OPINION

Emerald Inns v Assessor for Highland and Western Isles Valuation Joint Board

Summary

This is an appeal against the decision of the local Valuation Appeal Committee not to refer the appellants’ appeal to the tribunal. The subjects are a public house which the assessor has valued on the comparative principle by the well established method of applying percentages of turnover. The appellants claim that in relation to a significant category of public houses, namely those in the so-called ‘managed’ sector, the hypothetical landlord and tenant would not in fact refer to turnover and would arrive at the rent on an area basis. We have primarily had to decide, on the material before us and as a matter of impression, whether their appeal based on that proposition “raises a fundamental or general issue likely to be used as a precedent in other cases.” We have, on balance, been persuaded that this test is satisfied and we accordingly allow the present appeal.

The Issues

Regulation 4 of the Valuation Appeal Committee (Procedure in Appeals under the Valuation Acts) (Scotland) Regulations 1995 provides for either the assessor or the appellant to seek referral of appeals to the tribunal. Regulation 5 provides inter alia as follows:-

“(1) Where an application under regulation 4(1) has been made, and it appears to the Committee that –

(a) the facts of the case are complex or highly technical;

(b) the evidence to be given by expert opinion is complex or highly technical;

(c) the law applicable to the case is uncertain or difficult to apply;

(d) the case raises a fundamental or general issue likely to be used as a precedent in other cases;

the Committee shall refer the appeal to the Tribunal for determination … ”

Section 1(3BA) of the Lands Tribunal Act 1949 provides a right of appeal to the Tribunal against a decision not to refer. It is well established that such an appeal is ‘open’ in the sense that the Tribunal is not confined to considering whether the Committee erred in its reasons for decision but rather has to reach its own decision on all the materials placed before it.

The appellants’ appeal relates to subjects comprising a public house, ‘Johnny Foxes’, 17 Bank Street, Inverness. The assessor entered the subjects in the Valuation Roll, with effect from 1 April 2005, i.e. as part of the 2005 general revaluation, at £128,000 N.A.V. The appellants duly applied under regulation 4, relying on grounds (a), (b), (c) and (d). The Committee refused the application. Their reasons included the following:-

“The Committee did not accept that this case apparently raised new general issues of precedent, as the Committee understood that cases involving similar issues had already been considered by other Courts or Tribunals. It was conceded that these subjects should be valued according to the comparative principle and that it is a basis of valuation on which it has generally been found that local Committees have the experience and competence to consider.”

The appellants have appealed timeously against that refusal. The assessor resists that appeal.

In terms of regulation 5, there is no discretion in the matter of referral if any of the grounds is established. Accordingly, we have to decide whether, on the material before us, the appellants’ appeal against the Assessor’s valuation falls within any of the grounds relied on.

Procedure

The appeal was heard at an oral hearing on 23 July 2007. The appellants were represented by Christopher Haddow QC, instructed by Atisreal UK, Chartered Surveyors, Edinburgh. The assessor was represented by Steven Stuart, Advocate, instructed by the Assessor for Highland and Western Isles Valuation Joint Board. The material before the Tribunal included the correspondence with the Valuation Appeal Committee, including the reasons for the Committee’s decision, the appeal and submissions for the appellants, Answers for the Assessor, Scottish Assessors’ Association Practice Notes in relation to Valuation of Licensed Premises, 2000 and 2005, a paper on Public House rent reviews by Atisreal, a table of public houses in Inverness, details of three 2005 Revaluation appeal settlements in Glasgow and extracts from the lease under which the appellants are tenants of the subjects of appeal.

Circumstances

Licensed premises including public houses are valued under the comparative principle of valuation. Comparison on the basis of ‘hypothetical achievable turnover’ (normally, actual turnover, but adjustment is made in some circumstances), applying percentages of turnovers of liquor, food, etc., based on analysis of rentals, is the long established prevailing method of arriving at comparative valuations. Assessors have applied Scottish Assessors’ Association Practice Notes setting out the detailed method, including rules about adjustment of turnover, in both the 2000 and 2005 revaluations. The 2000 Practice Note expressly allowed slightly more discretion than the 2005 Practice Note. In particular, there was express reference, under the heading, ‘Check on Valuation’, to comparison, once the valuation of subjects was arrived at, with similar properties and to analysis on the basis of rates per m2 of ‘reduced area’ and adjustment of valuations to compare more reasonably with similarly located and comparable properties. The 2005 Practice Note makes no reference to such check comparisons, although there will no doubt be elements of comparison involved where adjustment of the actual turnover to hypothetical achievable turnover is under consideration. There is of course nothing to stop appellants from seeking to introduce such material in negotiation or appeals.

The appellants refer to a distinction between two sectors of public house business, viz. ‘managed’ and ‘tenanted’. The suggested distinction is that in the ‘tenanted’ sector, the occupier is the tenant of some multiple group which also has him ‘tied’ to purchase stock from them, so that the rent is only one part of the landlords’ financial return. In the ‘managed’ sector, there is no such tie. Confusingly, operators in the ‘managed’ sector may, like the appellants in the present case, in fact be tenants, but in such cases the arrangements are said to involve straightforward property leases. Some companies apparently operate in both sectors. There is evidence (as to the reliability or usefulness of which we have no view at this stage), that in the ‘managed’ sector rent negotiations, including for rent reviews and rent review arbitrations, no attention is paid to turnover and rents are compared and assessed simply on area comparison, with value levels varying according to locality.

The subjects of appeal are said to be ‘managed’. The assessor has valued them using the turnover method, arriving at a value of £128,000. This is the highest public house value in Inverness, the next highest (Wetherspoon) being assessed at £100,000 for another ‘managed’ house the reduced area of which is apparently more than twice that of the subjects of appeal. 4 of the 8 largest public houses in the centre of Inverness are ‘managed’, and in these cases one appeal has been settled, one has been heard and decided by the Committee on the basis of the assessors’ scheme, and these two assessments, which are the largest by some considerable margin, remain under appeal. The appellants’ proposed argument is that in this sector actual rents are derived from area-based, and not turnover, comparison, with variations reflecting the location (value rates in Glasgow and Edinburgh being rather higher than in the smaller cities including Inverness) and that this requires to be reflected in valuations of ‘managed’ public houses. They claim that the valuations of 3 large ‘managed’ public houses in Glasgow have been settled by negotiation with one particular assessor on the basis of area-based rental rate comparison and without any reference to turnover. The assessor involved in the present appeal denies this. The appellants also say, anecdotally, that the same general problem will arise in appeals in Edinburgh.

Submissions

For the appellants, Mr Haddow mainly addressed ground (d). He described the two sectors, pointing out that in the ‘tenanted’ sector the existence of the tie means that the payments in name of rent do not amount to a pure rent. Valuations of public houses, he said, had always been a vexed problem. The turnover based approach was all right for the bulk of public houses, particularly smaller ones, but had been questioned in an earlier case in which the appellants operated under lower profit margins. Arbitrary adjustment of turnover did not solve problems like that. The task was to find the hypothetical rent, and the appellants proposed to show that in the real world, in this sector, that was based on area, not turnover, comparison. This was a fundamental difference in the way in which public houses of this character should be valued. The same issue was likely to come forward in England. This was a significant sector, particularly on a value, rather than a numerical, approach; and this significant change in the market had occurred over the last 10 to 15 years, but the ability to compare on an area basis had gone in the 2005 scheme. Different operators in this sector have different approaches, making it artificial to look at individual turnovers. If profitability were to be looked at, the difficulty was that information about this would not be available in the market. Reference was made to Armour, 20-28; J. D. Wetherspoon plc v Lothian Regional Assessor 2003 S.C. 400; Cornwall Coast Country Club v Cardgrange Ltd [1987] 1 E.G.L.R. 146; and Stakis Leisure Ltd v Strathclyde Regional Assessor 1993 S.L.T. (Lands Tr) 39. The primary question of law was not difficult, but application of it was a mixed question of law and fact which would be difficult or at least uncertain. Expert evidence would be required from people operating in the market and not just from the appellants’ agents.

For the assessor, Mr Stuart started by summarising the turnover method of comparison. This, he said, had been generally accepted. It was based on analysis of rents across Scotland. There were only two other outstanding appeals in the Highland area and it was not clear that this issue was being raised in the Wetherspoon appeal. The 2005 Practice Note allowed for a ‘stand back and look’, which might result in adjustment of the turnover figure. That required a look at comparisons, which was all that was being addressed in the 2000 provision about check valuations. In the present case, the assessor had carried out such an exercise, looking at the location and the nature of the operator, and there were relevant differences between the subjects. Mr Stuart was not able, when asked, to provide details of the actual effect of that exercise in this case. He pointed out that there was no reason why the appellant could not lead such evidence. The changed wording of the Practice Note had no bearing. The real issue was whether it was appropriate to review the method of valuation of managed houses. It was the position of the hypothetical tenant which mattered. The competing evidence would need to be addressed, but there was no fundamental issue. Turnover would also have a bearing and it would be a matter of the weight to be put on the competing evidence in the particular circumstances. As regards the position elsewhere in Scotland, the majority of cases had been settled. Mr Stuart had a different understanding of the Glasgow settlements referred to, and could not comment on the position in Edinburgh. It was not suggested that profitability was irrelevant. There was no case under ground (d), the matter being one of well established practice. A decision to depart from that in this particular case might be of interest, and might shed light on the valuation of public houses, but other cases would turn on their own facts. Neither were any of the other grounds satisfied.

Tribunal’s Consideration

We are in no doubt that there is a fundamental difference between the appellants’ approach, as it was outlined to us, and that of the assessor.

There is room for some slight confusion in this area. The assessor does – at least sometimes – compare public houses on an area basis. He measures areas and apparently carries out a reduction exercise in every case. That leaves him in a position to compare on an area basis and there are evidently circumstances in which he does so, particularly where, for whatever reason, some question arises as to the reliability of the turnover figures available to him in a particular case. However, all the assessor is considering in such an exercise is whether to adjust the turnover so that the case fits properly into the scheme. That is a quite different exercise from comparing rents or valuations under reference to area rather than turnover. This is what the appellants say they want to do in this case. That would represent a major change in method, although apparently only in a relatively small, but (they claim) significant proportion of cases. As the passage in Armour at 20-28, with its lengthy quotation from the opinion of Lord Salvesen in Haggart v Assessor for Leith 1912 S.C. 784, shows, it has for many years been recognized that there might be the two different methods of valuing this type of subject under the comparative principle, but the turnover basis has become the norm. An attempt by appellants to use the other method in one class of case would indeed raise a significant issue.

The crucial question in the present appeal is, we think, whether the decision in the case, whichever way it goes, is likely to be used as a precedent in other cases. We have not found this an easy question, for a number of reasons. Firstly, we did not find it easy to understand exactly how the argument was going to be presented, or indeed how far the evidence available to the appellants will go. Secondly, we found it slightly difficult to understand the significance in this context of the distinction between ‘managed’ and ‘tenanted: the general picture looks to us more like a problem, if it is a problem, which may arise at large public houses. It might be an uphill struggle to carve out a separate category of public house which is to be valued by a completely different method. Thirdly, we were not very clear as to the number of cases in which this issue is or might be raised.

Mr Stuart suggested, in effect, that this will really turn out to be a dispute as to whether, in the particular circumstances, there was any need to adjust the valuation based on unadjusted turnover figures, and therefore that, while it might be of interest to those involved in other cases those cases would in turn depend on their own facts. We understand why the assessor (and perhaps the Committee) might view the dispute in that way, but we have reached the view on balance, on the information available, that the appeal as presented by the appellants will probably be on a wider basis. If that is right, it seems to us almost inevitable that the decision, either way, will be a significant one which will be used as a precedent for other cases. The appellants propose to prove that the hypothetical rent would not be based on turnover at all, not just in this case but in a class of cases, and they have shown us evidence to that effect (although we repeat that we have not formed any view on that evidence at present). The Committee indicated that cases involving similar issues had already been considered. We can understand that view, because it is clear that that there have been cases in recent years in which appellants have sought to address what they have seen as the unsatisfactoriness, in relation to their types of operation, of valuation on the basis of turnover, e.g. J. D. Wetherspoon plc v Lothian Regional Assessor. We were not, however, referred to any case in which appellants had gone beyond seeking substantial reductions in the turnover figures applied. The issue described to us in this case is different. In these circumstances, we are persuaded that the test in ground (d) is met.

Grounds (a), (b), (c) were not, we felt, seriously advanced or pressed by Mr Haddow, and we would not have upheld any of them. In relation to ground (b), we would mention that if this ground is to be upheld we would expect to be given a clearer idea as to why the evidence in question is likely to be complex or highly technical than Mr Haddow was able to give us.

Finally, we would stress two matters. Firstly, our decision involves no criticism of the Committee which refused the appellants’ application on the basis of the written submissions to them. Secondly, in accepting that this case does raise a significant issue, we of course have reached no view at all at this stage as to the outcome.


Certified a true copy of the statement of reasons for the decision of the Lands Tribunal for Scotland intimated to parties on 27 July 2007

Neil M Tainsh – Clerk to the Tribunal