OPINION

J. D. Wetherspoon v Assessor for Lothian Valuation Joint Board

Summary

[1] These are appeals against decisions of the local Valuation Appeal Committee not to refer the appellants’ 2010 revaluation appeals in relation to 8 public houses to the Tribunal. Briefly, the Assessor has applied a scheme of valuation on the comparative principle by the well established method of applying percentages of turnover. The appellants, however, have in this and the previous two revaluations maintained, in some cases at least, a challenge which is essentially based, under the principle of ‘over-performance’, on their differing model of operation of public houses. They argue that this results in increased turnover for no more gross profit, thus rendering the Assessor’s method of valuation unsuitable for assessing the hypothetical rental values of these subjects. Although this issue has received consideration in previous revaluations, the appellants argue that the issues between them and this Assessor in this revaluation are still such as to justify reference of these appeals to the Tribunal.

[2] The Tribunal is of the clear view that ground (d) of the Valuation Appeal Committee (Procedure in Appeals under the Valuation Acts) (Scotland) Regulations 1995 is satisfied; and also considers, on balance, that grounds (a) and (b) under Regulation 5(1) are satisfied. The appeals have accordingly been allowed.

The Issues

[3] Regulation 4 provides for either the Assessor or the appellant to seek referral of appeals to the Tribunal. Regulation 5 provides inter alia:-

“(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 uncertrain 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’ so that the Tribunal is not confined to considering whether the Committee erred in refusing the reference but rather has to reach its own decision on the materials placed before it. There being no discretion in relation to referral if one or more ground is established, we have simply to consider, as a matter of impression, whether or not the appellants’ appeals fall within any of the grounds.

[4] The appeals relate to 8 listed public houses in Edinburgh, Bathgate, Dalkeith and Livingston. There is in fact an apparent specialty in relation to one, the Alexander Graham Bell in Edinburgh, because while the others are all 2010 revaluation appeals in relation to the appellants’ occupation, this one was in fact at the relevant date occupied by another party and only since then taken over by the appellants, who are, however, running the revaluation appeal as well as a ‘running roll’ appeal which is not presently before us.

Procedure

[5] The appeals were heard at an oral hearing on 9 January 2012. The appellants were represented by Christopher Haddow QC, instructed by BNP Paribas Real Estate, Edinburgh. The assessor was represented by Geoff Clarke QC, instructed by the Assessor. The material before the Committee included the correspondence with the Valuation Appeal Committee, whose reasons for refusing the applications made to them under all of grounds (a) to (d) were quite brief, grounds of appeal and answers, and the Scottish Assessors Association Practice Note 17 before the 2010 Revaluation, ‘Valuation of Licensed Premises’. There was some discussion at the outset of the hearing about whether some very late revision of the grounds of appeal should be admitted. The Tribunal decided that it should, subject to the Assessor having an opportunity if necessary to seek any redress such as adjournment, and in the event the hearing proceeded normally.

Background

[6] It is well established, in general, that valuation of licensed premises such as public houses follows rental analysis using turnover rather than area as the unit of comparison, the resultant scheme of valuation involving application of set percentages to ‘hypothetical achievable turnover’.

[7] The appellants, who operate a considerable number of ‘managed’ (as opposed to ‘tied’) public houses in Scotland, maintain that their particular method of commercial operation, which is said to involve in effect systematic ‘price-cutting’, is such as to increase turnover without corresponding increase in gross profit (because they take lower percentage profits) and that this renders, at least in some cases, valuation on the general scheme inappropriate. Some of their appeals under the 2000 and 2005 revaluation appeals were referred to the Tribunal under the regulations (the Tribunal having heard argument and issued one Opinion (LTS/VA/2003/25, 26-8), and also issued brief reasons for allowing one unopposed appeal (LTS/VA/2008/01)). However, many appeals were settled and in the event since 2000 only one substantive appeal has proceeded to a contested hearing and that before the Lothian Valuation Appeal Committee (“the 2000 ‘Standing Order’ appeal”). The Committee upheld the appellants’ argument in principle, but rejected their alternative competing valuations and instead applied a 10% end allowance to the valuation under the Assessor’s scheme. The appellants (but not the Assessor) appealed this decision. The Lands Valuation Appeal Court upheld the Committee’s decision (J D Wetherspoon plc v Lothian Regional Assessor 2003 RA 105).

[8] In that and one or two other decisions, in particular Assessor for Lothian v Belhaven 2008 CSIH 60, the court has clearly set out the law and principle on so-called ‘over-performance’. As Mr Haddow recognised, the principle appears to be very clear: in exceptional cases a valuation produced under this scheme may not be a reliable indicator of annual value where the actual turnover has been influenced by some factor that would not apply in the hypothetical transaction; if a turnover is to be held to reflect over-performance, it has to be abnormally high; one example is an abnormally high turnover generated by abnormally low prices and margins, as in the 2000 ‘Standing Order’ appeal; but such cases are uncommon, and there are ‘normal’ cases of more attractive, perhaps better managed and more successful public houses, where the success cannot be characterised as over-performance or, to put it another way, there is nothing to indicate that the hypothetical parties are not simply considering normal factors such as location, layout, atmosphere, etc., and anticipating such success when the rent was struck: c.f Assessor for Lothian v Belhaven 2008 CSIH 60, per, Lord Justice-Clerk Gill at paras [8] to [14]. There may be cases where the strength of turnover performance can be explained partly by such normal objective factors and partly by over-performance, as the court recognised in the 2000 ‘Standing Order’ appeal (2003 RA 105, at para 17.)

[9] For the 2010 revaluation, the Commercial Properties Committee of the Scottish Assessors Association issued Practice Note 17 on ‘Valuation of Licensed Premises’. This is a committee which apparently includes ratepayers’ as well as assessors’ representatives. The Practice Note sets out the general scheme, explaining that rental anlaysis of appropriately adjusted gross turnover had been undertaken. A section on ‘Other Factors’ includes the following guidance:-

“6.2 Over or Under Performance.

As stated at 6.1 it should be assumed that the hypothetical tenant will seek to maximise the potential turnover of the premises.

No adjustment of actual turnover should be made solely on the grounds that a particular brewery company occupies the property, nor should the popularity of the products on offer give rise to any adjustment.

It has been clearly established in Lands Valuation Appeal Court decisions that neither should good management practice be identified as a cause of over performance requiring an adjustment, since it is open to other hypothetical operators to replicate them.

Where, however, there is clear evidence that the actual turnover is considerably different from the hypothetically achievable turnover, an adjustment to the supplied turnover may be appropriate. The reason for apparent overperformance could be the fact that the premises are operated by a celebrity.

“6.3 Pricing Policy.

No adjustment should be made to the level of turnover applied to a particular licensed premises simply because the operator’s pricing policy permits the sale of liquor at lower pices than those offered by competitors, on the basis that another hypothetical operator could do the same.”

[10] In these appeals, the Assessor does not accept that the appellants’ trading policy gives rise to over-performance. Her contention is that, whatever the position was in 2000, as at the relevant date for this revaluation price cutting has become a recognised trading policy used by a number of public house operators to offer price reductions on selected lines. Other assessors are apparently taking a similar line (there being presently pending before the Tribunal some other appeals similar to this.) In these substantive appeals, therefore, there are issues both as to whether there is relevant over-performance and also, if so, as to how to reflect this in the valuations.

Submissions

[11] The appellants made clear that they continue not to accept the appropriateness of valuations based solely on direct application of percentages to their turnover. Rather, and as shown by the settlements during the 2005 revaluation, they negotiated upon evidence derived form local comparables, using turnover rates per square metre of reduced area, resulting in some cases in acceptance of the Assessor’s values, in some cases in some end allowance and in some cases in significantly lower valuations, although they did not know the basis of assessors’ acceptance of lower valuations. Mr Haddow stressed that because the Assessor contended in these appeals that other public house operators had similar business models, exploration by industry analysis and interpretation of accounts would be necessary, the appellants being unaware at this stage what that would amount to. The appellants’ evidence would consist of valuation evidence from one witness and accounting evidence from another, probably the appellants’ finance director. He also suggested that turnover valuation was, or had in effect become, actually a shortened version of revenue (‘receipts and expenditure’) principle valuation, which was not a problem so long as profitability across the industry was the same but the problem in the present appeals arose because of the appellants’ different profitability: exploration of that was a necessary first step. Issues of principle remained outstanding. Cases being outstanding in other areas, these appeals would plainly be used as precedents.

[12] The Assessor’s position was essentially that in the circumstances of these appeals, there was no issue of principle to be decided. The appellants were clearly entitled to argue over-performance, i.e. that abnormal turnover had been achieved mainly by price cutting, as the Committee had decided in the 2000 ‘Standing Order’ appeal. The Assessor did not accept that for the 2010 revaluation. It was a simple question as to whether an abnormal business method had affected turnover. The Assessor’s argument, based on the evidence now available about other occupiers in Lothian, was that there was nothing abnormal about the appellants’ business method. The court had clearly rejected the appellants’ argument based on their trading policy or model. Evidence about that was irrelevant. Nor did the type of complications or complexity which had arisen in some other cases, e.g. about indexing, the distinction between ‘tied’ and ‘managed’ estates, or between rented and owned premises, arise.

Tribunal’s Consideration.

[13] There is no doubt, as we have set out, that the law to be applied in these appeals has been made clear in a number of judgments of the Lands Valuation Appeal Court. Although ground (c) was in the revised written grounds of appeal before us, Mr Haddow did not contend for it.

[14] However, treating the matter as a matter of impression on the material before us, and asking ourselves the question referred to in earlier decisions on ground (d), viz. whether there is a distinct issue with an appreciable bearing on valuation practice, we are of the opinion that there remain two such issues in these appeals notwithstanding the previous consideration of the broad type of argument which the appellants wish to make. These are, firstly, how to establish relevant over-performance by price-cutting; and, secondly, if such is established, in relation to valuation. These do seem to us each to be “fundamental or general” issues.

[15] We appreciate the Assessor’s position. She may turn out to be entirely correct that, as a relatively straightforward matter of fact, there is at present nothing abnormal about the appellants’ trading method and therefore no over-performance. Further, if all the appellants were proposing to demonstrate were that they have a different and unusual trading policy and lower profitability, we would agree that ground (d) could not be established, standing the authoritative guidance, particularly the court’s consideration of the appellants’ proposed alternative valuations in the 2000 ‘Standing Order’ appeal. We are, however, satisfied that the appellants’ evidence and arguments are likely to go beyond that. They are in our view entitled to attempt to show firstly that their trading policy is different and, secondly, crucially, that turnover is as a result abnormally high, and to put forward their valuation in the event that they establish over-performance. The court has made clear what this type of over-performance is, not necessarily how it is to be established, which was not in dispute before the court. Nor did the court lay down how, if established, it was to be valued, although their rejection of the valuations then attempted by the appellants is obviously instructive. We do not read the court’s opinion as precluding all reference to area based comparison, although at this stage we do not indicate any opinion on the method of valuation. Standing the Assessor’s opposition, and we would add standing the terms of the Practice Note, the result, either way, on one or both issues will, we think, be likely to provide a precedent. The Practice Note may not be completely inconsistent with the appellants’ position but success by the appellants would surely have an effect on practice. It is perhaps easier to envisage a precedent likely to be used in other cases if the case is decided by the Tribunal, but that begs the question.

[16] It does seem to us that these appeals raise a general issue as to the use of area-based comparison, on which the appellants place some reliance, and which clearly has some part even under the Assessor’s scheme (for example where there are no reliable turnover figures), can be used on this issue of over-performance. The appellants’ single comparison, without addressing any need to adjust, with turnover from one other public house, was clearly rejected by the court. A more nuanced approach may now be anticipated and the question whether over-performance can be reflected otherwise than simply by end allowance on the Assessor’s valuation does seem to us to be a valuation issue the decision on which is likely to have an appreciable bearing on practice. We would also point out that ultimately the issue is the effect, not simply on turnover, which is merely the unit of comparison, but on rent. There is in our view a degree of similarity between this argument for using area-based comparison and the argument for that in Emerald Inns v Assessor for Highland and Western Isles Valuation Joint Board, LTS/VA/2007/01, in which we held ground (d) established, although there is some difference in context.

[17] In reaching this view, we have not placed any weight on Mr Haddow’s reference to the revenue principle. We did not see where that argument was going. As we see it, the issue of principle can, and does, arise within the comparative principle.

[18] We have therefore decided that ground (d) is established and the appeals should be allowed. We are less certain, on the material placed before us, in relation to grounds (a) and (b). Mr Haddow did not provide much indication of the complexity of evidence to be led by the appellants, preferring, apparently, to concentrate on complexity which would result from the Assessor’s stance. Mr Clarke, however, appeared to be indicating a relatively straightforward approach by the Assessor on the basis of her factual assertion that there is, at least now, nothing unusual or abnormal about the appellants’ trading method with the result that relevant over-performance cannot be established. On what we heard, and considering this matter in the context of valuation appeals, complexity of accounting evidence appears somewhat borderline, but we can anticipate some complexity in the valuation evidence if and when the relationship of turnover and rent is explored and analysed. We would on balance, and as a matter of impression, hold both the facts and the expert evidence to satisfy the test of complexity.

[19] We are aware (not least from its presence directly underneath us!) of the specialty in relation to the Alexander Graham Bell pub, which, although previously in existence under a different name, has only been occupied by the appellants since the relevant date for the 2010 revaluation. The appeal in respect of these subjects does seem to be the revaluation appeal (although we were told that there is also a ‘material change’ appeal arising out of an increase in the assessment following some degree of alteration within the subjects). It rather looks as if the arguments which we have been considering might have no relevance to this revaluation appeal, but the Assessor did not make any special point about this appeal, so we do not propose to single it out for separate treatment.

[20] Finally, we would mention that, in the event of the present appeals succeeding, we were asked on the Assessor’s behalf to endeavour to hear them on their merits as soon as possible. Our clerk will contact parties to discuss arrangements. The Tribunal should be in a position to hear these appeals before this year’s summer break. It will need to be decided how many of the appeals it is necessary to hear. The Assessor’s argument would appear to lend itself to adoption of one test case, but the appellants, who apparently seek to introduce local comparison evidence, may wish to put forward a representative list of appeals to be heard together. The Tribunal will also now issue formal orders for grounds of appeal and answers in each case. Parties should consider agreeing, or if necessary seeking our direction, on the lodging of detailed valuations at a reasonably early stage of procedure.


Certified a true copy of the statement of reasons for the decision of the Lands Tribunal for Scotland intimated to parties on 16 January 2012

Neil M Tainsh – Clerk to the Tribunal