centre Ltd v Assessor for Strathclyde Region [1994] VA 209

Textbook

Armour on Valuation for Rating, 5th Edition

Background

We heard a good deal of evidence about the economics of the “aggregates” industry. We are satisfied that the issues in this case do not require us to make findings about these matters except in extremely broad terms and we make no attempt to summarise this evidence. It was established that the main British market was in the South East of England. In general terms, demand depends on the strength of the construction sector and to a significant extent on large Government supported projects such as road building. Supply depends on environmental factors and is controlled by the planning process. The price of aggregate will depend on the balance struck from time to time between these factors. It is sufficient to say that when Glensanda was initially developed it would have been reasonable to expect a growth in demand and some restriction on supply. This would have led to increased prices which could reasonably have been expected to justify investment in the project. By the date of valuation it was obvious that matters had not proceeded in accordance with these expectations and the prices achievable for the quarry products were not sufficient to allow the subjects of appeal to operate profitably.

There is no need for us to set out in detail the nature of quarrying processes. However, a broad description of the main quarries in question is necessary for an understanding of the valuation aspects discussed below. It is also appropriate to have in mind the concept of “adding value”. Although the appellants are not of the same size as the five major companies operating in this market, they are of substantial size. Companies like them and the “Big 5” will typically expect to derive a significant income from processes such as asphalting or block making, before sale to the ultimate consumer. This allows them to derive higher profits from their materials. It may also be noted that limestone and granite are interchangeable for many uses but only granite is used for rail ballast. It commands a higher price for this purpose.

Glensanda Quarry

Glensanda Quarry is the UK’s only coastal super quarry. Definitions of a super quarry vary but the term is only applied to quarries with an annual output in excess of 1 million tonnes. The agreed annual production at the appeal subjects is 5 million tonnes. The quarry was designed with an output capacity of 15 million tonnes per annum and in planning terms now has a permitted life until 2042. The total reserves amount to some 450 million tonnes. The capital cost of developing Glensanda has been in excess of £54 million excluding the costs of acquiring ships.

The quarry opened about 1986 and incorporates a number of unique features. The quarry extraction area, which is essentially a mountain, lies some way inland from the coast. For environmental reasons the quarrying method involves the excavation of the hill from the top down. The central area will be hollowed out leaving the overall shape of the mountainside broadly intact. A “glory hole” or vertical shaft has been sunk down from the quarry working area. At present this hole is some 300 metres in depth. It will reduce over the years as extraction proceeds. A horizontal shaft, some 1.8 km long has been driven into the hill to meet the vertical shaft. Quarried material, having been through the primary crusher located at the working area, descends down the “glory hole” to the horizontal conveyor which takes material from the bottom of the “glory hole” to a stock pile area with secondary plant and washing area, located nearby on the coast. From the secondary plant, stone can be loaded on to ocean going vessels which berth alongside a dedicated jetty.

There is no access to the quarry by road. The labour force and all supplies have to be transported in by boat and all quarry products can only leave by ship. Access for personnel and equipment between the foreshore facilities and the working quarry area is by way of a road over 3 miles long built into the hillside. Because of the scale and distances involved, the Company requires to maintain a large fleet of vehicles simply to allow personnel to travel around the work site.

For practical handling purposes the quarry has to operate with a dedicated receiving facility, described as a “virtual quarry” established at the Isle of Grain in Kent. This is the base for distribution to the South East by road and rail. In broad terms almost one third of the aggregate produced at Glensanda is sent to Isle of Grain, almost two thirds goes direct to the continent, particularly Germany and Holland, and some is sent direct to British ports. Sales through Isle of Grain represent the more profitable aspects of the Glensanda operation and it was thought unnecessary to consider the detail of the other outlets.

Many quarries are situated near other processing works producing asphalt, precast concrete and the like. Glensanda has no local market.

All quarries produce secondary material, commonly referred to as “scalpings” which has to be disposed of, or subjected to additional processing, before it can be effectively marketed. At Glensanda the original expectation of the proportion of scalpings to primary grade product was around 10%. It turned out that the “glory hole” method of working unexpectedly created scalpings due to attrition of the rock as it passed down the shaft. The proportion of scalpings is, in fact, about 40%. At Glensanda there is limited storage space. Some extra washing and treatment plant was installed to allow scalpings to be blended into saleable aggregate for shipping. The bulk of the scalpings have to be shipped to the Isle of Grain where they can be upgraded into saleable sized aggregate. Special plant is required for this purpose.

The appellants will have to pay to have the residue of the scalpings disposed of away from the Isle of Grain site.

Torr Quarry

Torr is a limestone quarry situated in the Mendip Hills of Somerset. It is owned and operated by the ratepayers and is a long established facility producing at its peak in the late 1980s, an output of 8 million tonnes per annum. Over the last 10 years, production has averaged approximately 4 million tonnes per annum and the current planning consent now restricts output to a maximum of 6 million tonnes per annum. Seventy five per cent of total output is distributed by rail to depots located primarily in the South and South East of England. Foster Yeoman uses dedicated, specialised trains to distribute aggregate and other quarry products to the South East, particularly into the London area.

At Torr the primary crusher is mobile but linked by conveyer to a secondary crusher and screening plant. Additionally there are two asphalt plants and two concrete block making plants. The limestone output of Torr is not suitable for rail ballast. The proportion of secondary material to primary material is between 20 and 25%. After suitable processing there is a residue of scalpings amounting to about 10% of production. There is room for this to be stored on site.

About three quarters of the stone from Torr is despatched from the quarry by rail. Torr also has asphalting and block making facilites on site and a proportion of stone is processed there.

The long term capacity of Torr will depend on planning consents but it currently has a planning consent expiring in 2030. The RV figure in 2000 at Torr, following appeal, was £663,650.

Whatley Quarry

Whatley Quarry is also located in the Mendips and it is operated by Hanson plc. It too supplies limestone aggregates by rail to the South East and the London area. Whately has a maximum output capacity of 8 million tonnes per annum but is currently producing approximately 4.3 million tonnes per annum.

The agreed figure in 2000 for Whatley was a RV of £633,300.

Submissions

For the ratepayers

Mr Haddow started with the submission that it was necessary to identify the hypothetical landlord and tenant. There was no doubt that the landlord was the owner of a huge quarry in which over £50 million had been invested. The reasons for that investment were clear from the various productions including the Verney Report. The appellants occupy and work the quarry and can be taken to be a hypothetical tenant. But the range of other potential tenants was very limited. Despite the Assessor’s suggestion of a theoretical interest on the part of the “Big 5”, there was, on the evidence, no likelihood of any interest from them. Both Mr Lucus and Mr Voaden were knowledgeable about the business. They had given clear reasons why the big firms would not be interested. Even the Assessor accepted that there would now be no real likelihood of any attempt to develop a new super quarry despite the theoretical advantage in more efficient systems of operation and marketing which the bigger companies might have. There was no logical basis for assuming any interest in Glensanda which, on the Assessor’s hypothesis, depended upon the same factors. In practice, there was no identifiable possibility of a tenant other than the appellants.

He accepted that as the appellants were using the quarry some royalty payment would be required. He suggested that on no view would it be higher than the payment made at Torr. There had to be some modification of the contractor’s basis of assessment for buildings, plant and machinery (“BPM”): Armour 10.02; 19.39; 19.40; 19.43, and authorities there cited. He suggested that the position of the tenant was similar to the situation in Hoare. No-one would now create an item like Glensanda. On any view there would have to be a significant end allowance.

Mr Haddow analysed the decisions in the SECC, Heart of Midlothian, and Civil Aviation Authority cases comparing the facts of these cases and showing that very large end allowances had been given for a variety of factors. Mr Voaden’s professional judgement was entitled to great weight. There was nothing to put against it. Mr Haddow made the point, in particular, that there was no dispute that allowance should be made for the excessive scalpings. The Assessor had expressly accepted that in relation to overprovision of BPM. He submitted that the Tribunal had to treat the agreement as leaving that element available at the stage of assessment of end allowance.

General industrial depression had been accepted as a relevant factor in assessment of an end allowance: Colville & Sons. The present case was a fortiori of that case in which there had been some concern about the possibility of unfairness to other ratepayers assessed on the basis of actual rents. That question did not arise in present valuation practice.

Although he submitted that it was unusual to refer to comparisons where the main submission was that there was no basis for a comparative assessment, there was no doubt that comparison with Torr provided a robust test. If a hypothetical tenant had a choice of Glensanda or Torr he would take the latter. Valuation of Glensanda could not be higher.

In response to submissions for the Assessor, Mr Haddow emphasised that the evidence in relation to Lingerbay was not evidence of current intention to develop a full super quarry. It was only evidence of attempts to get planning permission. The company could, in practice, have sat on the asset as part of their reserves for many years without any requirement for annual payment.

For the Assessor

Mr Doherty suggested that a critical issue was to identify the hypothetical tenant. Even if the appellants were the only possible tenants it was plain that their occupation had a commercial value. It secured their reserves and maintained their business connection. The Tribunal could not dismiss the possibility of there being an interest from the Big 5. It was not seriously disputed that they had the potential to operate it more profitably. They might value occupation as an opportunity to secure their supplies. It was attractive because it was a developed quarry. He stressed that in 1998 Lafarge were actively pursuing their planning application for Lingerbay. It was not until April 2004, well after any potential valuation date, that it became clear that they did not intend to take that application further. In his submission, the Assessor was correct not to dismiss the major companies as potential tenants. Because of that it was correct to say that the annual value should be based on an economic rent.

Mr Doherty then dealt with the issue of scalpings. The agreement of parties was to be found, he submitted, in all three letters. They had to be read together. The high percentage of scalpings had already been allowed for in the BPM assessment.

In relation to the royalty it was important to remember that although the Assessor’s rate came directly from Torr it was, in fact, derived from a comparative assessment. The figure was well below the rates of 25 or 30p per tonne which might be found at other granite quarries. Granite was more valuable than limestone. Nineteen per cent of Glensanda output went to a market which Torr could not supply. Output at Torr was lower and major elements of the production plant were not rateable. In any event there was no justification for Mr Voaden’s reduction from the Torr rate which was the lowest rate found anywhere. His “conceptual” approach involving a notional profit of 70 pence per tonne was based on hindsight and involved double counting.

It may be noted that both counsel made reference to a quarry at Bantray Bay, Republic of Ireland in course of their submissions. We did not think that the quality of evidence justified us relying in any way on the history of this quarry. Our substantive information about it came from questions posed in cross examination and from conflicting submissions of counsel.

Discussion

Although we heard much interesting evidence of the detail of public policy and of developments in relation to production and demand for aggregates, the essentials of this case can, as it seems to us, adequately be summarised in a few broad propositions.

The appellants developed Glensanda in the 1980s. It was based on a concept then untried in Great Britain, that of the coastal super quarry. Although there were words of caution to be found in the Verney Report, the decision to develop such a quarry was a perfectly reasonable commercial one. In the event it has not yet been commercially successful. The reasons for this are well understood. Production costs are high by comparison with other quarries. The demand for the product has not grown and planning consents have allowed available supplies closer to the market to be identified. These facts were not disputed. Nor was it disputed that there was little prospect of change in the foreseeable future.

Parties were agreed that there was no relevant difference in any material respect between the situation at 1 April 1998 and 1 January 2000 and nothing turns on the significance of these dates for valuation. Much of the evidence dealt with 1998 figures and we can, for convenience, treat that as the effective valuation date.

At that time no-one could have failed to recognise that, because of its location and the production methods necessary at that site, Glensanda would be expected to run at a significant loss for at least 10 years. The precise measure of loss was not easy to identify because of methods of accounting treatment. To take a minor example, it was clear that the Group Shipping Fleet was run only because it was necessary to have sea transport from Glensanda. The total annual cost of shipping was reduced by taking the opportunity of using intermittent surplus capacity for other purposes - the “back-haul” trade. It might have been legitimate to deduct the whole standing costs of maintaining the fleet as a charge against Glensanda leaving the net profit from other uses to be accounted for separately. Equally it would have been proper to take only the net cost. It was agreed by Mr Gillespie that the difference was insignificant in the context of the 1998 figures. There might come a time when such detail would be significant in determining whether there was any annual running profit. What was of much greater significance was the depreciation on capital. Once due allowance was made for the appellants’ capital investment, proper accounting revealed a substantial annual deficit.

Although one element contributing to the size of the deficit is the fact that the quarry was developed with a view to an annual output of 15 millon tonnes per annum and this has led to some element of overprovision, we are satisfied that the main reasons are intrinsic to the physical characteristics of the Glensanda Quarry. It is comparatively remote from its markets; there is no land access to it; the production methods necessary to work the raw material have proved very inefficient compared with quarries which can be operated by conventional means. These matters are not disputed.

It might appear that the most obvious reason why coastal super quarries cannot be compared with other quarries is because unavoidable shipping costs are a dominant factor in the accounting exercise. On the abstracted figures presented to us (the appellants’ production 12) the shipping costs from Glensanda appeared to be of the same order as the figure for direct cost of processing material. This would not be unique to Glensanda. The Department of the Environment Paper of December 1992 “Coastal super quarries to supply south-east England aggregate requirements” identified costs of the same general order. The shipping costs are of the order of twice the magnitude of the direct processing cost at Torr. They are well over 50% of the average “gate” price available at Torr.

However, this comparison may be more apparent than real. In the quarry business all haulage costs are a significant factor. In broad terms, bulk shipping is more efficient than rail transport and very much cheaper than road transport. Hidden in the shipping costs is the fact that they allow the product to be delivered nearer the areas of highest demand. Without more precise analysis of where the main markets lay and examination of evidence of transport costs by road and rail, it is not possible to take shipping as a unique burden. The said study paper demonstrates that the cost per tonne of moving large volumes of stone 700 miles by sea may not always be in excess of moving it 70 miles by road. We accept that Mr Gillespie was well founded when he said that it was not possible to make a comparison with selling prices at Torr without knowing detail of the costs of the rail connection system. We were provided with a gate price for road collection from Torr but heard no evidence of the level of demand for this product.

However, although the need to transport all the material by sea does not inevitably lead to greater costs, there is no doubt that it does tend in that direction. Demand will not necessarily be near a port. There will usually be road or rail costs on top. We accept that the need to maintain a fleet is an adverse factor.

There is no room for dispute that the need to transport men, equipment, and supplies by sea leads to greater cost than normal. One example is that the company requires to make provision for overnight accommodation of staff. They have to move staff back and forth by boat on a daily basis. They have to pay staff to cover this type of shift work, being away from home and longer hours of work to include travel. There was some indication of a need to pay excess to attract workers having regard to the inhospitable climate.

Before we turn to look in more detail at the problems created by the production method, it is, of course, important to recognise that a coastal super quarry might have been expected to have unusual benefits which would make it more attractive to a potential tenant. In broad terms, these might be referred to as the benefits due to economies of scale and to security of supply. These are important elements but we heard nothing of the detailed accounting implications of such factors. There is no doubt that they have not yet been able to outweigh the loss making factors.

We might also mention that direct comparison with Torr had to have regard to the difference between granite and limestone. For many purposes they served the same market but granite could attract a better price because it could also be used for rail ballast. On the other hand granite being harder took a much greater toll on equipment.

Because of the environmental constraints, the system of working which has had to be followed at Glensanda is to work from the top and, in effect, hollow out the mountain. This method requires use of a vertical shaft to deliver the rock after primary processing to a conveyer system running to the processing and handling facilities on the shore. The vertical stage has led to an unusually high percentage of “scalpings”. The dispute between parties in relation to scalpings turns essentially on two matters: the first relates to the terms in which parties have recorded their agreement on figures; the second relates to the fact that by their processing methods at Glensanda and at the Isle of Grain the appellants do, in fact, manage to find a market for the scalpings.

Before we look at the basis upon which figures were agreed it is important to keep in mind that it was not disputed that the proper basis for assessment was to use a contractor’s approach for BPM and a royalty rate applied to output. This was a sensible practical approach and was consistent with the fact that the basis of assessment, by reference to royalty rates, derived from evidence of actual royalties. Although few in number, there are, apparently, sufficient let quarries to provide a basis of comparison based on royalty rates applied to output. We understood that, in the case of such let quarries, the tenant would have provided the plant and machinery. This element, accordingly, is not part of the comparative royalty figure. The two elements in the assessment have to be examined separately. Although there would not necessarily be double counting in applying the same head of allowance to each element, care must be taken to be sure that double counting does not arise.

As we have seen, the case was presented in relation to BPM on the basis of an agreed figure. But, although there was no doubt that the parties had agreed a figure, it was plain that this was to be subject to argument that it might require to be reduced by applying an end allowance. The position of the appellants was that the excessive scalpings plainly required adjustment of the royalty rate. In relation to the BPM they founded upon the terms of their agreement letter of 15 November 2004. This narrated that the figure was derived from a contractor’s method and “would take account of the location of the subjects of appeal, age and condition allowances and over-provision in relation to extraction levels”.

The letter continued: “The agreement is without prejudice to arguments related to the unprofitability of the subjects in comparison with other quarries and without prejudice to arguments relative to comparison with such other quarries, not only in relation to royalty rates to be adopted in the valuation exercise but also in relation to overall end allowances at the final ‘stand back and look’ stage of valuation”.

For the Assessor it was contended that the agreement did not turn solely on the terms of this last letter. It was said that it was to be found in the terms of three letters. His first letter, of 3 November 2004, had included the following: “On the basis that it is agreed to reflect all physical over capacity at the quarry and the high scalpings element of the output, the figure for land, buildings, plant and machinery should be agreed at a compromise figure of NAV £600,000, RV £600,000 … The Tribunal would receive only this figure without a build-up”. He then proposed a royalty rate and set out his overall valuation. His next paragraph was in the following terms: “This would then leave the company to pursue a reduction from that figure on account of the economics of the operation”.

The second letter referred to discussions and confirmed that the Assessor was prepared to amend the proposed agreement to reduce the figure to £575,000. The letter continued: “I understand that this is acceptable to you and that you will pursue your economic argument by seeking a reduction in the royalty rate which I have applied or an end allowance or a combination of the two”.

The letters can be read together. On the face of it, the agreement would appear to be that the physical over capacity at the quarry and the high scalpings element of the output was part of the deal which led to an agreed figure for BPM. The letter of 15 November, narrating the elements which the appellants accepted as included in the figure, did not expressly attempt to exclude the high scalpings. There was no explicit qualification of what the Assessor had set out as his understanding on this matter. As the appellants were at pains to establish from the Assessor that they had at all times been open and cooperative with him, it cannot be imagined that they intended by inference to exclude the adverse implications of scalpings in relation to BPM.

The nature of the agreement in this case has presented a difficulty which ought not to have occurred. At the end of the day neither party attempted reference to principle or authority as to the proper construction of the agreement. They left it to the Tribunal to construe it.

In the whole circumstances, we think that the matter must be approached by accepting an element of misunderstanding. But we do not think that this is necessarily fatal to the agreement. It is possible to reconcile the two approaches on the basis of Mr Gillespie’s evidence as to how he had, in fact, made allowance for the scalpings. Although he referred to discounting figures, he explained that what he meant was that he had excluded from assessment altogether certain items of plant which were provided solely to treat the scalpings. However, the impact on profitability from the presence of scalpings arises not merely from the need to provide additional plant, as such, but from the whole additional costs of handling, treating and disposal of such material.

It is, accordingly, consistent with the terms of the agreement as explained by Mr Gillespie that we should make no allowance for scalpings in relation to BPM but need not attempt to exclude it from consideration in relation to the royalty rate.

We heard much about scalpings, contrasting the position at Torr and the position at Glensanda. We had thought that there was a risk that the word was being used in too broad a sense to be entirely helpful. In its original sense, no doubt, it referred to the first cut of rock contaminated by other material and, accordingly, not worth processing or grading. Plainly it has come to mean rock which, for whatever reason, requires some processing beyond crushing and grading. For example, it applies to the very fine material created as part of the initial blasting process. At Glensanda the problem has arisen from what might be seen as an inadvertent extra process, namely, the stage of descent down the “glory hole”. The result of unintended attrition is to produce an excess of fine material.

The significance of scalpings is that they require additional processing and handling costs as well as the cost of dealing with the unsaleable residue. At Glensanda the proportion of scalpings was 40%; at Torr it was about 25%. The latter was close to expected levels from quarries generally.

We are satisfied that the fact that the nature of the operation at Glensanda necessarily gave rise to an unusually high proportion of scalpings would be a matter which would be reflected in the level of royalty paid for the product rather than solely by reference to the extra equipment required to deal with it. A drag on profitability arises from the extra handling including, of course, energy costs. The major difficulty at Glensanda is that the extra processing required has to take place off site at the Isle of Grain. In short, when material leaves the quarry it is not all in a readily saleable state. Further processing costs are incurred. Although the proportions which ultimately remain to be dealt with as waste may not be radically different, costs are incurred in respect of disposal of the final residue from Isle of Grain. The Torr site is of a nature which allows for storage of the residual unsaleable material. The physical presence of the scalpings might impede further extraction in the very long term but on the evidence we cannot accept Mr Gillespie’s description of this as “sterilising reserves”. Access to reserves may require some further handling costs. However, the evidence of Mr Lucas was that the Torr site would, in itself, provide facilities for ultimate disposal without prejudice to operation of the quarry. On any view disposal of waste from Glensanda will be more expensive than from Torr.

Having dealt with the nature of the parties’ agreement and its bearing on the question of scalpings, we turn to look at the substantive issues. The Assessor’s approach did not involve any attempt to demonstrate a build-up of any sort. He had chosen his royalty based, not upon any direct basis of comparison, but in recognition that the appeal subjects were unique, and that because of their particular circumstances it was appropriate to apply as low a royalty rate to them as possible. He had taken the lowest rate he could find. If he had been able to find a lower rate applicable to any quarry he would have been prepared to give serious consideration to the application of it to the Glensanda production figure.

It appeared that it was, in a sense, coincidence that the lowest rate happened to be that applicable to Torr quarry. This led to a good deal of evidence aimed at drawing a comparison with Torr. However we think it important to keep in mind that the Glensanda assessment was not based on a direct comparison with that quarry. The rate for Torr was selected because it was the lowest figure the Assessor could find. He had taken a broad view of the industry and accepted that there was no quarry comparable with the appeal subjects. He did not attempt to base his assessment on any similarity with Torr. He pointed out that the latter was a limestone quarry and had different landlords’ processing equipment. Its annual output was different. That said, we accept that comparison with Torr provides a robust check of the Assessor’s figures. At its most simplistic, a royalty rate for a quarry which has easy access to road and rail systems and an established record of profitability, would be expected, all else being equal, to attract significantly higher royalty levels than a remote quarry which showed no prospect of operating at a profit.

We were not persuaded of the logic of the Assessor’s reluctance to go below the lowest rate he could find. When faced with the direct comparison with Torr, he expressed a serious of doubts as to the reliability of the comparison and tended to repeat that he could find no other quarry with a lower rate. However if Glensanda is accepted as being unique, the absence of a comparative lower rate must be taken as a given. It was not suggested that there were any other quarries which, in fact, ran at a loss on a long term basis.

We are satisfied that the argument over identification of a hypothetical tenant is sterile. Even if we accept that any of the “big 5” might be interested in acquiring stone reserves, if the price was right, this tells us nothing about what the price would be. It was not suggested that anyone would wish to run the quarry for its annual income potential. There was, accordingly, nothing to support the view that any incoming tenant would pay rent based on royalties. Such tenant might have to pay something to take over the landlord’s plant and machinery. He might be prepared to pay something for the long term economic benefit of securing a supply of material but this would, in a sense, be a payment for a landlord’s asset in the ground. There is no doubt that the ratepayers, as active occupiers, must be seen as potential tenants. A royalty based assessment is not disputed.

If the nature of the Glensanda quarry operation is such that it cannot be operated at a profit, a direct application of a royalty based on a profitable quarry cannot logically be justified merely because that is the lowest royalty rate that can be found. We accept in broad terms the approach of the appellants in taking the figure derived from Torr as a start point and attempting to adjust it to meet the very different situation at Glensanda. However, we did not find persuasive the detail of their calculations.

Mr Voaden recognised the difficulty of making an assessment in the unusual situation of a commercial operation which was inevitably going to run at a loss but where the occupiers had demonstrated that there was a value in occupation by their long term commitment to it. Plainly use of the quarry had to be taken as having a commercial value. He argued that it could not be valued on any simple conventional approach. It required a hybrid approach. He looked at it from three separate angles. His first was described by him as a conceptual valuation using the revenue principle; the second was a traditional quarry valuation; and finally he used a comparative valuation having regard to the Mendip Quarries, Torr and Whatley. His final figures were based on an overall assessment of these three approaches.

Mr Voaden’s first approach was labelled by him as a “conceptual” approach. Mr Haddow preferred to refer to it as an approach based on first principles. It started by taking an assumed figure of 70 pence per tonne as the level of profit which would have been expected by the appellants had all their initial assumptions as to the level of profitability at Glensanda proved to be well founded. This was said to equate to 12.5% return on capital which was “in line with industry expectations”. Mr Voaden then compared that figure with the actual profit level at Torr and applying the same ratio of profit level to the Assessor’s royalties as applied at Torr, produced a comparative rate for Glensanda of 10 pence for the first million tonnes, 8.5 pence for the second million and 7.25 pence for the remainder.

The 70 pence start figure was, however, one taken from Mr Lucus’ calculations. It was a derived figure assessed with the benefit of hindsight. It is impossible to avoid the conclusion that the evidence as to what must have been expected from the Glensanda operation has been conditioned, consciously or unconsciously, by the realisation that it is, in fact, a loss making venture as matters stand. It is almost inevitable that anyone asked now what they expected then would tend to a conservative figure. It was not clear whether it was based on the rate per tonne on predicted output or was based on a return of some sort converted to match the achieved output. In absence of contemporary records, we feel quite unable to place any weight on the calculation based on the figure proposed. In substance Mr Voaden’s approach is equivalent to contending that although the Assessor’s evidence was not disputed in that the royalty rate was chosen as the lowest that could be found anywhere, the profit levels at Torr were twice as high as industry expectations. We had no reason to think the Torr figure out of line in this way. To state the obvious, if the assumed figure had been taken to be the same as the actual figure achieved from operations at Torr, the whole basis of this preliminary calculation would simply disappear. In other words, the start point for Mr Voaden’s allowance for the special circumstances at Glensanda would have been the same royalty figures as the Assessor.

The approach set out in Mr Voaden’s Precognition and described as the traditional approach took virtually the same figures for royalties as his conceptual approach but examined his own approach to calculation of a BPM figure on a contractor’s principle. As a figure for this had been agreed, we consider this material distracting and potentially misleading. We are satisfied that his approach to a traditional assessment must be ignored by us.

His conclusion in relation to examination of comparable features at the Mendip Quarries was that there would have to be such an arbitrary adjustment of the individual elements of the assessments that this might give unreliable results. However, he moved from that position to one which relied on a comparison of the overall position at these quarries without detail of individual elements. We are satisfied that if careful comparative assessment of recognisable individual elements is liable to lead to arbitrary and unreliable results, reliance on the whole could only be justified if there was some reason to believe that the unreliable aspects of the individual comparisons could be said, in some way, to cancel out. We find no justification for this. The bases upon which the present occupiers occupy and use Torr and occupy and use Glensanda are plainly different. Direct comparison may provide some sort of very broad check but, in our view, does not provide reliable guidance to appropriate figures.

Leaving aside the assessment based on the 70 ppt rate supplied by Mr Lucus, Mr Voaden’s substantive assessment, exercising his own judgment, on the rating hypothesis of occupancy by the present occupier, was that there would have to be a 50% reduction of the profitable level of royalty to take account of economic circumstances at Glensanda. He sought a further 35% allowance based upon the high level of scalpings. In relation to the BPM he initially took a overall end allowance of 20% but told us that, on final reflection, he was satisfied that the figure should be 25%. This was based upon the view that having regard to the adverse economic circumstances at the quarry an incoming tenant would “require a further allowance on the BPM”. He ended with figures of £562,500 NAV, and £497,850 RV.

We are satisfied that there is an element of double counting in his approach. We consider that no separate allowance can be made for scalpings. Although we heard detailed evidence about the cost implications of the scalpings as a separate item of cost we did not hear how that was reflected in the overall losses. We consider that this is simply an element leading to the absence of profitability. That is consistent with the terms of the agreement.

In assessing what allowance if any should be made for the fact that this quarry can only be operated at a net annual loss, we think it plain that we must approach on a very broad basis. Parties were agreed that the subjects were unique and that close comparative scrutiny with the detail of other operations would be unreliable.

We have considered the authorities cited by Mr Haddow. He relied on them as providing detailed illustration of various, substantial, end allowances in a variety of different situations. Most of these cases shared the characteristic of having some element of public or non-commercial benefit.

In the SECC case it was argued that as the unit was being operated on commercial principles it should be assessed as a commercial undertaking which was endeavouring to run without making a loss. In fact there was no dispute that it was unlikely to be able to generate sufficient revenue to cover much more than its operating costs. The Court, however, had no difficulty in accepting that the enterprise was run with a wider purpose in view. It had a public benefit beyond its commercial viability. In that case an end allowance of 20% was allowed on the basis of “non-commercial use”. We do not consider that of any assistance in the context of an operation which plainly must be viewed as a commercial enterprise.

In relation to Edinburgh Airport (Assessor for Lothian Region v British Airports Authority) the Court held that the BAA was, in a sense, “hybrid”. Its duties were public duties but they had to be conducted in a businesslike manner. In that case the accounts showed no operating profit even before charging depreciation. The Committee made a finding that no hypothetical tenant would lease the airport either on a commercial basis or on a reduced decapitalisation rate applied to subjects of a public character. The only tenant which could be envisaged might be the Authority itself. The Committee concluded that a rent approximately half that appropriate to buildings of a public character appeared to be a realistic figure of rent which the hypothetical tenant might reasonably be expected to pay. In refusing the appeal the Court emphasised that the case depended on its special facts.

The case was unusual in that the commercial element in the operation was seen to justify a lower figure than assessment on a purely public basis. It is difficult to take from it any more general principle because of the very special circumstances of the Authority and the statutory duties imposed on it. It may be taken to show that a higher level of assessment may be appropriate in situations where there is some public or private benefit derived from occupation which goes beyond a mere commercial return. We are satisfied that no such element is properly to be found in the present case. In other words, although there was some reference to the appellants as being, perhaps, motivated to some extent by memory of the strong views of the late Mr Foster, we must approach on the basis that this is wholly a commercial enterprise. It is plain that the Court considered that the figure of 50% was, in the particular circumstances of that case, very much on the high side although it was not prepared to interfere with the judgement of the Committee.

Examination of the detail of the Civil Aviation Authority case in relation to the airports at Islay and Tiree revealed many special aspects of detail as to the nature of the heritable subjects. A very large allowance was made to reflect the fact that the runways which were used by the airports were of a physical character grossly in excess of the current or prospective requirements. They had been built to cope with the very special needs of the Second World War. The issues in that case were issues of practical detail. They related to application of the contractor’s principle. They reveal a difficulty which arises, to some extent, in the present case, namely the question of the stage at which allowance should be made. The case demonstrates that there is no inherent reason why end allowances of well over 50% should not be made but casts no light on the particular issues arising in the present case.

It might be thought that dicta in Colville & Sons provide greater assistance. In that case the Valuation Committee reduced figures derived from the contractor’s principle by an allowance of 30% to reflect a “collapse” of trade. As Mr Haddow pointed out there was a possible difficulty in that case in that other subjects in the valuation roll had been assessed on direct rental evidence. This would influence the Court. Too great an allowance in relation to a contractor’s principle could have been perceived as “unfair” to other ratepayers assessed on a comparative basis. One of the facts found in that case was that there was a depreciation in trade which was not in the category of a temporary dislocation but was largely peculiar to the steel industry. The Court was satisfied that the steel and iron works were “suffering from an almost complete collapse of trade”. Several had had to close their doors and the remainder were working only to about one-third of their capacity. The Court accepted the truth as being that “in consequence of the War, the steel works throughout Great Britain have been immensely over-capitalised, and that large portions of them, while perfectly efficient to produce steel, cannot be effectively used and will only be a source of expense”. The Court went on to consider the comparison with operating methods in England and the advantages English competitors had. Lord Salvesen took the view that a “drastic allowance” should be made to reflect these economic circumstances. He suggested over 50% but, in the event, the Court did not interfere with the 30% allowance made by the Committee.

The aim of all valuation approaches is to determine the rental which would be paid by a tenant under the statutory hypothesis. The Colville case makes it plain that in making an assessment on a contractor’s principle there is scope for a substantial end allowance based on economic circumstances or profitability. The case is not authority for the application of such allowance in relation to an assessment derived under the comparative principle and based on royalties. In such a case the aim would normally be to adjust the royalty figure by making appropriate comparisons. Where the features of a particular business plainly make it less profitable by comparison with others the royalty should reflect that.

Conclusion

The circumstances of the present case are unusual in that the assessment is to be based on two separate elements; one based essentially on the contractor’s principle and the other on royalties. Fortunately, there was no dispute that this was a proper approach.

In the particular circumstances of this case it seems to us that the appropriate place to reflect the inevitable economics of operation at Glensanda is in relation to the royalties. These are essentially a species of valuation on the comparative principle and are indirectly based on profit or gain although, of course, like any assessment derived from comparison, the assessment is based on the potential of the heritable subjects and not in any way on the profit of individual occupiers. Because of the difficulty of carrying out a direct comparison, the assessment cannot be viewed as based on a conventional application of the comparative principle. Neither party suggested that close examination of the differences between different quarries would produce a reliable result. The differences must be reflected in a very broad way.

The payment which a prospective tenant would be prepared to make by way of royalty must, inevitably, depend on a prediction as to what he will be able to derive as a benefit or profit from the use. A commercial tenant would not be limited to consideration of his immediate income stream by way of profit. Such an occupier might well be prepared to take subjects at an operating loss with a view to establishing a market, discouraging competitors, or perhaps providing business for his own associated companies. Nevertheless, the royalty rate is where the economic potential of the lands and heritages would normally be reflected.

The hypothetical tenant would have to pay for use of the buildings, plant and equipment before any question of royalties could arise. If due allowance is made for the condition of the equipment and for elements such as over provision, the value of the equipment to him as an occupier, will not depend upon his ultimate profit.

We have discussed the lack of clarity in the agreement between parties. As explained, we consider that, as well as the usual age and condition allowances which were expressly agreed by parties, we must assume that the BPM figure includes allowance for scalpings and there is no doubt that parties are agreed that it takes account of the location of the subjects. When regard is had to the nature of the allowances already incorporated in the agreed figure, it is clear that any tenant would require broadly that level of equipment to maintain the agreed level of production. In taking a “final stand back and look” we have considerable doubt as to whether the circumstances properly call for any reduction in relation to BPM by way of end allowance. However, we have, on balance, come to the conclusion that there is some force in the contention that the peculiar economic circumstances would have a bearing. They would certainly be used in negotiation on this front. We conclude that an end allowance of 10% should be applied to the agreed BPM figure.

In relation to royalty we consider that the logic of the Assessor’s approach in seeking to apply the lowest rate he can find has not been carried far enough. The example of Torr discloses a royalty rate of 13 pence as the lowest figure. We recognise that we heard no explicit submission that the differential rates be ignored but it is within the scope of the broad approach urged by the appellants to look only at the lowest as the start point. Where the landlord is able to negotiate for a fixed figure by way of reference to the provision of plant and equipment there may be less justification for the conventional graduated scale weighted in favour of the initial output.

In any event the logic of seeking to find the lowest figures agreed for a profitable quarry does not, in itself, justify applying the higher rates applicable to the first million tonnes from such quarry. In relation to a loss making quarry, the first million might, by the same process of logic, be thought to justify a lower differential rate.

We are satisfied that the persistent inability to operate the quarry profitably is not attributable to any fault on the part of the operator but is an intrinsic feature of this super quarry in the current economic circumstances of the aggregates market. We can accept Mr Voaden’s assessment that a deduction of at least 50% is appropriate to take account of the economic circumstances at Glensanda. He is very experienced. His assessments are entitled to weight and can be supported by reference to the operating features discussed. His approach was based on having isolated particular reasons which he attempted to use in further reduction of his figure. In particular he sought separate allowance for scalpings. We have not accepted that approach. We think that the attempt to make an explicit deduction by reference to scalpings cannot be justified. However, we must recognise that in seeking to avoid double counting we run the risk of failing to give proper weight to the problem of the scalpings as an inevitable drag on profitability. Whatever may be the case in future as the height of the glory hole reduces, the problem is plainly a significant one.

This may ultimately be a matter of impression based on the whole body of evidence which we have heard. It was agreed on both sides that no reliable basis existed for detailed calculation. Doing the best we can, we have concluded that the problems which any tenant would face in operating the subjects justify a deduction of 60% from the royalty rate of 13 pence derived, as we have discussed, from potentially profitable quarries. The applicable royalty rate would, accordingly be 5.2 pence per tonne. It is not disputed that a derating factor of 50% is to be applied to this element.

The result is as follows:

Item NAV £ RV £
Land, Buildings, Plant & Machinery £575,000  
Less 10% end allowance -£57,500  
  £517,500 £517,500
Minerals
5 million tonnes @ 5.2 pence £260,000 £130,000
TOTAL £777,500 £647,500