PETER LAVERY (Valuation Officer) v LEEDS CITY COUNCIL RA/403/1995

UPPER TRIBUNAL
LANDS CHAMBER
RA/403/1995Case No RA/403/1995
Between
PETER LAVERY (Valuation Officer)ApplicantLEEDS CITY COUNCILRespondent
Before
N J Rose FRICSVenue 48/49 Chancery Lane, London WC2A 1JRHearing 9-11 September 2002Property: Leeds District Magistrates’ Courts, Westgate, Leeds, West Yorkshire, LS1 3JPCatchwords: RATING – Magistrates’ Courts – valuation – contractor’s basis – whether hereditament properly identified in rating list – whether rooms occupied by Department of Health and Social Security and Crown Prosecution Service constituted separate hereditaments – whether land value, based on agreed percentage of construction cost, should reflect fees – whether grant from Home Office should be reflected in valuation – valuation officer’s appeal allowed in full.
[1]This an appeal by Peter Lavery, the valuation officer for the Leeds valuation area (“the appellant”), relating to premises known as Leeds District Magistrates’ Courts, Westgate, Leeds, LS1 3JP (“the appeal property”). It is against the decision of the West Yorkshire Valuation Tribunal (“the VT”), determining the assessment of the appeal property in the 1990 rating list at rateable value £657,000.[2]The appeal property was first entered in the list on 20 December 1993, described as “Magistrates’ Courts and Premises” with the address “Magistrates’ Courts, Leeds District Magistrates Courts, Westgate, Leeds, LS1 3JP” and an assessment of RV £952,000. The entry took effect from 2 July 1993. It was challenged by a proposal dated 21 March 1994 made on behalf of the respondent, Leeds City Council, claiming that the entry was “incorrect, excessive and bad in law”. The resulting appeal was heard by the VT on 24 October 1995 and the VT decision was dated 10 November 1995.[3]The appeal to this Tribunal was dated 7 December 1995. The grounds were that an assessment of RV £657,000 was “incorrect and insufficient”.[4]The respondent owns the freehold interest in the appeal property. In its notice of intention to appear on the hearing of the appeal the respondent indicated that it proposed to argue that the VT’s assessment of £657,000 was not insufficient and such further or other grounds as it may adduce. In its reply dated 19 October 1999 the respondent proposed a much reduced assessment of £166,300 and before me its expert argued for a value of £197,000 (Appendix 1). Although the respondent did not submit a formal cross-appeal, the appellant did not object to the respondent’s right to argue for a rateable value lower than that determined by the VT and the hearing was conducted on the basis that it was so entitled. The assessment proposed by the appellant at the hearing was £792,500 (Appendix 2).[5]Counsel for the appellant, Mr Timothy Mould, called one expert witness, Mr L M Hatchwell, MA (Oxon.), MRICS, IRRV. Mr Hatchwell has been employed by the valuation office and subsequently the valuation office agency since 1974. In April 1990, after being involved with rating valuation in the London Borough of Southwark and the Royal Borough of Kensington and Chelsea, he was appointed a senior principal valuer within the rating section of the chief executive’s office. In that role he has assisted in the formulation of policy, led central negotiations and provided guidance in individual cases on a wide range of classes of hereditament for which rental evidence is lacking, principally healthcare and educational hereditaments, and other classes of property occupied by local authorities and public utilities.[6]Mr Peter Village QC appeared for the respondent. He, too, called one expert, Mr P R Maney, MRICS, IRRV. Mr Maney worked for the valuation office and the valuation office 3 agency between 1975 and 1990, serving in Leeds, Kirklees, Enfield and, from 1984 onwards, Calderdale. While at Calderdale he was team leader on the 1990 revaluation, dealing with a wide range of properties, including municipal buildings. In February 1990 Mr Maney joined the respondent to set up and run a rating department for the whole of the authority, dealing initially with a £35m RV portfolio. His substantive post within Leeds development agency is that of group manager responsible for rating, asset valuation, compensation, acquisition and disposal and best value performance and management services. Facts[7]The parties agreed a statement of facts, in the light of which I find the following facts. The appeal property The appeal property occupies a prominent position on one of the main routes into the city centre and is five minutes walk from the Leeds railway station and the main shopping centre. It adjoins one of the main office districts in Leeds, within which solicitors’ offices and barristers’ chambers are concentrated.[8]The property is also situated in an area in which there is a cluster of public buildings. It is on the same site as the West Yorkshire Police Bridewell police station and adjacent to the Leeds Combined Court Centre, which houses the County Court, the Crown Court and the District Registry of the High Court. Further along Westgate are the Town Hall, the City Library and the City Art Gallery. This is therefore an excellent location for a Magistrates’ Court as it is a high profile location in the city centre, close to public transport and convenient for the city’s legal profession. There is also direct internal communication between the appeal property (at level 3) and the Bridewell, which makes the appeal property additionally suited for its purpose.[9]The property was completed in 1993 and comprises 21 courtrooms and ancillary office and service accommodation. The elevations feature polychromatic brickwork. The walls of the building possess a reinforced concrete (anti-blast) inner skin. The facing brickwork has decorative bands, stone dressings and copings allied to polished slate feature columns and inset glazed tiles at street level. Pitched roofs are covered with Welsh slate; flat roofs with asphalt. Windows are generally steel framed with epoxy powder coating. Internally, the property has a plaster and painted finish to most walls and suspended ceilings to the majority of areas. There is decorative plasterwork to ceilings in courts, court halls, the magistrates’ assembly and dining areas, circulation areas to offices and circulation areas with curved walls.[10]Floor finishes vary. Entrance halls, court halls and the fines hall have terrazzo tiled floors. Carpets of varying qualities are provided in courts, interior rooms, part of the court hall, the magistrates’ assembly and dining areas and circulation corridors, and in all offices. Carpet tiles are used in the computer room and linoleum tiles in refreshment areas. 4[11]The heating system comprises gas-fired boilers serving perimeter heating, air-handling units and hot water storage. A low-pressure system serves radiators in the administrative accommodation. Air conditioning systems are provided in the main courts block. These comprise supply and extract systems with heating, comfort cooling and heat reclaim. Courtrooms have individual control systems. Cooling is facilitated by roof-mounted air- cooled water chillers. Fire-protection equipment includes a sprinkler system limited to the court halls only.[12]The building possesses 8 passenger lifts and 2 custodial lifts and a multi-purpose or goods lift. The custodial lifts adjoin the Bridewell, are of a more robust construction that the other lifts and fitted with closed-circuit television cameras and emergency alarms.[13]The accommodation is on 6 principal levels and, in broad terms, comprises: 4 large courts on level 1. These courts are on split levels, have large ceiling voids and security glass around the dock; 8 courts on level 3, only some of which have security glass around the dock; 9 courts on level 5, up to 5 of which are capable of being used as juvenile courts, with separate entrance halls for the main courts and the juvenile courts; office accommodation on levels 1, 2, 3, 4 and 5 (part of which extends over the Bridewell) and, on level 6, a kitchen and dining areas; a magistrates’ assembly room and magistrates’ retiring rooms connected to each court; holding cells; lifts, a boiler room and various plant rooms; and a multi-storey car park.[14]The court building includes areas occupied by the Probation Service (on levels 2 and 3) and the respondent’s Social Services (on level 5) which are separately assessed and, like the Bridewell, do not form part of the appeal hereditament. The court building also includes two further areas which the respondent contends do not form part of the appeal hereditament. The first (“the DSS area”) is a room on level 3 provided for use by officers of the Department of Health and Social Security (“DSS”). The second (“the CPS area”) comprises an interview room, office and toilets provided for the Crown Prosecution Service (“CPS”). This is also on level 3.[15]The appeal property is constructed with a view to ensuring the security of both magistrates and prisoners. Accordingly, levels 1-6 contain, in addition to public circulation space, two separate corridor systems: the custodial corridor and the magistrates’ corridor. These independent circuits enable both prisoners and magistrates to reach their courts without coming into contact with each other or the general public.[16]The appeal property is connected to Leeds Bridewell police station which also contains holding cells for prisoners. The Bridewell is not occupied by the Magistrates’ Court Committee (“the MCC”) and is separately assessed.[17]The total gross internal area (“GIA”) of the building comprising the appeal hereditament is 11,803.13m2, excluding the multi-storey car park. Within this total, 349.6m2 is occupied by the Probation Service and the respondent’s Social Services Department occupies 156.5m2. The DSS area occupies 16.34m2 and the CPS area occupies 25.0m2. The 5 multi-storey car park contains 144 spaces on four levels, but only 119 spaces are occupied with the Magistrates’ Court and form part of the appeal property. Of the remaining 25 spaces, 12 are occupied with the Bridewell, 10 by the Probation Service and 3 by the respondent’s Social Services department. Use and Occupation[18]The respondent is the owner of the appeal property, but it is not the actual occupier. That is the Leeds District Magistrates’ Courts Committee (“MCC”), which is the only likely occupier of the property as it stands, the premises being purpose-built and unsuitable for any other use. The MCC is a body corporate established under sections 19 to 24 of the Justices of the Peace Act 1979 (“the 1979 Act”). It is responsible for the effective and efficient administration of Magistrates’ Courts in its area. Sections 55 and 56 of the 1979 Act require local authorities to provide the resources which enable MCCs (and their appointees and employees) to discharge their respective duties. In a guidance note issued on 21 August 1996 the Lord Chancellor’s Department expressed the view that MCCs are not able to hold land in their own names.[19]The members of the MCC are elected by magistrates in the area. Their functions include the appointment of justices’ clerks and other staff and determining what resources (buildings, staff, equipment etc) the local authority should be asked to provide.[20]The appeal property is required to be shown in the local non-domestic rating list by virtue of section 64(5)-(7) of the Local Government Finance Act 1988 (“the 1988 Act”), being premises provided and maintained by a district council (the respondent) for purposes connected with the administration of justice. The respondent is required by statute to pay the expenses of the MCC. Property-related expenses are not excluded from this requirement. Maintenance is initially funded by the respondent. Although the MCC could appoint any contractor of its choosing for carrying out structural alterations and repairs, it used the respondent’s in-house structural engineers because of their involvement with the construction of the building. The respondent has also been meeting the rate liability arising from the MCC’s occupation of the property although, as with other outgoings, 80% of this expenditure has been recovered from central government (previously the Home Office, now the Lord Chancellor’s Department). Procedures for approval of new building schemes[21]The procedures in force at the antecedent valuation date (1 April 1988) for obtaining government approval for Magistrates’ Court buildings schemes are set out in Home Office Circular No.73/1986. They came into force on 15 December 1986 (with subsequent amendments introduced by Circular 47/1990) and, so far as concerns “major schemes” (defined as those costing £1m or more), involve the following steps which summarise the full procedures set out in the Circular. References are to numbered paragraphs within the Circular:[22]Para 9: The Home Office periodically invites bids for new major schemes; alternatively local authorities may submit a bid at any time, should a pressing need arise 6 which was not foreseen when bids were last invited. The bid will be made by a local authority, in consultation with the relevant MCC, and should include a description of the circumstances and justification of the need for the scheme, together with a summary list of the main options for meeting the need, and a broad estimate of cost.[23]Para 10: the Home Office considers each bid, and if satisfied that there is a priority need to be met, places the bids in order of operational priority, adding them to the priority planning list (“PPL”) as likely future resources permit. Magistrates’ Court schemes are assessed in relation to four basic criteria of operational need – shortage of courtrooms, split venues, shortage of staff accommodation and inadequacy of ancillary features.[24]Para 12: The Home Office informs the local authority whether its scheme has been added to the PPL. When the scheme has been added to the PPL, the authority will be authorised to incur expenditure on a first stage planning submission.[25]Para 14: A first stage planning submission should provide a full description and justification of the need which the scheme is designed to meet. It should describe the proposed scope and content of the scheme, including the gross area of any buildings and the total estimated cost. The design and cost should conform to the standards set out in the Home Office design guide. The submission should also include a first stage investment appraisal report identifying the options for meeting needs, and the costs and benefits of each option, including factors which cannot be expressed in money terms (Para 15). The appraisal report should be certified by the local authority’s Chief Executive (Para 16).[26]Para 17: When the Home Office has approved the first stage planning submission, applications for site acquisition or appropriation may be made, supported and accompanied by a qualified valuer’s report. The MCC and the local authority then proceed to make a second stage planning submission (Para 18), including a second stage investment appraisal which explores the main design options for the selected site (Para 18 (iii)). The costs and benefits appraised should take account of both capital costs and running costs.[27]Para 21: When the Home Office accepts the submission, it adopts the cost as the “approved cost limit” (“ACL”) for the scheme. The cost of the scheme must be contained within the ACL, subject to annual adjustment to reflect cost changes, and a 5% tendering tolerance. The local authority is then given consent to proceed with the detailed planning.[28]Para 25: Acceptance of a scheme onto the PPL, and completion of the first and second planning stages does not imply any commitment to a building start in any particular year. The start date is considered by the Home Office centrally, within overall capital allocation for Magistrates’ Courts and Probation Office buildings, and on the basis of relative operational priorities. Start dates may be offered before the second stage of planning has been completed, but will be conditional. 7[29]Para 27: Once a scheme has both an ACL and a start date, the authority can invite tenders. When the tender is agreed and let, the authority confirms to the Home Office the amount, expected start date and date of practical completion, and the yearly spread of expenditure. Responsibility for monitoring the progress of building work rests with the authority; it must send quarterly progress reports to the Home Office. The Home Office should be told when the building work has been completed and given the final account figure. If this exceeds the agreed tender price (after allowing for inflation), there is no guarantee that the excess will be met by an additional capital allocation. Funding of the appeal property[30]Local authorities are required, under section 55(1) of the 1979 Act, to provide the court house and other accommodation and pay the expenses of MCCs. Under section 59 of the 1979 Act, the Secretary of State may contribute, to the local authority, up to 80% of both the capital cost of the hereditament, and the running costs of the MCC. In practice at the antecedent valuation date, expenditure was incurred initially by local authorities; the Home Office then reimbursed 80% of their costs. As a matter of procedure the MCC prepares its own budget which it submits for approval to central government (originally the Home Office, subsequently the Lord Chancellor’s Department), not to the local council. When the budget is approved, 90% of the annual sum due from central government (80% of the approved budget) is paid by quarterly instalments to the council which holds it as, in effect, a fund- holder. The remaining 10% of the sum due from central government is paid after the submission of final accounts for the relevant period. The MCC makes its own decisions as to expenditure and requisitions payment by the council, which draws cheques and makes payments as directed by the MCC within the scope of the latter’s budget.[31]In 1990 the respondent sought and received from the Home Office approval for an 80% grant to construct the appeal property. 80% of the approved cost of constructing the court was provided as a capital grant from, in the first instance, the Home Office and then from the Lord Chancellor’s Department which assumed responsibility for Magistrates’ Courts in 1992. The remaining amount was funded by the respondent, involving credit approvals from central government. The respondent received no grant in respect of the site for the appeal property, which was already in its ownership prior to the construction of the building. Construction cost of the appeal property[32]The total tender price for construction of the building, including the car park, and associated site works, but excluding the separately assessed Bridewell and the portion of the car park occupied with Bridewell, was £16,194,102 at the base date of September 1989. After deduction of non-rateable elements and adjustments to tender levels as at the antecedent valuation date, the appropriate sum to be adopted as the estimated replacement cost (before the addition for fees) at stage 1 of a contractor’s basis valuation would be £11,180,010 if the areas occupied by the Probation Service and the respondent’s Social Services are excluded, but the areas allocated to the DSS and CPS are included.[33]£24,401 is attributable to the cost of the CPS area and £15,949 is attributable to the cost of the DSS area. Professional and other fees associated with the construction of the appeal 8 property as at the antecedent valuation date would have amounted to 10% of the construction cost. Issues[34]It is agreed that the MCC is the only likely occupier of the appeal property; that the contractor’s basis is the most appropriate method of valuation; that there are no adjustments to be made at stage 2 for obsolescence and that the appropriate decapitalisation rate at stage 4 is 6%.[35]There are five issues between the parties. The first is whether the DSS area and the CPS area each comprised a separate hereditament. Assuming that one or both of those areas was in separate occupation, the second issue is whether as a result the entry under challenge is invalid and should be deleted from the list. The third issue is whether the appropriate figure for use as the “stage 1” estimated replacement cost (before addition for fees) in the valuation is the figure of £11,180,010 referred to in para 32 above, or that figure reduced by £24,401 and/or £15,949 on the basis set out in para 33 above. The fourth issue is whether “grant” of 80% (or of some other amount) should be deducted from the figure determined under the third issue by virtue of the matters set out in paras 30 and 31 above. The final issue is whether, in calculating the stage 3 land value based on the agreed 7.5% of the stage 1 cost, account should be taken of the fees associated with the construction of the appeal property. The proper identification of the hereditament[36]Mr Hatchwell disagrees with Mr Maney’s contention that the DSS area and the CPS area should be left out of account when estimating the value of the appeal property. The background to this matter is as follows. On 16 April 1993 Mrs J E Devlin, the principal assistant – administration with the MCC, wrote to the valuation officer, informing him that the courts were due to move to the appeal property from the town hall on 12 July 1993. The letter continued “To date, I have not received information as to the rateable value of the property and I would be obliged if you could supply the same. I should add that the Courthouse will be jointly occupied by the Leeds Magistrates’ Court Committee, the Probation Service and the Leeds City Council’s Social Services Department. The Bridewell accommodation will be solely occupied by the West Yorkshire Police Authority.”[37]When the appeal property was brought into assessment in December 1993, the valuation officer noted and assessed separately the areas occupied by the Probation Service and the appellant’s Social Services Department. He took no such action in relation to the DSS area or the CPS area. The suggestion that the two latter areas should form the subject of separate assessments was not mentioned in the originating proposal, nor was it referred to at the VT hearing in 1995. The respondent did not raise the possibility that the DSS area and the CPS area had been separately occupied until October 2001 and June 2002 respectively. 9[38]So far as the DSS area is concerned, Mr Maney relied on two matters in particular. Firstly, that from an early date the plans of the building indicated the location of the DSS office. Secondly, he produced an e-mail dated 7 January 2002 from Mr John Hannigan, the respondent’s premises manager, which read as follows:
“DSS had a small office on level 3 to accommodate two officers. From very early on (a matter of months) this dropped to 1 officer. After a period of approximately 2 years DSS withdrew the placement of that officer on site. The liaison benefited the courts but DSS did not see it as a productive use of their staff. The arrangement was as far as I know never formalised but was included in the original building plans and labelled as DSS office. DSS in common with CPS and Social Services Youth Court Justice Team never paid rent or a contribution towards overheads since their presence was seen as improving the efficiency of the courts. I would reiterate that most officers and magistrates involved with the building of the Leeds courthouse have now retired or left the service so backtracking is particularly difficult. Current management would also have difficulty identifying where to find information. The supervising architect Ralph Cornfield at Leeds City Council DSA may still be able to locate copies of original design brief and drawings which will support my recollection.”
[39]Mr Hatchwell did not accept that this was an accurate summary of the position. He produced a letter dated 18 February 2002 from Mr Jeff Hutton of the Magistrates’ Court Building Branch of the Court Service, based on information provided by Mr Stuart Baker, the justices’ chief executive for West Yorkshire MCC. This indicated that the DSS use ceased within months of the building being commissioned. This suggested, he said, that even if the DSS had exercised paramount control over this small room, its occupation may have been too transient to be rateable.[40]The second area in dispute comprises an office, an interview room and toilets provided for the CPS. Apart from the interview room, these were also shown on the original building plans. Mr Maney said that Ms Christine Gregory, the current district services manager, had told him that the rooms were used solely by the CPS from the opening of the building until October 2001. As with the DSS area, the CPS rooms were lockable. Mr Maney believed that they were in the paramount control of the CPS whose occupation, in consequence, must have been exclusive.[41]Mr Hatchwell considered that the functioning of the court required the presence of CPS lawyers engaged in prosecution, and their work was so integral to the court’s operations that it should be regarded as part of the same occupation as that of the MCC, namely occupation by the Crown for the purposes of the administration of justice.[42]Neither of the expert witnesses was able to give primary evidence of the mode or duration of use of the two areas in question during the relevant period. In forming their opinions on the subject, they both had regard to information received from parties who were not called to give evidence. In my view, the most reliable indication of the true position at the material day – 2 July 1993 – is likely to be provided by the nearly contemporaneous letter 10 from the principal occupier of the court building, the MCC. The MCC did not consider the presence of the DSS or the CPS to be of any significance for rating purposes when its principal assistant – administration wrote to the valuation officer in April 1993, despite the fact that the proposed occupations of both bodies were indicated on the then current plans of the building. By contrast, in that letter the MCC gave notice to the valuation officer of the fact that it would share occupation of the new court building with the Probation Service and the respondent’s Social Services Department. The limited evidence that has been produced by Mr Maney, at a very late stage in the history of this appeal, as to the occupation by the DSS and CPS of the disputed rooms is, in my view, inconclusive. It follows that the onus on the respondent to demonstrate that the areas occupied by the DSS and the CPS should be excluded from the assessment of the appeal property has not been discharged. In the light of that finding, it is not necessary for me to decide whether the entry in the list should have been quashed if the extent of the appeal property had been wrongly identified. Stage 3 – land value[43]At the hearing the issue on land value was whether the construction cost, to which the agreed figure of 7.5% is to be applied, excludes or includes the architects’ and other fees which would be incurred when constructing the notional alternative building. As with the identification of the hereditament, this issue only arose at a very late stage. Until shortly before the hearing both valuers had accepted that such fees should be included in the calculation. At that time, the issue was simply whether or not the land value should reflect the 80% funding contribution made by the Home Office. In his expert report Mr Hatchwell pointed out that Mr Maney’s contention that grant should be deducted rested upon the fact that grant was actually paid. Since no such grant was, in fact, paid for the land, there was no justification for any “grant” deduction on the land element. In his revised valuation, submitted shortly before the hearing, Mr Maney accepted that approach. He qualified that concession to some extent, however, by arguing for the first time that the fees on construction should not be included in the calculation. In oral evidence he sought to justify this approach on the basis that the respondent owned the land on which the appeal property was constructed. In cross-examination he agreed that he had been involved in the contractor’s basis valuation of public sector schools for the 1990 list and had then agreed as correct an approach to land values based on a percentage of actual construction costs including fees.[44]Mr Mould submitted that Mr Hatchwell’s approach to this issue – namely that the agreed percentage should be applied to the total construction cost including fees – should be preferred to that of Mr Maney. He said that Mr Maney had departed, without explanation, from his habitual use of Mr Hatchwell’s approach; fees were as much a part of the overall cost of constructing a building as other relevant costs and there was no reason to disregard them at this stage. Perhaps understandably, Mr Village did not refer to this issue at all in his closing submissions. I have no hesitation in accepting Mr Mould’s submissions on the matter. 11 Treatment of 80% grant[45]The main issue in this appeal relates to the appropriate treatment of the 80% grant, which was received from the Home Office towards the cost of constructing the appeal property. Mr Maney considers it should be reflected by an 80% deduction at stage 2; Mr Hatchwell does not think that any deduction is justified.[46]Mr Hatchwell approached the valuation on the basis that the hypothetical tenant of the appeal property was the MCC. He accepted that, in certain circumstances, it would be appropriate to adjust the rental value produced by the contractor’s basis, to reflect the fact that the availability of a grant would be treated as a negotiating factor between landlord and tenant. He considered, however, that the nature of the grant in the present appeal was such that an adjustment for grant should not be made.[47]Mr Hatchwell said that the reality of the circumstances behind the provision of the appeal property was that it was required by three parties, the MCC as the physical occupier, the respondent as the statutory provider and the Home Office as the guardian of law and order. The objectives of the MCC – the efficient and effective administration of the magistrates’ courts for Leeds, formed part of the Home Office’s wider objective – to enable criminal justice to be dispensed fairly, effectively and without undue delay, promoting confidence in the rule of law and contributing to the government’s aim of reducing crime and the fear of crime, and the respondent’s objectives – to bring the benefits of a prosperous, vibrant and attractive city to all the people of Leeds and to discharge its statutory duties.[48]The hypothetical landlord would be well aware of both the shared interests in the benefits of occupation of the appeal property and in the funding arrangements. He would reasonably demand a rent which reflected the value to all three of these parties. He may be negotiating with a single tenant, but that tenant had the resources of both of the funding parties.[49]Mr Hatchwell said that the evidential significance to be attached to grant may arise in two respects. The first was the significance of the actual cost borne by the occupier. The only likely hypothetical tenant for the appeal property was the actual occupier, the MCC. In normal circumstances, if there were evidence of actual costs borne by the occupier, then that was an indication that the capital value placed on the hereditament by the occupier was not less than that sum. In the case of the appeal property, however, the occupier received in effect a 100% grant. The only conclusion which could be drawn from this was that the capital value to the occupier of these buildings was not less than nil. In this respect the actual grant received by the occupier of the appeal property said nothing helpful about value. Even if it were correct to regard the respondent as the hypothetical tenant, and to have regard to the fact that it bore only 20% of the cost of the building, this merely showed that the value placed on the property by the respondent must include at least 20% of the building cost. It certainly did not require the valuer to ignore the hypothetical landlord’s realistic expectation that the respondent would be prepared to bid a rent in the knowledge that it would be supported by the Home Office to the extent of 80%. 12[50]The second respect in which grant may be significant in a cost based valuation was the way in which it would affect negotiations, where the availability of grant for an alternative hereditament might dispose the tenant to persuade the landlord to take a rent which did not exceed the annualised cost of that alternative, net of grant. When considering the hypothetical negotiations between the landlord and tenant, Mr Hatchwell said it was very material that the funding available to MCCs by both local authorities and the Home Office was available in either capital or annual form. Indeed, part of the funding for the appeal property was in annual form. 100% of the capital cost of the appeal property was met jointly by the Home Office and the respondent. If the property were available only on a tenancy from year to year, it was reasonable to suppose that the respondent and the Home Office would contribute 20% and 80% respectively towards the annual rent. The MCC would therefore be funded to pay 100% of the rent. The existence of these particular funding provisions did not therefore serve to reduce the rent payable. The grant was quite clearly available to pay the rent.[51]The contractor’s basis involved the hypothetical tenant considering the possibility of constructing alternative premises instead of taking a tenancy of the actual hereditament. Were this to be considered, the hypothetical tenant would understand that it would have to fund the development through normal channels, that is the cost would ultimately be wholly borne by the respondent and the Home Office under the funding arrangements described in paragraphs 30 and 31 above. These arrangements were explicit and would be equally obvious to the hypothetical landlord of the appeal property.[52]The fact that the same funding from the same sources was available to the MCC in order to pay rent, would not incline the MCC to consider the construction of an alternative in preference to paying a rent based on full cost. Nor would it lead the parties ultimately responsible for funding to persuade the tenant to limit its rental bid below that level. Nor would it incline the landlord to accept a rent less than the full decapitalised capital cost of that hereditament. Whether the MCC chose to rent or to build, the accommodation was provided for it, effectively, at no cost to itself. The very existence of the appeal property, recently constructed, purpose built and meeting all the requirements of the MCC, was a strong indication that its full cost, borne by public funds, represented its value. The hypothetical landlord was well aware that the MCC was effectively funded by the public purse and would reasonably insist upon a rent which reflected the full value of the hereditament for public purposes. The full cost of the hereditament, before grant, was the best evidence of that value. The alternative scenario, where the respondent was viewed as the only hypothetical tenant, pointed to no different conclusion.[53]Although the MCC (or possibly the respondent) might as a remote possibility consider the construction of an alternative, it would have to recognise that the adoption of this alternative course of action would not place it in any more advantageous funding position than that which would result from taking a tenancy based on 6% of the full cost. It was therefore reasonable to suppose that the rent which would be agreed between the hypothetical tenant and landlord would incorporate no discount for grant.[54]In his expert report and rebuttal report, Mr Maney said that his approach was based on what he considered to be the reality of the situation. This was that the appeal property had 13 been built at no cost to the actual occupier, which was also the only possible hypothetical tenant. Statute made the respondent responsible for the provision of the appeal property; however there was no doubt that it would not have been provided but for the availability of the grant. The consideration for the provision of the property was the payment of grant; the respondent was under a duty to exercise close scrutiny and stewardship of the public money entrusted to it. It would therefore not pay any more for the property that it would be compelled to pay. So far as the cost of construction and the annual costs were concerned, the element of compulsion extended only to 20% of those costs. Mr Maney felt that it was entirely inconsistent with these realities to expect the hypothetical tenant to pay rent based on funds to which it was never entitled and which it had never received.[55]The realities of the situation were that the property would not have been built without the central government grant. The MCC had no assets of its own; it did not even have the capacity to hold an interest in land and must therefore have a third party (the respondent in this case) to hold such an interest on its behalf. The MCC had no specific provision for the payment of property costs within its annual grant and those grants were not determined in a way that reflected such outgoings. The annual amount of the grant was determined by the statistics branch of the Lord Chancellor’s department, based partly on the previous year’s spending and partly on a formula related to performance indicators such as population, number of cases and accounts closed. All of the bodies concerned, whether the Home Office, the Lord Chancellor’s department, the MCC or the respondent, were subject to close public scrutiny. It was therefore unlikely that it would be possible, in reality, for an excessive rent to be paid for the appeal property. For this reason he had based his valuation on the 20% of the cost that was actually incurred by the respondent.[56]Mr Maney also drew attention to the manner in which decapitalisation was approached in the 1973 list in England and also to the manner in which it was applied in Scotland prior to the prescription of decapitalisation rates for contractor’s test valuations. In his opinion, the current inflexibility of decapitalisation rates had hindered the operation of the principle of reality, in that it no longer enabled the distinction to be made at stage 4 of the valuation between public and private sector tenancies. Here was a case in which there was undoubtedly a public sector tenancy, since there was only one possible hypothetical tenant, the MCC. In such circumstances, if it was not possible to reflect reality in any way through the decapitalisation rate, another means had to be found. Mr Maney had chosen to do this, in a measurable way which was attached strictly to the realities of the situation, by making a reduction at stage 2 to reflect the actual cost to the respondent (standing in the shoes of the MCC) of providing the appeal property.[57]Following the principle of reality, the only likely bidder for the appeal property would have been the MCC. There would have been no competition, in practice, for the hypothetical tenancy. Consequently, the hypothetical landlord and the hypothetical tenant would have sought to agree a rent which the hypothetical landlord could accept in order to let the hereditament, and which the impecunious hypothetical tenant could afford to pay.[58]Since the hypothetical tenant – the MCC – was completely dependent upon and accountable to others for its funding, Mr Maney could not accept that it would agree to pay a rent which a hypothetical landlord might ask, based on the total cost of the building. It would 14 instead rely upon that landlord’s willingness to see the property occupied for the purpose for which it was intended, which necessarily meant that the landlord would accept a lower rent.[59]At the commencement of his oral evidence on the afternoon of the second day of the hearing, Mr Maney produced what he termed a “speaking note in reply to the appellant’s evidence”. In this document he departed from his previous view that the MCC would be the hypothetical tenant, in the light of the fact that an MCC was unable to hold an interest in land. In his revised view, the MCC’s role was as an occupier and the MCC and the respondent effectively worked together in tandem. This approach was endorsed by Mr Village who, in closing, formally submitted that the only hypothetical tenant would be the respondent.[60]This change of approach did not result in an alteration to Mr Maney’s valuation, however. He said that it would be for the respondent to choose a means of providing the Magistrates’ Courts which was in the best interests of its council tax payers in terms of having the most beneficial (or least adverse) effect on its overall financial position. The respondent would be required to choose between building itself or agreeing a rent for the premises as provided. In the self-build option, 80% of the cost would be funded and 20% borrowed by means of supplementary credit approval (SCA) at an advantageous rate. This would not affect the respondent’s other commitments and had the added attraction of providing ownership of the property. The MCC was the only occupier and the respondent, being publicly funded, would not pay more than it would cost to build. To do so would be unacceptable to the District Auditor. Mr Maney believed that the building would not have been constructed if the respondent had not received the grant. Indeed, he knew of no council which could afford to build a Magistrates’ Court without grant.[61]The other alternative would be to rent the premises as already existing. Mr Maney rejected Mr Hatchwell’s suggestion that this course would be equally acceptable to the respondent if 80% of the rent were to be reimbursed. The reason he rejected it, he said, was that cost in terms of rent did not equate to borrowing at the advantageous rate the respondent could attract following SCA. In respect of capital expenditure, the 20% borrowed after SCA would allow the respondent to borrow money beyond its cap. In respect of pure revenue items, on the other hand, the respondent’s 20% would come from the net revenue charge, made up of rate support grant, national non-domestic rate and community charge/council tax. Thus the payment of rent would come within the standard spending assessment, that is the capping limit imposed by central government. In addition, a contractor/developer would require a profit. Moreover, the cost of borrowing would almost certainly be higher to the developer than to the respondent. Finally, given that grant payments for rent were paid on an annual basis, they were discretionary and could be withdrawn in the future as a result of policy changes or legislation.[62]Consequently, in Mr Maney’s view, renting would always produce a higher cost than building. He considered it was fully consistent with this to suggest that the respondent, as the hypothetical tenant, would not pay more than the 20% it would cost to build the property itself. 15 Decision on main issue[63]Both counsel referred in the course of their submissions to the decision of the Court of Appeal in Hoare (VO) v National Trust [1999] 1 EGLR 155, [1998] RA 391. The fundamental characteristics of the rating hypothesis were summarised there by Schiemann L.J. They included the following:(1) Both the tenant and landlord are hypothetical (p156L).(2) The hereditament is the actual hereditament, which is supposed to be in the market with all its attractions to would-be tenants and also with all its imperfections and drawbacks which may deter or reduce competition for it (p156M).(3) One of these attractions may be the hereditament’s appeal to the hypothetical tenant’s political interest or sense of duty, in order to perform a statutory duty (p156M).(4) The statutory hypothesis provides the yardstick whereby the real value of the occupation of the hereditament is to be measured, the measure being the rent agreed on the statutory terms between a reasonable landlord and a reasonable tenant (p156M).(5) The statutory hypothesis requires the valuer to take into account the actual occupier and the value of his occupation, notwithstanding the fact that, in reality, he cannot or would not take a tenancy of the hereditament (p157D-J).[64]In my opinion, those principles may be applied to the present case in the following way. The respondent was under a statutory duty to provide a court house and related accommodation for the purpose of enabling the MCC to carry out its duties in the administration of justice. In fulfilment of that statutory duty, the respondent provided the appeal hereditament. The MCC has occupied the appeal property for the purposes of fulfilling its statutory duties in the administration of justice. The MCC has no statutory power to take a tenancy of the appeal property. But that fact does not prevent the valuer considering the MCC as a bidder for the hypothetical tenancy and taking account of the value of its occupation in estimating the rent payable on the statutory hypothesis. The MCC is the only likely occupier of the appeal property. Up to 80% of the costs to the respondent of providing the appeal property were able to be reimbursed by the Home Secretary by way of grant and, in fact, were so reimbursed. The grant monies in question passed through the respondent’s books. Such grant funding is payable by the Home Secretary in respect of both capital and revenue expenditure incurred by the respondent in fulfilment of its statutory duties. It would, therefore, be available in principle, in respect of the rent payable under the hypothetical tenancy. The decision that court house and related accommodation is required by the MCC for the purposes of its statutory functions is primarily one for the MCC itself, in consultation with the respondent. At the antecedent valuation date the policy arrangements that governed the consideration and approval by the Home Secretary of bids for such accommodation were set out in Home Office Circular 73/86 “Magistrates’ Courts and Probation Office Buildings: Revised Procedures”. The appeal property was considered and 16 approved by the Home Secretary in accordance with the requirements of that Circular. Thus, the appeal property was seen by the MCC, the respondent and the Home Secretary as giving full value for money. Pursuant to the 1979 Act, the respondent was reimbursed 80% of the costs of provision by way of grant from the Home Secretary. That the appeal hereditament has given value for money for the purpose of accommodating the MCC in performing its statutory functions is confirmed by the fact that neither valuer argued for any allowance on the cost of construction of the building to reflect either physical, technical or functional obsolescence. The appeal property is, therefore, in all material respects, both fit for and required for the purpose of its only likely occupier, the MCC. It gives full value for money.[65]In the light of these matters, it is appropriate to turn to the contractor’s method of valuation. What Lord Denning described as the “classic” explanation of the method was given in Dawkins (VO) v Royal Leamington Spa Corporation [1961] 8 RRC 241 as follows:
“The hypothetical tenant has an alternative to leasing the hereditament and paying rent for it; he can build a precisely similar building himself. He could borrow the money, on which he would have to pay interest; or use his own capital on which he would have to forego interest to put up a similar building for his own owner- occupation rather than rent it, and he will do that rather than pay what he would regard as an excessive rent – that is a rent which is greater than the interest he foregoes by using his own capital to build the building himself.”
[66]The hypothetical tenant’s negotiating position is that he can build for himself a “precisely similar building”, in the event that the landlord insists upon a rent which is greater than the interest which the tenant will either pay or forego in order to meet the capital cost of constructing that “precisely similar building”. The landlord’s negotiating position, at least in the present case, is that the MCC requires the appeal property for the proper performance of its statutory functions and that the appeal property gives full value for money for that purpose. In other words, in the present case the cost of building the tenant’s alternative does represent the effective capital value of the appeal property.[67]It is at this point in the analysis that the main issue falls to be considered. Mr Maney’s view is that the landlord will be prepared to agree a rent set at only 20% of the annual cost of constructing a precisely similar building to the appeal property. In the light of the matters referred to in paragraph 64 above, there is in my view simply no reason why the landlord could be persuaded to do so. The landlord knows that the full annualised cost of construction must be defrayed in order to provide the tenant with a “precisely similar building” that is commensurate in value to the appeal property. He knows that the MCC requires such a building in order properly to fulfil its statutory functions and that the Home Secretary will fund 80% of the cost of provision and the respondent must fund the remaining 20%. He knows that both funding parties are satisfied that the appeal building meets current policy requirements for the provision of new court accommodation. He knows that Home Office funding is available to defray up to 80% of the cost of renting the appeal property, just as it is available to defray up to 80% of the annualised cost of constructing the tenant’s alternative. Finally, he knows that the respondent must defray the balance of the cost of renting the appeal property. 17[68]For these reasons, there is in my judgment no sensible incentive for the landlord to give the discount for which Mr Maney argues. Even if Mr Village is right to submit that the respondent, and not the MCC, is the hypothetical tenant, this would provide no greater incentive to the hypothetical landlord to give the discount for which the respondent contends. The landlord would know that the respondent’s bid was motivated by the need to provide court and related accommodation for occupation by the MCC in fulfilment of the respondent’s statutory duty. He would know that the respondent will be reimbursed 80% of that cost by way of grant paid by the Home Secretary. Again, the hypothetical parties would act in the knowledge that the grant was available to pay a rent which properly reflected the annualised cost of constructing a precisely similar alternative to the appeal property. On the logic of Mr Village’s argument, the respondent would expect to pay a rent representing, not 20%, but 4% of the annualised costs of constructing such a precisely similar alternative. This is because 80% of the agreed rent would continue to be reimbursed by way of grant from the Home Secretary. It is difficult to see how the landlord might conceivably be persuaded to agree a rent which gave rise to such favourable consequences for the respondent.[69]The respondent’s approach regarding the alleged profligacy with public funds underpinning the appellant’s case is, in my view, misconceived. It is no part of Mr Hatchwell’s approach to assume that the hypothetical tenant, the MCC, would simply accept the landlord’s bid, however excessive and unjustifiable. His case is that the bidding parties would be guided primarily by the annualised cost of construction of a precisely similar building to the appeal hereditament. That is the yardstick which enables the parties to avoid fixing an “excessive” rent on the classic explanation of the contractor’s method in Dawkins.[70]In my judgment, the circumstances of this case certainly do not justify fixing a rent below the level indicated by that annualised cost, for three reasons. Firstly, the appeal property is entirely fit for the MCC’s purposes. Secondly, it gives full value for money in physical, functional and technical terms. Thirdly, the funding parties have been prepared to bear 100% of the actual cost of the appeal property, which demonstrates that from their perspective the full cost represents the value of the public benefit derived from its occupation and use by the MCC in fulfilment of its statutory functions.[71]Finally, both Mr Village and Mr Maney contended that local government finance arrangements and expenditure controls would lead the respondent to prefer to build rather than to rent. That contention, and the points made in support of it are, however, irrelevant to the question whether the rent should be discounted to reflect the payment of the 80% grant by the Home Secretary. If they were to have any bearing on the valuation of the appeal hereditament for rating, they would relate to the question whether some allowance should be made in respect of the respondent’s funding responsibilities – that is, the 20%. Yet Mr Maney does not raise any issue in that respect. In any event, the respondent has produced no evidence as to its financial circumstances at the antecedent valuation date. Nor has evidence been produced to enable me to judge the financial and budgetary consequences to the respondent at the antecedent valuation date of renting rather than building. The mere fact that the respondent chose to build is of no significance, since it has not been suggested that renting was a realistic alternative in the real world. 18[72]Mr Village submitted that the hypothetical tenant would prefer to build rather than rent because the latter would incorporate an element of “developer’s profit”. In addition, he said, the developer would have to recover his costs of borrowing money, which would not have been at the advantageous rate available to the respondent. These submissions, in my view, are not well founded. Neither Mr Hatchwell nor Mr Maney has added any “developer’s profit” into their contractor’s basis valuations, since neither valuer has assumed the interposition of a developer. Nor have the valuers added in the costs of financing either the development or site acquisition for the duration of any assumed development period.[73]Finally, I should refer to Mr Maney’s suggestion that the valuation should take account of the extra advantage that may be derived from actual ownership of a capital asset, which he says is not reflected in the statutorily prescribed decapitalisation rate. In this context, Mr Village refered to the following extract from the decision of this Tribunal in Eastbourne Borough Council and Wealden District Council v Allen (VO) [2001] RA 273:
“The fourth stage consists of decapitalising the effective capital value, including the land. Although it appears that it was sometimes the practice in determining the appropriate decapitalisation rate to import as considerations the negotiating positions of hypothetical landlord and tenant (see Cardiff Corporation v Williams (VO) [1971] RA 417, [1973] RA 46), the more usual approach was to leave such matters to Stage 5 (or even to have a further Stage 6 to address them exclusively). It was this latter approach that was used in Imperial College v Ebdon (VO) [1984] RA 213. In that case a substantial part of the 18-day hearing appears to have been taken up with economic argument on the appropriate decapitalisation rate. The Local Government Finance Act, Schedule 6, para 2(8) gave the Secretary of State for the Environment power to make regulations prescribing assumptions to be made in valuing hereditaments of prescribed classes. The Non-Domestic Rating (Miscellaneous Provisions) (No.2) Regulations 1989 Reg 2 and the Non-Domestic Rating (Miscellaneous Provisions) (No.2) (Amendment) Regulations 1994 Reg 2 prescribed (for the purposes of the 1990 and 1995 rating lists respectively) “the percentage rate applicable in relation to the notional cost of constructing or providing the hereditament” where “the rateable value is being ascertained by reference to” such notional cost. In the 1989 Regulations the rate is 4% for an educational hereditament or hospital and 6% in any other case; and in the 1994 Regulations the rate is 3.67% for an educational or healthcare hereditament, and 5.5% in any other case. It appears clear to us that the prescribed rates are directed at removing from contention the economic considerations that occupied so much time in Imperial College and to avoid the lack of uniformity that decisions in different cases might produce. By “economic considerations” we mean those matters affecting the rate at which money might be borrowed for the purpose of financing the provision of the notional alternative building. Other matters, including those in practice taken into account at stages 1 to 3 and 5, are unaffected by the prescription of a decapitalisation rate.”
In fact, the economic advantages of ownership over renting is one of the “economic considerations” considered by the Court of Appeal in Cardiff and by this Tribunal in Imperial College, in the context of fixing the appropriate decapitalisation rate. That issue has been 19 removed from argument by virtue of the statutorily prescribed rate. There is ther[74]Mr Mould summarised his submissions on the grant issue by suggesting that Mr Hatchwell’s approach was properly founded upon the facts of the case. He had departed from reality only to the extent that the rating hypothesis required him to: that is, by taking the actual occupier to be a hypothetical bidder notwithstanding that, in reality, he was incapable of taking a tenancy of the appeal property. Mr Maney on the other hand had ignored the fact that 80% of the rent would be paid by the Home Secretary, would not be a financial burden to the respondent and, on the rating hypothesis, would pass through the hands of the respondent to the hypothetical landlord in the form of rent paid on behalf of the MCC. In so doing, Mr Mould submitted that he had failed to focus on the value of the appeal property to the actual occupier; a value which was fully reflected in the costs of constructing the property and motivated both the respondent and the Home Secretary to support its construction. I accept those submissions, and thus the valuation of Mr Hatchwell, in their entirety. The appeal is allowed. I order that the assessment of the appeal property in the 1990 rating list shall be altered to rateable value £792,500.[75]A letter on costs accompanies this decision which will take effect when, but not until, the question of costs is decided. Dated 8 October 2002 (Signed) N J Rose ADDENDUM[76]I have received submissions on costs from the parties.[77]The appellant pointed out that he had been completely successful and applied for his costs. The respondent, properly in my view, confirmed that it would not resist the appellant’s application.[78]Accordingly, I order that the appellant shall recover his costs of the appeal from the respondent. Such costs, if not agreed, are to be assessed on the standard basis by the registrar of the Lands Tribunal in accordance with the Civil Procedure Rules. Dated 14 November 2002 (Signed) N J Rose Appendix 1 20 LEEDS DISTRICT MAGISTRATES’ COURTS VALUATION BY P R MANEY, MRICS IRRV Actual construction costs, as adjusted to exclude Probation Service, Leeds Social Services, DSS and CPS £11,139,660 Fees at 10% £ 1,113,966 £12,253,626 Less allowance for capital grant at 80% £ 9,802,900 £ 2,450,726 Value of land at 7.5% of adjusted construction costs £ 835,474 Total Value £ 3,286,200 Decapitalisation rate 6% £ 197,172 Rateable Value say £ 197,000 21 Appendix 2 LEEDS DISTRICT MAGISTRATES’ COURTS VALUATION BY L M HATCHWELL, MA (Oxon), MRICS, IRRV Stage 1 Actual tender as adjusted £11,720,087 Less Costs attributable to Probation Service hereditament £376,687 And Social Services hereditament £163,390 Actual apportioned tender price of the appeal hereditament £11,180,010 Fees 10% £ 1,118,001 Total Stage 1 cost £12,298,011 No Stage 2 adjustments Stage 3 Value of land (7.5% of Stage 1 cost) £ 922,351 Total Value £13,220,362 Stage 4 Decapitalisation Rate 6% £ 793,222 No Stage 5 adjustments Rateable value say £792,500 22