EASTBOURNE BOROUGH COUNCIL; WEALDEN DISTRICT COUNCIL v PAUL STUART ALLEN (Valuation Officer) RA/16-17/1999

UPPER TRIBUNAL
LANDS CHAMBER
RA/16-17/1999Case No RA/16-17/1999
Between
EASTBOURNE BOROUGH COUNCIL; WEALDEN DISTRICT COUNCILApplicantPAUL STUART ALLEN (Valuation Officer)Respondent
Before
The PresidentMr N J Rose FRICSVenue 48/49 Chancery Lane, London WC2A 1JRHearing 4-6, 10-13 and 16-18 July and 7 August 2001 © CROWN COPYRIGHT 2001Property: The Sovereign Centre, The Foreshore, Eastbourne, East Sussex and, Goldsmiths Leisure Centre, Eridge Road, Crowborough, East SussexCatchwords: RATING – valuation – local authority leisure centres – method of valuation – shortened profits basis rejected – contractor’s basis adopted – simple substitute building – size and content – utilisation – allowances for under-utilisation rejected – constraints on local authority finance – effect on hypothetical rent – whether justifying stage 5 allowance – held evidence did not show allowance appropriate - assessments reduced.
[1]These appeals relate to two sets of premises, of a type generally referred to as “local authority leisure centres”. The first is situated on the foreshore at Eastbourne and is occupied by Eastbourne Borough Council. It is known as the Sovereign Centre (Sovereign). In the 1990 local rating list it was entered as “Swimming Pools and Premises” at a rateable value of £489,000. In the 1995 list it was entered at £400,000 RV. The second set of premises is situated at Eridge Road, Crowborough, and is occupied by Wealden District Council. It is known as the Goldsmiths Leisure Centre (Goldsmiths). In the 1990 local rating list it was entered as “Sports Centre and Swimming Pool” at £120,950 RV. The assessment was amended to £126,800 RV with effect from 1 May 1994. In the 1995 list the assessment was £108,500 RV.[2]Proposals to reduce the assessments were made on behalf of the councils in relation to each of these five entries, and the appeals were heard by the East Sussex Valuation Tribunal which, in a single decision of 25 February 1999, directed that each of the assessments should be reduced - those relating to Sovereign to £390,000 RV in the 1990 list and £316,500 RV in the 1995 list, and those relating to Goldsmiths to £120,000 RV in the 1990 list, £123,500 RV in the 1990 list from 1 May 1994, and £100,000 RV in the 1995 list. All these assessments are now appealed against. By the end of the hearing, the figures for which the valuation officer was contending had been reduced to £357,000 RV (1990) and £276,000 RV (1995) for Sovereign and £112,750 RV (1990), £121,500 RV (from 1 May 1994) and £94,500 RV (1995) for Goldsmiths.[3]We were told that a large number of appeals, perhaps some hundreds, were awaiting the outcome of our decision in the present cases. The appellants were part of a consortium of 126 local authorities formed to contest what were regarded as excessively high assessments for this type of hereditament. There are of the order of 3,000 local authority leisure centres in England and Wales. In the present cases, the appellants seek substantial reductions - to £76,850 RV (1990) and £78,000 RV (1995) for Sovereign, and to £30,000 RV (1990, including the period from 1 May 1994) and £50,250 RV (1995) for Goldsmiths. The importance of the cases, both locally and nationally, is clear.[4]The principal issues in the appeals are these. Firstly, the method of valuation. The main valuation witness for the appellant councils, Mr R G Messenger, BSc FRICS, IRRV, MCIArb used what is sometimes referred to as the shortened version of the profits basis, applying a percentage, 7%, to the total annual receipts for each of the centres. The valuation officer, Mr P S Allen BA(Hons), MRICS, contended that Mr Messenger’s method was lacking in any justification, and he used the contractor’s basis. The second principal issue was the degree of constraint on local authority finances generally and on the finances of the two appellant councils. It was the case for the appellant councils that such constraints would have materially affected the negotiations between the hypothetical landlord and the hypothetical tenant and would have limited the rent that they would have agreed. The 3 valuation officer contended that such considerations would not have affected the hypothetical rent. The third area of contention concerned the application of the contractor’s basis, if this was to be the method of valuation used. There were a number of specific points on this issue on which the parties were in dispute. After describing the appeal hereditaments and outlining their history, we will deal in turn with each of the issues.[5]Mr Anthony Anderson, QC and Mr Richard Glover appeared for the appellant councils. In addition to Mr Messenger they called Mr I R J Dewar, FRICS, IRRV, MCIArb on the application of the contractor’s method to the appeal properties; Mr S P Worthy ARICS, BSc, CPFA on building costs; Ms J Henham, BSc, CPFA on financial details of the appellant councils; Mr C P Sullivan, CPFA, an affiliate of the Institute of Chartered Accountants in England and Wales, on general local authority financial matters and Mr I Warren on aspects of the leisure industry.[6]Mr David Holgate QC and Mr Timothy Mould appeared for Mr Allen and called him to give evidence before us. They also called Mr A Holdsworth BSc(Hons), MRICS, of the chief executive’s office of the valuation office agency who gave general evidence on the powers and duties of local authorities in relation to leisure provision, valuation methods employed for the rating of other types of public buildings and guidance by the Royal Institution of Chartered Surveyors on the capital valuation of local authority leisure centres; Mr M Dallas CPFA, a member of the South African Institute of Chartered Accountants on both local authority finance generally and the financial position of the appellant councils in particular and Mr Mark Sutcliffe, BA (Hons) on detailed aspects of the leisure industry.

(i) Goldsmiths Leisure Centre

[7]The Wealden District extends southward across East Sussex from the Surrey and Kent borders between East Grinstead and Tunbridge Wells to the English Channel at separate points on either side of Eastbourne.[8]Wealden is the second largest district in the county, with a population at mid 1991 of 131,500. It is mainly rural in character, interspersed with communities, hamlets, villages and small towns. There are, however, centres of development in Crowborough, Hailsham, Heathfield, Polegate, Uckfield and Wadhurst, which are still expanding as more houses are built. The population of Crowborough parish in 1991 census figures was 18,791.[9]Goldsmiths is located on the northern outskirts of Crowborough, five minutes walk from the town centre and on the main bus route to Tunbridge Wells. It was built in two phases, the dry sports centre being completed in 1985 and the swimming pool in August 1986. The phases had always been planned together and the total cost of both was approximately £2,200,000. 4[10]The site was donated to Crowborough Parish Council (now the Town Council) by the Goldsmiths Company in 1930 and the Parish Council played a major role in the initial development of the centre. The debate within the Parish Council had started in the late 1970s and, following a public meeting on 26 June 1980, the Recreation Grounds Committee recommended the formation of the Goldsmiths Development Committee. This Committee of the Parish Council met monthly for the next three and a half years following its first meeting on 5 August 1980. Whilst Wealden District Council was always going to be the major funder of the scheme, the drive and direction very much came from the Parish Council. There was initially a strong debate as to whether the proposed centre should be at the Beacon School or on part of the Goldsmiths Recreation Ground. Wealden District Council was originally in favour of the Beacon School option, but in February 1982 it agreed to support the Parish Council’s preferred option of the Goldsmiths site.[11]Work on the first (dry) phase began at the beginning of 1984 after preliminary works to the car park and access, the pool contract beginning in 1985. At that time the two contracts were running concurrently. In 1987 the Parish Council leased the whole complex for 125 years to Wealden District Council at a peppercorn. The centre was the subject of CCT bidding in 1992 and 1997. The Direct Services Organisation of Wealden District Council won both those tenders and the centre has therefore been continuously run by them since 1992. It comprises a ground floor and first floor leisure centre. It is of a steel frame structure with a modern external cladding to all perimeter walls. The swimming pool is 25 metres by 13 metres with a movable floor. This allows the depth to be regulated for toddler classes and fun sessions or lowered for serious swimming sessions. The four court sports hall caters for indoor sports such as five-a-side football, volleyball, short mat bowls and gymnastics. The “Definitions” fitness suite on the first floor, which was extended and fully refurbished in 1994 and in 1998, contains a wide range of cardiovascular and resistance equipment.[12]Originally four squash courts were provided on the ground floor. These have been progressively converted to alternative uses. There were three squash courts in 1988 but no fitness facility. By 1991 two courts had been converted into a fitness gym, covering approximately 1,250 square feet. In 1994 a mezzanine floor was installed into these two courts. The lower half became a dance studio of 1,250 square feet and the upstairs area was extended into a function room and viewing balcony to form a fitness gym of around 1,800 square feet. This was further extended in 1997. In 1998 all squash courts had been removed and both the upstairs fitness gym and the ground floor dance studio had been extended to their current size. The dance studio now occupies approximately 1,875 square feet and the fitness gym in excess of 2,500 square feet.[13]The “Silhouettes” dance studio, off the ground floor, was also completed in 1994 and is able to cater for a wide variety of classes. The Heath suite is on the ground floor. There is a café and bar on the first floor and a crèche facility on the ground floor.[14]The leisure centre is adjacent to other facilities owned and managed by the town council, namely a running track, bowls area and camping ground. These facilities do not form part of the leisure centre facility. Car parking is provided to the south-east of the building. 5[15]The gross internal floor area on 1 April 1990 was 2,526m2, as follows:- m2 Ground Floor Wet 859 Dry 1,170 First Floor Wet 97 Dry 400 Total 2,526 The gross internal area on 1 May 1994 was 2,665.70m2, reflecting the extension of the dry facilities.[16]At all material times Goldsmiths was run as a service to provide a facility for all the residents of the district. It provided additional social benefits to the Crowborough area in terms of amenities for youth, discouragement of vandalism and a general practitioners referral service. The council was satisfied with the performance of the centre in fulfilling the socio-economic objectives that it sought to achieve through its policies and programmes.[17]The original intention was that Goldsmiths, and other leisure centres operated or managed by Wealden, should be self-financing, with a view to maximising use and income. In fact, Goldsmiths has always operated at a loss. A confidential report to the Leisure and Amenities Committee of the District Council dated 12 October 1988 accepted that the Council’s three leisure centres had been “planned, designed and built with insufficient regard or knowledge of the demand for sports and leisure in the area. It is now necessary for the management to create demand through aggressive marketing in an attempt to work towards a break-even policy on operating costs.” The pricing policies adopted at both centres were the result of a balancing exercise between the need to obtain income and the councils’ intention to provide various socio-economic benefits in their area. The subsidies paid by the council in respect of the centre are set out below. Actual attendances, in contrast to income, compared more favourably with previous estimates. Goldsmiths was originally targeted to accommodate a throughput of 120,000 per annum, to be realised after four years of full operation. In fact, there were 150,000 attendances by 1988/89 and an average of 206,250 per annum between then and 1995/96. (ii) The Sovereign Centre[18]Sovereign is located in Eastbourne, on the south-east coast of England, approximately 60 miles from London. It is prominently situated on Royal Parade, overlooking the foreshore to the eastern side of the town centre. 6[19]It was also built in two phases. The original swimming pool complex was built in 1977 and the second phase, comprising a leisure pool and a dry sports hall, in 1987/88. The second phase cost some £3.6m, representing the cost of the buildings, the equipment being leased.[20]In March 1985 the Tourism and Leisure Committee of Eastbourne Borough Council decided to invite proposals from companies interested in developing the leisure pool, but by November 1985 the short-listed companies had withdrawn their interest. The team who had been working on the project for the Borough Council, however, had formed a company which was willing to continue with it. This new company was Clifford Barnett Developments Limited (CBD). On 11 December 1985 the Tourism and Leisure Services Committee recommended that the scheme for the leisure pool development be approved and that the Council should proceed with the proposals in partnership with CBD.[21]A company called Eastbourne Leisure Pool Limited (ELP) was set up to build and manage the leisure pool development. This was a wholly-owned subsidiary of the Borough Council. ELP took a lease at a peppercorn of the old pool plus land for the extension from the Borough Council which owned the freehold. ELP was responsible for repaying the centre’s loans. Its annual business plan was submitted to the Council, from whom it required a subsidy. In 1997 ELP ceased trading and its assets were transferred to the Council, which has operated the centre ever since.[22]The original pool comprised a competition pool with seating for galas, a diving pool and a training pool, changing facilities and catering. There is a flume which serves the main pool.[23]The second phase was developed in 1987/88. It comprises a leisure pool, with wave machine and flumes, and a dry sports hall and ancillary accommodation. The original pools were retained, but other parts of the building were demolished. Between the two areas was a new entrance and re-planned catering facility. The original building is a mixture of concrete frame and structural wall design, with a lightweight flat roof. The exterior is clad in masonry brick with some feature glazing and towers over entrances. The extension is a steel portal frame structure with a pitched profile metal roof with full height brick walls. The brickwork includes some feature fenestration and curtain walling, and a projecting eaves detail.[24]On the ground floor of the leisure centre is the main fun swimming pool and associated male and female changing areas. Dry facilities include a sports hall and amusement area and lounge and bar/kitchen area. On the first floor is a fitness suite area overlooking the main swimming pool and a small storage room. 7[25]The gross internal floor area is 6,877m2, as follows: m2 Leisure pool/changing/WC 1,711 Original pool and café 3,967 Sports hall 1,199 Total 6,877[26]Car parking is provided to the front and the east of the building.[27]As with Goldsmiths, at all material times Sovereign was run as a service to provide a facility for all the residents of the borough. In addition, the centre was intended to – and did in fact – enhance the tourist attractions of Eastbourne, so as to improve the facilities of the town related to the tourism industry, such as hotels and restaurants. The council was satisfied with the performance of the centre in fulfilling its socio-economic objectives. Attendances at the centre averaged 508,175 between 1989/90 and 1995/96, rather less than the majority of estimates made before work commenced. These had ranged from 450,000 to 600,000 and, in some cases, related to the wet side only. In 1985 attendances at the first phase had totalled 350,000.[28]A feasibility report on the second phase of Sovereign, prepared by CBD in February 1986 at the request of the Borough Council, expressed the view that, as a result of heating and staffing savings, the enlarged centre should break even on its operating costs. A further financial appraisal of the proposed development, this time prepared by Eastbourne Leisure Pool Limited subsequent to a meeting of the Borough Tourism and Leisure Services Committee on 5 June 1986, forecast an operating surplus in base year.[29]In the event, Sovereign, like Goldsmiths, was always loss-making and the pricing policies adopted for the centre were the result of a balancing exercise between the need to obtain income and the council’s objective of providing socio-economic benefits. The subsidies paid to the two centres by their respective local authorities were as follows: Year Sovereign (£) Goldsmiths (£) 1986/87 93,196 148,462 1987/88 195,664 238,591 1988/89 188,155 266,282 1989/90 148,450 207,670 1990/91 302,878 261,953 1991/92 286,736 598,809 1992/93 254,828 154,715 1993/94 255,450 295,025 1994/95 312,705 250,983 First principal issue: the method of valuation 8[30]We reproduce in Appendix 1 the valuations of Mr Messenger, who gave evidence for the appellant councils. Mr Messenger is a partner in Wilks, Head and Eve. He has dealt with and settled large numbers of rating appeals on behalf of local authorities in the 1973, 1990, 1995 and 2000 lists, including town halls, theatres, piers, museums, cemeteries, crematoria, schools, public conveniences, swimming pools and both “wet” and “dry” leisure centres. Mr Messenger said that prior to the 1990 rating list the customary method of valuing local authority swimming pools and sports facilities was the contractor’s basis. Little effective consideration, however, was given to the appropriateness of this method of valuation or the values that it produced. This was because the assessments of property occupied by rating authorities were of little significance to those authorities since, precepts apart, they were effectively the recipients of the rates that they paid. Since 1990, with the introduction of the uniform business rate, the amount of rates that a local authority paid had been unrelated to the amount that it received through the grant system, and it had thus assumed an importance that it did not previously have. Local authorities had sought to challenge assessments in the 1990 and 1995 lists, made, as previously, on the contractor’s basis. Many hundreds of appeals were awaiting the outcome of the appeals now before the Tribunal, and the appellant councils were supported by a consortium of 126 local authorities.[31]It was agreed that there was little or no rental evidence on which a rental comparison for local authority leisure centres could be based. Neither of the subject hereditaments had ever made a profit or could be expected to do so. The only possible tenant for such hereditament was the local authority that actually occupied it. In these circumstances the choice of valuation method was between the contractor’s basis, on the one hand and, on the other, the method that he, Mr Messenger, had adopted, that of taking a percentage of the gross receipts relating to the hereditament. There were a number of general problems with the contractor’s basis which caused him to reject it as the appropriate method for such hereditaments as these. Difficulties arose in adjusting building cost, the starting point of a contractor’s valuation, to value, but in the absence of any evidence of value provided by transactions the method necessarily operated in a vacuum. The adjustments needed to reflect age and obsolescence in the building that was not new were fraught with difficulty, and any allowance for over capacity was difficult to quantify. The use of the statutory decapitalisation rate was imposed on the valuer, and to the extent that it might be inappropriate he was unable to allow for this elsewhere in his valuation. Any stage 5 allowances were intuitive or subjective.[32]Mr Messenger’s receipts based approach had, he said, a number of advantages. It was a valuation primarily from the tenant’s viewpoint. It looked at trading potential and reflected what the tenant could afford. It did not require adjustment for excess capacity since the usage was reflected in the trading receipts. It did not require adjustments for age and obsolescence. As applied by him to local authority leisure centres the method involved comparison with other classes of property and thus ensured a consistent approach to valuation. It had the merit of simplicity.[33]In order to derive the appropriate percentage to apply to the receipts from the subject hereditaments Mr Messenger had regard to percentages established for other classes of hereditament. They fell, he said, into three categories. 9[34]The first category consisted of loss-making, but not directly comparable hereditaments, such as trams and railways. He did not use them as true comparables although, like the appeal properties, they offered socio-economic benefits. The second category comprised more direct comparables. Mr Messenger divided these into three sub-categories, the first of which consisted of hotels, public houses and cinemas. All these, he said, were in the profitable sector and the methods of valuing them were derived - at least in part - from rents, largely related to turnover. In the case of hotels, the agreed basis was derived from accounts and rents to give the short form approach of a percentage of gross receipts. Public houses, in the 1990 and 1995 lists, were assessed by reference to gross receipts on the wet and dry trades. The agreed method was reached after consideration of market rents. Cinemas were valued on the profits basis, but in the absence of full accounts the preference was for taking a percentage of gross takings from all sources, exclusive of VAT, with a range from 5% to 10% in relation to the income per seat. Broadly, the percentages of receipts used to value properties in the first sub-category were between 7% and 15%, at the upper end of the range that Mr Messenger considered relevant.[35]The second sub-category consisted of more local comparables, sea-front attractions in Eastbourne occupied by the local authority: the Butterfly Centre (10% of receipts in 1990, 14% in 1995), Fort Fun amusement park (14.6% in 1990), Treasure Island adventure playground (17% in 1990, 15% in 1995), the Redoubt Tower Museum (10% in 1990), and two theatres, the Congress Theatre and the Devonshire Park Theatre (5% in both 1990 and 1995). The conclusion Mr Messenger drew from these comparables was that Sovereign was the only local authority leisure property in the immediate locality which was not valued on its receipts.[36]The third sub-category consisted of theatres, ice-rinks and football clubs throughout the country. These were the ones on which he placed most reliance, albeit football clubs to a slightly smaller extent. For theatres a percentage of gross receipts at the door was used in the 1990 list, and in the 1995 list any revenue subsidy was also included in the gross receipts. Rental evidence had been taken into account in reaching a range of 5% to 7%. All provincial theatres were loss-making and attracted heavy subsidies.. Ice rinks had been valued by reference to a percentage of gross receipts in the 1995 list. The range was from 5% to 8%. There was some rental evidence, but Mr Messenger did not know how valuation officers had arrived at the percentages. For football league clubs, the range was generally 5% to 8%. Like local authority leisure centres, Mr Messenger said, they were predominantly loss making, they had a degree of monopoly and there was a motive beyond just trading income.[37]Hereditaments in the final category on which Mr Messenger placed reliance were, he said, slightly esoteric - conference centres, which at Blackpool and Eastbourne were assessed on a percentage of receipts, and the Dome at Greenwich. In the case of the Dome, following 9 months’ trading, the assessments were reduced to £4.4m RV for 1995 and £7.1m RV for 2000. Assuming a cost of construction of £190m, application of the statutory percentage, 5.5%, would have given a value on the contractor’s basis in excess of £10m ignoring the land value.[38]The percentage that Mr Messenger takes is applied both to the revenue from sales and charges and also to the subsidies provided to balance the authority’s accounts. Although he 10 terms the method a percentage of receipts, it might equally, or better, be called a percentage of outgoings, since the total amount of the receipts reflects nothing other than the amount that is required to pay for the outgoings. Subsidies are given to the extent needed to make good the shortfall in other receipts. A fundamental difficulty, in our view, is that there is no apparent reason why the amount that the hypothetical landlord and tenant would agree on as a rent should be related in some identifiable way, or at all, to the totality of other operating costs. This point was made with some force by Schiemann LJ in Hoare (VO) v National Trust [1998] RA 391. That case concerned the assessments of two National Trust properties, Petworth House and Castle Drogo, and the valuation officers’ valuations, which were arrived at by taking 3% of the gross receipts of each property, were accepted by this Tribunal ([1997] RA 295). Before us Mr Anderson drew attention to the valuation officers’ choice of method. The Court of Appeal, however, overturned the Tribunal’s decision on the basis that there was no evidence to support a conclusion that something more than a nominal rent would be paid. At 411-412 Schiemann LJ said:
“Both the National Trust and the valuation officers are anxious for the court to lay down some guidelines which can easily be applied to National Trust and similar properties throughout the country. I can understand that desire. Moreover, I recognise that the case law does not, in cases such as the present, give much help to the valuer on valuation principles to be applied when arriving at the amount of an overbid. However, I do not feel it appropriate in an obiter dictum to discuss the question in the abstract. I content myself with recording my total inability as at present advised to understand the theoretical justification for arriving at the amount of the overbid by starting at the gross receipts figure rather than a profit figure. The fact that one can adjust the percentage of that gross receipts figure in order to arrive at the hypothetical rent does not detract from the arbitrariness of starting with that gross figure. Moreover the amount of the percentage reduction seems to me equally arbitrary. The resulting valuations give a wholly misleading picture of scientific rigour. One suspects that what the valuer does is to use his evaluation of all the facts of the case and arrive at an intuitive figure and then build a theoretical structure to justify it. I cannot see any rational hypothetical tenant, who (unlike the Trust) is prepared to make an overbid, using that theoretical structure to arrive at the amount of his overbid in his negotiations with the hypothetical landlord. Nor can I see the hypothetical landlord having such calculations in mind.”
At 418 Peter Gibson LJ said:
“Was there anything in the authorities or in the evidence to show that the modified profits basis was the appropriate basis for arriving at the rateable value in accordance with the statutory hypothesis? Certainly there is nothing in the authorities that lends support to the adoption of such a basis in a case such as the present. We were told that it is a basis used for profitable bingo halls, hotels and cinemas, in respect of which there is some evidence of a correlation in the real world between turnover and rents. There is no comparable evidence whatever in the case of loss-making heritage properties such as those in the present case.”
[39]The evidence before us does not establish any theoretical justification for taking a percentage of gross receipts as a method of valuation in itself. Indeed we find ourselves, like Schiemann LJ, unable to understand why a hypothetical tenant would base his bid upon the totality of the receipts from the hereditament or why the hypothetical landlord would for his 11 part have such calculations in mind. We can see good reasons why they would not approach the matter in this way. We take one example. As a building ages, more has to be spent on repairs and maintenance. Outgoings increase, and thus the gross receipts that are required to meet those outgoings have to increase also. The likelihood is that the increased costs are met by a larger subsidy. On Mr Messenger’s approach the rental value of a leisure centre would tend to increase as it aged and as maintenance costs increased. This would self-evidently not be the case. In the real world an increase in maintenance costs, which under the rating hypothesis are the responsibility of the tenant, would be offset by a reduction in the rent payable to the landlord.[40]A percentage of receipts (or outgoings) cannot, therefore, constitute a method of valuation in itself. It could be used as a comparator, but only if an analysis of rental evidence showed this to be justified. In the case of local authority leisure centres, however, there is no rental evidence (or none that the parties have been able to bring to our attention) relating to these. It is indeed what he saw as the absence of useful rental evidence that led Mr Messenger to adopt his percentage method.[41]Mr Messenger places reliance on the bases of assessment of other types of hereditament. There is no reason why he should not do so provided there is evidence that shows such reliance to be justified: Williams (VO) v Scottish & Newcastle Retail Ltd [2001] RA 41, [2000] RA 119. There are no doubt similarities between local authority theatres and ice rinks and local authority leisure centres. All (it appears) are loss-making. All provide recreational facilities. In providing them, the local authority is motivated by what can generally be described as socio-economic objectives. There is, however, no reason to conclude that the strength of an authority’s motivation to provide these various types of facility would be the same in relation to each category. Moreover, in the absence of any apparent reason why the hypothetical rent should be directly related to the operating costs, it would, we think, be necessary to see and to have explained the evidence that is said to establish such a relationship in the case of theatres and ice-rinks in order to be satisfied that a similar approach should be followed in the case of leisure centres. Mr Messenger did not know how the percentages adopted for theatres and ice rinks had been derived from the rental evidence. Mr Allen, as a result of questions from us, produced towards the end of the hearing copies of two internal documents prepared by the valuation office agency relating to the valuation of certain types of leisure property for the 1990 list. One contained brief details of certain theatre rents and the other summarised certain rents of ice skating rinks. We do not obtain any assistance from those documents. Apart from their mere production by Mr Allen, they did not form part of the evidence of any of the witnesses, they were not the subject of cross-examination, and, on their face, they do not appear to provide any support for valuations based on total outgoings. In our view, there is wholly insufficient evidence before us to explain the relationship between the rents of local authority theatres and ice rinks and their outgoings. In these circumstances we can see no justification for basing a valuation of local authority leisure centres on the assessments of those other classes of local authority hereditaments.[42]The grounds of league football clubs appear us to be so palpably dissimilar from local authority leisure centres as to require no further consideration. We can discern no similarity between the motivation of the shareholders in keeping a loss-making club in operation and 12 that of a local authority in providing a leisure centre. Hotels, public houses and cinemas are in the profitable sector, and the commercial motivation of their occupiers is quite different from the local authority that provides facilities for socio-economic reasons. Other seaside attractions at Eastbourne would appear to share with the Sovereign Centre the same underlying objective on the part of the council in their provision, although their physical nature and use are very different. But the percentages adopted (from 10% to 17% for the amusement parks and museums in 1990) are clearly at variance with the 7% taken by Mr Messenger for leisure centres, and we do not regard these settlements as lending any support to his valuation. Finally, conference centres are different in terms of use, physical nature and the purpose of their provision, while the Dome is, self-evidently, a case apart.[43]Accordingly we reject Mr Messenger’s basis of valuation. The strictures that Schiemann LJ levelled at the percentage of gross receipts method in the National Trust case apply, in our view, to its application to local authority leisure centres. Mr Messenger’s valuation is clearly the result of his valuer’s “sense” that the assessments of local authority leisure centres are high in relation to those of other types of hereditament. The fact that so many similar appeals to the present ones are outstanding suggests that his views are shared by other valuers. It is right that we should take note of the opinion of such an experienced valuer. However, on the evidence before us, there is nothing to justify the assessment of local authority leisure centres by reference to the assessments of other hereditaments that have been agreed on the basis of a percentage of gross receipts. The parties are agreed, and there is no doubt that they are right to agree, that, if Mr Messenger’s method is not to be applied, the appeal hereditaments should be valued on the contractor’s basis. That the contractor’s basis has its limitations is undeniable. The criticisms of it that Mr Messenger advances are ones that are not confined to its use in the present context but are of general application. Nevertheless it is a method with a clear intellectual justification. This, and the application of the method, are most fully explained in Monsanto plc v Farris (VO) [1998] RA[107]It is long-established and widely understood by rating valuers: see the Guidance Note of November 1995 produced by the Joint Professional Institutions’ Rating Valuation Forum. As Mr Holdsworth explained, it is used for a wide range of local authority hereditaments for which there is no rental evidence or for which a profits basis valuation cannot be made, including public conveniences, schools, sewage works, museums and art galleries, cemeteries, bus stations, public halls, and fire stations. The fact that a hereditament is revenue-producing does not render its application inappropriate or cause any difficulties. Second principal issue: constraints on local authority finances[44]The appellants say that, at the two AVDs, they could not have borne high rent levels because of the restraints imposed upon them by central government and would have bargained hard in any negotiations. Unless a deal could have been done at an acceptable price they would have had little choice other than to forego the benefits of the properties to their residents. The position in relation to the hypothetical rental negotiations would thus be more favourable to the tenants, who held most of the cards.[45]Mr Allen’s case is that the appellants would not reasonably have expected to pay less than a rent estimated by use of the contractor’s basis. The parties would bargain in the knowledge that the tenants, while subject to the financial discipline imposed by the local 13 government finance regime, had a multitude of functions to perform, some out of statutory duty and some by virtue of their discretionary powers. They would budget in order to reflect the importance of those functions. The landlord would rely upon the undoubted strength of their motivation and their political will to secure sports and leisure facilities for the public. The parties would proceed on the basis that the tenants would arrange their budgets in order to meet the costs of that provision.[46]Ms Henham has worked in the finance departments of local authorities for over 27 years. From 1979 to 1983 she was with Eastbourne Borough Council, firstly as a Technical Officer (Financial Systems) and subsequently as Group Accountant with specific responsibilities for housing and tourism and leisure. In December 1983 she moved to Wealden District Council as Principal Accountant and was promoted to Assistant Treasurer in 1988. Ms Henham explained that her experience had been with the financial aspects of Wealden. She had not been concerned with the formulation of leisure policy or strategy, which was the responsibility of the Head of Leisure Services. For the purposes of the appeal, she had prepared an analysis of Wealden’s finances and also those of Eastbourne, the latter being based on documents which had been supplied to her by that Council. She gave detailed evidence of the financial constraints with which both councils were faced on the two AVDs. In her view, if in 1988 Wealden had been asked to find a further £120,000 of recurring expenditure, it is likely to have refused to pay that figure and would have insisted on re- negotiating. She considered that Wealden would have been even more determined in 1993/94 to re-negotiate the rent being suggested, even though it was somewhat lower than the 1988 figure.[47]Mr Sullivan has worked in local government since 1972, initially as a local government officer, then with the Chartered Institute of Public Finance and Accountancy and then as a consultant. Since November 1993 he has been a partner in Messrs Deloitte and Touche, where he is responsible for local authority and central government business in London and the south. In this appeal his brief was to report on the direction that had been taken in the revenue and capital positions of local authorities from a national perspective. His evidence was not directed to the two appellant local authorities.[48]Mr Dallas is the partner in charge of the Public Services Division of Messrs PricewaterhouseCoopers and lead partner for his firm’s work for the Audit Commission for Local Authorities and the National Health Service in England and Wales. During the period since 1985 he has been the appointed auditor for a number of local authorities and National Health Service bodies. He described the arrangements for revenue support from central government to local authorities between 1985 and 1995 and the capital controls in place in the same period. He provided an assessment of the financial resources available to the appellant councils, primarily at the two AVDs. He then considered whether those authorities would have been able to pay, and could have afforded to pay, the annual rents suggested by Mr Allen’s valuations at the relevant dates. In his opinion, if the two councils had had to reduce their budgets in order to incur additional expenditure at both AVDs, they would have considered a combination of expenditure reductions and the identification of additional resources. The actual combination would have depended upon the specific financial circumstances of the council in question. 14[49]Mr Dallas considered that Mr Allen’s valuations of Goldsmiths at both AVDs would not have represented a significant sum for Wealden. He believed it would have been possible in each case for that authority to reduce its net revenue expenditure budget elsewhere to accommodate an additional item of that size. He thought that Mr Allen’s valuation of Sovereign for the 1990 list was a significant sum for Eastbourne, but that his 1995 valuation was less significant. In both cases he did not consider it would have been impossible for the council to reduce its expenditure elsewhere to enable the suggested rents to be paid.[50]In the light of the evidence of these witnesses we make the following findings on local authority finance and the constraints under which the appellant councils found themselves at the antecedent valuation dates.[51]In the early and mid 1980s local authority expenditure was relatively untrammelled. In 1981/82 and 1982/83 there were no penalties for spending below the Government’s assessment of a local authority’s need to spend, which was known as the Grant Related Expenditure Assessment (GREA). There was a system of grant penalties, but this only applied to spending above Government-set thresholds in excess of GREA. At this time, many district councils’ actual spending was considerably below GREA. These councils, therefore, had the ability to increase spending without incurring immediate grant penalties.[52]From the financial year 1983/84, the Government supplemented the penalty regime for spending above the GREA thresholds with the introduction of volume targets for authorities. These targets were based on an authority’s expenditure in the previous financial year. Failure to spend up to target in any one year could result in a lower target for the next. This had the effect of encouraging many local authorities, especially the low-spending ones, to find ways to increase expenditure to reach their target. This often involved increasing fund balances and creating reserves, or making revenue contributions to capital projects.[53]In 1986/87, after three years of setting volume targets, a practice that had actually encouraged many authorities to increase their spending to avoid grant penalties, the Government dispensed with targets and reverted to a system of grant penalties which related only to expenditure above the GREA thresholds. By 1987/88 an increasing number of councils were spending at or close to their GREA. Indeed, higher spending councils frequently made contributions to their general rate fund from surpluses in their Housing Revenue Account (HRA), which was allowed until 1990/1.[54]By September 1987, the Government’s intention further to increase central control of local authority revenue spending was also becoming clear. Proposals to assess centrally the level of spending required to deliver a standard level of services had been published and most councils were becoming increasingly aware of the need to pay close attention to current costs and to new and additional commitments. In 1988/89 and 1989/90 the Government first relaxed the thresholds at which grant penalties were incurred and then dispensed with penalties altogether for one financial year. However, this was done primarily to ensure that the burden of considerable increases in local authorities’ costs resulting from the introduction of the community charge did not result in losses of grant. 15[55]The Local Government Finance Act 1988, which came into effect on 1 April 1990, developed and took forward the concept of a Government assessment of an authority’s need to spend, with the introduction of a new, formula-based Standard Spending Assessment (SSA). This Act also introduced a new system of local authority taxation, the community charge. One of the main objectives of this Act was to increase accountability. The key to this was that spending above SSA would not attract additional grant and would therefore have to be met by local taxation. Grant was also to be fixed before the start of any financial year and would not vary with actual expenditure. Spending below, at, or above SSA would not affect an authority’s entitlement to grant. As a result, councils’ expenditure decisions would impact directly on local taxation.[56]As entitlement to grant did not provide a direct disincentive to spend above SSA, the 1988 Act also gave the Government powers to set limits on the spending of individual councils above SSA, that is to cap the level of any excess. Initially, authorities with annual spending of less than £15,000,000 were not subject to these capping restrictions. This meant that many districts were not capped and, although the impact would fall on local taxpayers, they could still choose to spend above SSA.[57]The new system of grant has been modified over the last decade, principally to allow for the introduction of council tax, the payment of grant to individual tiers of local government, changes to the SSA formula and local government reorganisation, but the basic formula remains unchanged. Two changes are relevant, however. Firstly, in 1992/93, under the Local Government Finance and Valuation Act 1992, capping was extended to all councils. This forced many smaller district authorities to find additional income or cut costs to move closer to SSA or to stay within their new expenditure caps. The effects of this were far reaching, with many councils only being permitted to increase year on year expenditure by very small percentages. Secondly, in 1993/94, council tax was introduced, replacing the community charge. More importantly in this context, the continuation of the capping regime meant that many districts could only increase net expenditure by 1.5%, thus increasing the pressure to cut spending or generate more income.[58]In addition to the specific changes that have arisen from new legislation relating to local government finance, there are two further factors which have had an effect on local authority budgeting and financial management. Firstly, up to 1988 local authorities were only required to subject certain “blue collar” functions to Compulsory Competitive Tendering (CCT) under provisions contained in the Local Government Planning and Land Act 1980. Some local authorities did contract-out other services, but there was no legal requirement to do so, or indeed to test whether there was a case for doing so. However, the Local Government Act 1988 extended CCT to other blue-collar services and, in 1991/92, to leisure services, under Statutory Instrument. This had been trailed in various documents and government statements prior to 1988 and had the effect of forcing local authorities to examine costs critically in order for the in-house operation to be as competitive as possible, where that was the council’s strategy. Some councils also took decisions to invest in income- generating projects in the period preceding the introduction of CCT to leisure, again to ensure the in-house operation was as competitive as possible. One effect of CCT was to produce greater efficiencies in the provision of existing services. The revenue savings which accrued were then available for councils to spend as they saw fit. 16[59]Secondly, local authorities are now subjected to scrutiny regarding their performance, including the use of financial indicators. The Audit Commission extended its use of Key Performance Indicators (KPIs) to leisure services in 1994/95 and the current Best Value (BV) regime extends the principles of market testing and performance management through inspection and the BV indicators. These changes, however, occurred after 1993.[60]In real terms, after a significant increase from 1985/86, net revenue expenditure by local authorities remained virtually unchanged in real terms between 1987/88 and 1994/95, apart from a step increase in 1991/92. In that year the contribution from central government increased substantially, to fund the £140 per person reduction in community charge and the increase in VAT. In this connection, the expression net revenue expenditure includes grants from central government; rates from the business community and funding from local people (rates until 1990, community charge and the council tax from 1993); it excludes expenditure funded by transfers from reserves. (It should be noted that by far the two biggest elements of local authority expenditure were education and social services, which were the responsibility of county councils, not district councils such as Eastbourne and Wealden).[61]The absence of a significant increase in real net revenue expenditure over this period coincided with the imposition of many additional statutory duties on local authorities. These included those arising from the Consumer Protection Act 1987, the Local Government Finance Act 1988, the Children Act 1989, the National Health Service and Community Care Act 1990, the Environmental Protection Act 1990, the Food Safety Act 1990 and the Planning and Compensation Act 1991.[62]Up to 1988/89, many authorities could expand their capital programmes by generating and fully utilising substantial capital receipts. Since that time, the capital capacity of local authorities has been considerably eroded through a general reduction in borrowing powers, declining levels of capital receipts, changes to local authorities’ powers to use those receipts and a reduced ability to finance capital from revenue and revenue reserves. As a consequence, local authorities have shown interest in bidding for new and additional forms of funding from other sources such as special capital grants, the National Lottery, challenge funds (such as the Single Regeneration Budget) and the Private Finance Initiative. In part, this explains why some local authorities have still been able to create new assets such as leisure centres although the capital capacity of local authorities generally has fallen.[63]Although, between 1980 and 1995, central government increased its control over the total resources available to local authorities, and increased their statutory responsibilities, there was no effort to direct local authorities as to where they should spend those resources. Local authorities were free to choose how to spend their available resources on the various discretionary services and, in relation to mandatory services, they could decide the level or standard of service to provide above a basic minimum statutory level.[64]As at 1 April 1988, a continuation of Wealden’s expenditure policy adopted in 1987/88, together with an allowance for inflation in 1988/89 would have resulted in total net expenditure of £5.202m. To reduce this to £4.918m, the level at which excess grant penalties would be avoided, therefore required the council to identify approximately £300,000 of 17 savings. In fact, Wealden’s total net expenditure in 1988/89 was £4.638m. By comparison, Mr Allen’s valuations for the 1990 list are £112,750 and (with effect from 1 May 1994) £121,500.[65]When preparing the 1993/94 budget, the council was required to identify savings or alternative sources of finance totalling at least £500,000 to avoid being capped. It breached its normal prudent practice by using £257,000 out of its working balances to finance revenue expenditure. There were bids for over £400,000 of additional funds for improvements in specific services, but only £56,000 was approved. The council’s total net expenditure in 1993/94 totalled £11.318m. By comparison, Mr Allen’s valuation at this date is £94,500.[66]The initial budget estimate put forward by Eastbourne for 1988/89 totalled £8.36m. At its meeting on 24 February 1988 the policy and resources committee assumed that the final budget would not exceed £6.97m in order to avoid the loss of grant entitlement of 78 pence for every pound spent - a reduction of 17%. In the event, savings totalling £117,000 were identified in the budgets of the tourism and leisure committee - only 4% of the net revenue expenditure. The council’s net expenditure in 1987/88 totalled £6.79m. Mr Allen’s valuation at this date is £357,000.[67]In November 1992 Eastbourne’s policy and resources committee was presented with a paper reviewing the council’s revenue budget for 1993/96. This identified a need to make some £3.4m of savings over the period. Of the total savings required, approximately £1.4m was budgeted to come from corporate sources such as renegotiated CCT contracts, leaving £2m to be funded from services. The council’s analysis showed that to achieve the £2m target reduction in expenditure would require reductions falling between the modified and threshold levels, still therefore leaving in place a level of service above the minimum. Officers proposed reductions of service for Sovereign to the modified level (to which the service could fall, albeit with some disbenefits). The members felt, however, that this appeared to represent too draconian a service reduction. They recommended, instead, the efficiency level (efficiency savings at marginal service cost). The council’s total net expenditure in 1993/94 was £11.19m. Mr Allen’s valuation at this date is £276,000.[68]What, if any, effect the financial constraints that these two authorities were under would have had on the rents that they would have agreed for the centres on the rating hypothesis is a matter we address when considering the application of the contractor’s basis. The contractor’s basis applied[69]Mr Dewar is a partner in Wilks, Head and Eve. Both he and Mr Allen followed the conventional 5-stage form of the contractor’s valuation. They both amended their valuations during the course of the hearing. We reproduce them, as they appeared in their final form, in Appendix 2 and Appendix 3 respectively. At stage 1 an estimate of the cost of equivalent premises is made, taking a simple substitute building that will perform the same function as the actual building. At stage 2 allowances are made, principally for age and obsolescence, to convert the stage 1 cost to effective capital value. At stage 3 the value of the land is added. At stage 4 the decapitalisation rate prescribed by statutory instrument is applied to reach an 18 annual value. At stage 5 this annual value is adjusted as necessary to reflect factors that have not already been allowed for, but which would be in the minds of the hypothetical landlord and hypothetical tenant and thus to reach a rateable value based on the statutory hypothesis.[70]In what are necessarily detailed valuations, most of the details are agreed between the valuers. There are, however, differences between the valuers at stage 1 in relation to Sovereign. Mr Dewar’s simple substitute building is smaller because he allows less floorspace for a number of the elements. At stage 2 Mr Dewar makes substantial allowances for under-utilisation (or over-capacity). Mr Allen rejects the appropriateness of such allowances. The land values at stage 3 are agreed, and the decapitalisation rates are prescribed at stage 4. Neither valuer sees fit to make any allowance at stage 5, but it is, as we shall say, necessarily at this stage that any effect created by constraints on the ratepayer’s expenditure falls to be reflected in the valuation.[71]Rateable value is established through the assumption of a hypothetical tenancy; and the contractor’s basis is founded on a further hypothetical assumption - that the tenant has an alternative to leasing the hereditament because he can build similar premises; so that in the hypothetical transaction he would not pay more in rent, and might well pay somewhat less, than the interest charged or foregone on the capital sum employed in providing the “tenant’s alternative”: see Dawkins (VO) v Leamington Spa Corporation (1961) 8 RRC 241; Monsanto Plc v Farris (VO) [1998] RA 107 at 140. In Hoare (VO) v National Trust [1998] RA 391 at 415, Peter Gibson LJ emphasised the necessity when valuing a hereditament “to adhere to reality subject only to giving full effect to the statutory hypothesis.” Before us, Mr Holgate placed reliance on this principle of reality, and Mr Anderson accepted it also. Both are agreed that in applying the contractor’s basis to these local authority leisure centres it is right to have regard to the fact that in the real world the particular facility is in existence and is being operated by the local authority; that no one other than the particular local authority would be interested in occupying the premises; and that each local authority has spent funds on building the facility. We accept that this is the correct approach, and that it is appropriate, when considering the negotiation between the hypothetical landlord and the authority, to have regard both to the motivation evinced by the authority in constructing and continuing to operate the facility and to the state of its finances at the antecedent valuation dates. Consideration falls to be given to these matters in considering whether any stage 5 allowance is appropriate.[72]The fact that each council has in fact constructed the facility for itself, and, in the case of Goldsmiths and the extension to Sovereign, has done so relatively recently, appears to make the contractor’s basis a particularly suitable method of valuation. If the council has seen fit to make a capital investment in the provision of the leisure centre, why should it not pay rates on it on the basis of an annualisation of that capital sum? While there is some attractiveness in the point, it will nevertheless be necessary to take into account the age of the building and any obsolescence and excessiveness that it suffers from; and to have regard also to the fact that the financial considerations relevant to a local authority’s decision to make a capital investment will be different from those affecting the rent that the council would be prepared to pay. We return to these matters later. Stage 1 issues on Sovereign 19[73]Although a great deal of agreement was reached as to the size of both simple substitute buildings, at the end of the hearing there remained a number of outstanding disagreements on matters of detail in the case of Sovereign. The overall effect is that the areas finally suggested for the simple substitute by Mr Worthy and Mr Allen at both AVDs were 4,925 square metres and 5,712.5 square metres respectively. We will deal with each point of difference in turn.

(i) Diving pool

[74]Mr Warren has been involved with leisure services since 1982, working either directly with or on behalf of local authorities. He is currently group operations director of CCL Leisure Ltd, which now manages 37 leisure facilities for local authorities. He considered that the removal of the diving facility would have had little or no effect on the overall use of the building. It would in effect support only one user at a time. To operate a facility of this nature safely required the pool to be cleared after each dive. This was clearly not cost effective, considering that it would require a dedicated lifeguard and would contain nearly the same volume of water as the main pool. The water would require heating, treating and replenishing on a regular basis to maintain its quality. The regulations applying to diving facilities had been tightened and, by 1993, the use of most of them had been affected. For example, many facilities, including Sovereign, had had to remove their 5 metre diving platforms. The removal of this facility would therefore make complete sense. In Mr Warren’s opinion, if the diving pool had not existed on the AVDs the local authority would not have chosen to provide one in the absence of massive lobbying, or a specific grant to fund it. Such a pool would have appealed to a very limited number of people within the community. It would not have been provided by a local authority in a new complex which contained the other pools which existed at Sovereign. So far as he was aware, no diving pool had been provided in any of the leisure centres constructed at the relevant time. Crawley, which was not very far away, contained superior diving facilities to those offered at Sovereign. Diving was also available at Haywards Heath, which was even closer than Crawley and at Worthing, which was also in East Sussex.[75]In the light of Mr Warren’s evidence, Mr Dewar considered that very substantial obsolescence allowances would be appropriate even if the diving pool were to be costed. However, given its sporadic use and the large adjustments that would be necessary, he had decided to exclude the diving pool completely from the simple substitute building.[76]Mr Sutcliffe has been involved in local authority leisure management for almost 20 years. He joined Strategic Leisure Ltd in 1994, since when he has advised over 100 local authorities on leisure services issues. He is currently managing director of the company. He considered that Mr Warren’s suggestion that the removal of the diving pool made sense was inconsistent with the borough council’s marketing literature, which extolled the virtues of the diving pool and confirmed its importance within the range of facilities provided. Furthermore, the Amateur Swimming Association advised that each local authority area should make some provision for diving and each county should have access to a specialist diving facility. 20[77]He accepted that, to the extent that some people used the diving pool as a source of fun and enjoyment, some members of the public may have ceased using it once the leisure pool was in use. However, the diving pool also catered for more serious participants and competitive diving, neither of which could be accommodated in the leisure pool.[78]The area of the diving pool is 252 m2. In our view, it would not be appropriate to exclude this area when determining the extent of the simple substitute building. The pool provides a benefit to the small proportion of the public which is interested in diving, competitively or otherwise and there is no evidence that the borough council has ever considered it to be surplus to requirements. On the other hand, we find on the balance of probability that the use of the diving pool declined materially following the construction in the late 1980s of the new leisure pool, which attracted some of those who had previously used the diving pool. We consider this reduction in use, combined with the high operating cost per user and the availability of other diving facilities within reasonable proximity, would have had an adverse effect on the capital and rental value of the diving pool on both AVDs. It would be possible to reflect this factor either at stage 2 or stage 5 of the calculation. We propose to take it into account at stage 2, by costing only one half of the pool’s area, namely 126m2. (ii) Teaching pool[79]The second disagreement relates to the size of the teaching or training pool. This is significant only because it is common ground that any increase in the size of the pool must be reflected in a proportionate increase in the size of the wet changing area. (Either of the suggested pools could be accommodated within the same overall space allocation).[80]The size of the existing pool is 20 metres by 8.5 metres. It is agreed that some reduction in this size is appropriate; the issue is the degree of reduction. Mr Warren considered that a pool 13 metres long by 7 metres wide would be preferable to Mr Sutcliffe’s suggestion of 13 metres by 10 metres. It was only necessary for people to swim 3 or 4 strokes for their coach to be able to correct them. It would be a waste of swimming time for them to do another 3 metres. He accepted that the precise size was a matter of judgment. However, the majority of pools managed by his company were of the size he was suggesting, which was suitable and adequate for the provision of teaching in a pool with a regional function.[81]Mr Sutcliffe pointed out that the size suggested by Mr Warren was the minimum referred to in the relevant Sport England Guidance document. He considered it was inappropriate to adopt such a minimum size for Sovereign, since this was a large facility with a regional significance catering for a large catchment area and the existing pool was used for other purposes in addition to swimming lessons.[82]Although we think that his suggested size would probably be adequate for teaching purposes, Mr Warren himself accepted that at the material time the existing pool was also used for other activities such as aqua splash sessions, ladies’ nights and club training. In the 21 light of all the evidence we consider that a pool width of 10 metres would be more appropriate than 7 metres for such uses. (iii) Competition and teaching pool hall[83]There was a small difference between the parties in respect of the competition and teaching pool hall, where Mr Worthy’s area is 746m2 and Mr Allen’s is 785m2. (Mr Worthy is a partner in C M Parker Browne). The difference is due to the fact that, in Mr Worthy’s amended drawings, a small five sided bite has been taken out of the rectangular hall to accommodate the showers in the wet changing area. There was no evidence to explain why this should be a problem. In view of this, we accept Mr Worthy’s area. (iv) Wet changing area[84]Mr Allen considered that the size of the wet changing area should be 415.5 m2, compared with Mr Worthy’s figure of 389 m2. The difference essentially relates to the disputed areas of the diving pool and the teaching/training pool. We have preferred Mr Allen’s approach to the latter and adopted a mid-way position on the former. The difference between the parties is small and we accept Mr Allen’s figure for the wet changing area.

(v) Dry changing area

[85]Mr Worthy argues for a dry changing area of 125m2 and Mr Sutcliffe for 202m2. Mr Sutcliffe’s area was assessed by reference to guidelines published in 1994 and Mr Worthy’s by reference to 1996 guidelines. Mr Anderson submitted that there was no need to debate the merits of each, because Mr Sutcliffe confirmed in cross-examination that the dry changing areas suggested by himself and Mr Worthy would both operate more efficiently than the existing provision. We agree and therefore accept the lower area of 125m2. (vi) Viewing areas[86]The parties had viewing areas of the same size for the competition pool. The difference over viewing areas lies in the fact that Mr Sutcliffe included a bespoke viewing area for the sports hall, whereas Mr Worthy sought to replicate the arrangement in the actual centre, whereby the bar area also serves as a viewing area into the sports hall. Mr Worthy’s total area is 240m2 compared with 281m2 for Mr Allen. In cross-examination, Mr Sutcliffe said that it was not part of his case that, in terms of viewing areas, the appellants’ simple substitute was deficient in terms of the actual; his contention was that the actual was deficient. In the light of that answer, we are satisfied that Mr Worthy’s proposed viewing area represents an adequate substitute for the purposes of a valuation on the contractor’s basis. (vii) Reception area 22[87]Mr Worthy’s area for the substitute reception was 60m2 and Mr Sutcliffe’s 150 m2. As with the viewing area, Mr Sutcliffe accepted that Eastbourne’s simple substitute in this regard was not deficient as against the actual. In view of this, we accept the lower area. (viii) Shop[88]Mr Allen’s simple substitute incorporated a shop of 24m2. Mr Warren did not consider that a separate retail facility would be required. He said that he would not have wanted to operate a retail outlet at Sovereign and he did not think that an independent retail unit would be profitable. He would have much preferred to have had a retail provision at the back of the reception, with a good display cabinet to advertise a limited number of available goods. These goods could then be delivered to customers from behind the reception area without the need for an additional member of staff to look after a facility that would probably be closed between peak hours.[89]Mr Sutcliffe accepted that, in the case of Goldsmiths, a retail outlet behind the reception would be adequate, given the size of the facility and the level of throughput. Sovereign, on the other hand, had an annual throughput of more than 500,000 people. A combined reception/sales area there would cause chaos at busy times. Moreover, he considered that any operator would wish to maximise customers’ secondary spending, and this would be better achieved with a dedicated retail outlet than by serving behind the reception.[90]We accept Mr Sutcliffe’s evidence on this issue. Sovereign at present includes a small shop. It is a facility which the operating company considered to be worthy of mention in its publicity material and no evidence has been produced to show that occupation of the shop has been of no value. There is in our view no justification for excluding it from the calculation. (ix) Internal walls[91]There was a dispute between the parties as to the thickness of certain internal walls, totalling 82m2. Mr Sutcliffe’s approach was based on the fact that the gross internal floor area, as defined in the RICS Code of Measuring Practice, represents the total internal floor area of the building to the inside face of the external walls, including the space taken up by all internal walls. On the other hand, the areas which had been adopted for each specific room or area represented the net area required and did not include the space taken up by intermediate or surrounding walls or structures.[92]For Eastbourne Mr Worthy explained that he had prepared a block plan to produce the simple substitute building. Having created the blocks he then worked out what the outside footprint of the building would be. He agreed that the area to the inside face of the outside walls represented the gross internal area. For the purpose of this exercise, he had deemed that the internal walls between the spaces of block planning were contained within the block plan areas. When laying out a wet changing room he would not take into account the thickness of the cubicles between the spaces. Similarly, he had not taken into account the thickness between adjoining uses. There was only one space that required a net internal area 23 of a defined size, namely the sports hall. In effect, therefore, each of Mr Worthy’s measurements except the sports hall included one-half of the width of its surrounding walls. Mr Worthy considered that this approach was the one generally adopted in the profession.[93]Mr Anderson submitted that Mr Sutcliffe’s approach should only be accepted if, on the evidence, we concluded that any part of Mr Worthy’s simple substitute would be inadequate to the extent of half the width of its walls. We accept that submission. The total area suggested for this element by Mr Sutcliffe represents less than 1.5% of the total area of the simple substitute building. We are not satisfied on the evidence that it would be necessary to make an allowance of this minor order to produce a satisfactory building and we accept Mr Worthy’s approach.

(x) Circulation space

[94]The circulation space in Mr Worthy’s substitute building, as eventually amended, totalled 138 square metres, compared with Mr Sutcliffe’s 295 m2.[95]Mr Sutcliffe made a number of criticisms of Mr Worthy’s approach. He considered that the proposed reception area was too small to cater for the volume of people who would use it; ladies who had changed into workout clothing would have to pass through the cafeteria to reach the fitness gymnasium; goods being delivered to the bar store would need to go through the cafeteria or reception area; it would be necessary to pass through the wet changing area in order to reach the first aid room and the staff changing area and the staircase access to the changing areas, whilst not in breach of regulations, was only a little wider than a domestic staircase and could cause operational difficulties.[96]In the light of our inspection of the existing centre, we consider that Mr Sutcliffe’s criticisms are justified and that, in terms of circulation, Mr Worthy’s proposed building would not operate as effectively as the existing centre. We bear in mind that the precise area required for circulation depends upon the design of the particular building and that Mr Sutcliffe’s figure of 295m2 is based on a completely different design approach from that of the appellants. Having decided that Mr Worthy’s allowance is inadequate, however, and in the absence of any other evidence on the point, we adopt Mr Sutcliffe’s figure. (xi) Build quality allowances[97]The parties have agreed the estimated replacement cost of Sovereign for the 1990 list at £6,109,853 and for the 1995 list at £5,392,170. The agreed area was 6,877m2, so that the mean rates were approximately £888.4 and £784.1 per m2 respectively. Both Mr Worthy and Mr Allen adopted these rates as the starting point for costing the simple substitute building. Mr Worthy, however, ignored the fraction of a £ in each case and we propose to do the same.[98]Whilst Mr Allen adopted these figures directly when costing his simple substitute building, Mr Worthy reduced them by £52 per m2 (1990) and £46 per m2 (1995) to reflect an alternative external envelope. In his report he expressed the view that, if a commercial 24 operator were to develop such a centre, the design approach would be different. The location would be more “out of town” to reflect the site values available and the need to put up more flexible, cheaper buildings, designed for a short term use rather than as a long term investment. The external envelope would therefore comprise an eye catching entrance area and utilitarian envelope. This would mean the building was more suited to future alternative use and would minimise the capital cost. The use of windows in the building would be limited and this would also have certain advantages.[99]He then made a further deduction of £24 per m2 for the 1990 list (£22 per m2 for 1995) to reflect alternative internal finishes. He said that the finishes within the existing building were dated, but would originally have been selected for their durability, maintenance and function rather than for cost and trends. Commercial users would be more likely to have opportunities to find capital sums to alter the centre, follow trends and write off unsuccessful ventures in the future.[100]Mr Allen did not think it was appropriate to consider the simple substitute from the viewpoint of a commercial operator, since the only likely hypothetical tenant was the local authority. Mr Sutcliffe expressed the view that Mr Worthy’s suggested building was a hybrid public/private facility, that would not have been provided for either centre and would not provide comparable opportunities to the existing facilities.[101]In his evidence to the Tribunal, Mr Worthy explained that the method of construction he had suggested for the simple substitute was similar to that of Goldsmiths. He considered that there could be no objection in principle to such a building being erected in Eastbourne, albeit to a larger scale than in Crowborough. Moreover, he considered that such a building would provide a better balance between the life cycle costings of the walls and roof than the existing building. The existing building, which had walls with a life expectancy of 60 years, would be costly to alter, require regular maintenance and be expensive to replace at the end of its economic life. A metal clad building, on the other hand, which was in keeping with the style of leisure centres that were being built at the relevant dates, would have cheaper capital costs, be more flexible during refurbishment and be cheaper to maintain and keep clean. Set against that would be the need to re-cover or redecorate every 15 to 20 years.[102]So far as the roof was concerned, the existing flat roof would require regular maintenance every five years, whereas a metal clad pitched roof would have a similar life span and durability to his proposed metal - clad walls - 15 to 20 years. In response to Mr Sutcliffe’s observation that the integrity of the building structure and finishes, being located in a coastal resort, would be under constant environmental attack, Mr Worthy said that his selection of materials would provide a better balance than the existing structure. The existing flat roof would be subject to very severe weathering difficulties. His proposed metal profile decking, on the other hand, would have no problems at all with such conditions. Whilst an owner-occupier would see neutrality as between the actual materials and the materials used in his modern substitute, the tenant would see revenue benefits from the latter.[103]In re-examination, Mr Worthy said that he had used two yardsticks when deciding on the appropriate external finishes - namely Goldsmiths and the Spectrum Centre, Guildford. 25 The latter had been constructed within the last five to ten years and was a large centre, serving a large catchment area. He said that the method of construction adopted for the first phase of Sovereign was typical of swimming pools of that era, when clad construction was not considered appropriate for such buildings. The CBD feasibility report, prepared for the Eastbourne Borough Council, had indicated that the extension incorporated no fundamental change from the design concept of the original building. In cross-examination, he accepted that a sea-front environment would tend to cause accelerated decay in a metal structure. The metal could, however, be coated to protect against such decay and he considered that such coating had been allowed for in his proposed building costs.[104]As we have said, Mr Worthy in his report sought to justify his approach by reference to the attitude of a commercial developer. We agree with Mr Allen that this is an inappropriate starting point for an assessment of the rent to be paid by a local authority tenant. On the totality of his evidence, however, we are satisfied that what Mr Worthy had in mind was a centre built of the same sort of materials as Goldsmiths and the Spectrum at Guildford, both of which are local authority centres. We accept his evidence on the relationship between the life cycle and revenue costs of the actual building and of his substitute. In view of that, we find that the hypothetical tenant would not wish to calculate the rent by reference to the external envelope of the existing structure.[105]Mr Worthy made a further reduction to reflect the following changes to the internal finishes: the omission of the suspended ceiling and high level tiling from the pool area and the omission of terrazzo flooring and ceramic wall tiles from changing rooms. Mr Sutcliffe agreed before us that these items - apart from the ceramic wall tiles to changing rooms - should not be included in the modern substitute building and we accept this consensus. Following the completion of the evidence, but before closing submissions, agreement was reached that the equivalent cost of all four items was equivalent to £24 per m2 at 1 April 1988 and £22 per m2 at 1 April 1993. Mr Worthy’s unchallenged evidence suggests that the three items which it is agreed should be omitted account for approximately 75 per cent of the total cost. We therefore propose to reduce the building costs by £18 per m2 and £16.50 per m2 for the 1990 and 1995 lists respectively. Stage 2 issue: utilisation[106]A major disagreement between Mr Dewar and Mr Allen arises at stage 2. Mr Dewar made substantial deductions to reflect over - capacity of both centres, which he considered had not already been incorporated in the adoption of a modern substitute building. These deductions were 50% for Sovereign (both rating lists) and Goldsmiths (1990 list) and 45% for Goldsmiths (1995 list). Mr Allen did not consider that any such allowance was justified.[107]In arriving at his opinion, Mr Dewar had regard to an exercise carried out by Mr Warren in respect of swimming facilities operated by his company, CCL Limited. Mr Warren calculated the maximum theoretical capacity of each facility by assuming, firstly, in accordance with health and safety legislation, that the number of swimmers that could be allowed safely into a given pool space on both AVDs was one per 2 m2 of water and, secondly, that local authority pools would be open for 50 weeks of the year, allowing for closure for maintenance on bank holidays and over the Christmas period. He then made adjustments of 35% to arrive at a maximum practical capacity, against which to compare 26 actual usage levels. The 35% included 5% to reflect his experience that, if a pool were operated at maximum bathing load, it would need to be closed from time to time to ensure that the water remained crystal clear. The further allowance of 30% reflected various demand and other restrictions which limited the operators’ ability to maximise utilisation. Examples of such factors were use by clubs and specialist groups, and restrictions on use imposed by the Children Act 1989 and the Education Reform Act 1988.[108]Mr Warren also reduced the actual number of opening hours per week by 3.3% to reflect periods of pool closure for staff training, cleaning and other matters highlighted in a contemporary report by Sport England on best value issues in sports halls and swimming pools. The resultant utilisation figures for the nine facilities in 1999 and 2000 ranged from 10% to 47% of the maximum practical capacity, with an average of approximately 30%.[109]Mr Dewar’s allowance for utilisation of the appeal properties was calculated by reference to their total capacity. The average attendance at Goldsmiths was 150,000 in 1998 and 220,000 in 1993. Median attendance at the pool in July 1988 was 321 persons per day. Based on a 50 week year this produced a total of 112,350 attendances at the pool.[110]Mr Dewar produced a “robust” estimate of the maximum utilisation of the various uses within Goldsmiths by reference to the modern simple substitute. The capacity of the pool assumed the health and safety guidelines of one swimmer per 2 m2. Similar capacities were calculated for the other areas based on 2 people per squash court, 10 per fitness court and 16 for the main sports hall. These figures were multiplied by the number of cycles of occupation per day. The daily total was then multiplied by the number of days per week and a total of 50 weeks per year, allowing a two week period of shut-down.[111]The resultant figure of maximum capacity for the pool was 567,000. The 112,350 actual annual attendances, based on figures in July 1988, indicated a utilisation of the pool of approximately 20% (80% over-capacity). If the theoretical maximum capacity were adjusted by Mr Warren’s 30% for demand patterns, 5% for technical factors and 3.3% for the ‘Sport England’ adjustments (38.3%), it would fall to 349,839 and the over-capacity to 66%.[112]The available information concerning the utilisation of the Goldsmiths dry side facilities was limited and contradictory. In those circumstances, Mr Dewar relied on a calculation of capacity/utilisation, using the same methodology as he had adopted for the pool. On this basis, the total theoretical capacity of the dry side was approximately 168,000. His estimate of attendances at the pool in 1988 was some 112,000 out of a total attendance of 170,000. Dry side attendance was therefore approximately 58,000, which reflected utilisation of the order of 34% (58,000/168,000).[113]In summary, therefore, Mr Dewar calculated a utilisation in 1988 of approximately 34% (dry side) and a wet side utilisation of approximately 20%. The overall utilisation in 1988 was 30%, rising to 39% in 1993. 27[114]Mr Dewar carried out a similar exercise in relation to Sovereign, although he had no detailed utilisation information from council minutes or other sources. He prepared a calculation of maximum theoretical capacity, similar to that undertaken for Goldsmiths. He assessed the maximum physical capacity per cycle in respect of the main elements of occupation and multiplied this by the number of cycles, the number of days and the number of weeks to arrive at a total theoretical capacity of some 1.7m persons for the simple modern substitute building.[115]Actual attendances in 1988 and 1990 averaged some 542,000. In 1991/92 and 1992/93 they averaged 513,963. This produced an average utilisation of the order of 31% for the whole centre in 1988/93, compared with an average at Goldsmiths of 30% rising to 39%. In both cases, further adjustments could be made to take account of Mr Warren’s calculations of “down time” for the pool. Very broadly, such adjustments would add approximately one- third to the utilisation figures he had calculated.[116]In addition to this exercise, Mr Dewar had regard to the results of a study of the sports facilities at the English Riviera Centre carried out by the Torbay Borough Council. He considered that Sovereign was similar to the Torbay centre, since both were located in seaside holiday towns.[117]The maximum utilisation in Torbay occurred in August, presumably on rainy days. It was on those few days in August when the capacity of the centre was reached and session swimming was introduced to move customers through the pool on regular cycles. Using a similar approach to that which he had adopted for the appeal properties, Mr Dewar calculated that the utilisation of the Torbay Pool was approximately 32%. This compared with wet utilisation at Goldsmiths of 20% and at Sovereign (overall) of 31%. All these figures excluded Mr Warren’s additional adjustments.[118]With overall average utilisation figures at Goldsmiths in the range of 30% to 39% and Sovereign of approximately 31%, Mr Dewar had looked for comparative supporting evidence to test whether or not these figures provided a fair representation of the position. He noted that Mr Warren had calculated utilisation figures (adjusted for “down time”) at between 10% and 47% for the nine centres with which he was familiar.[119]Mr Dewar considered that no local authority tenant would pay a rent based upon the full cost of construction on the basis of rarely, if ever, reaching full capacity. Doing the best he could with the incomplete evidence available, he had formed the view that the utilisation allowance for Sovereign should be 50% for both 1988 and 1993. Utilisation at Goldsmiths was broadly similar to Sovereign in 1988, but rather better in 1993. Accordingly, he considered that the 1988 utilisation allowance for Goldsmiths should be 50%, with a reduction to 45% in 1993.[120]In reply, Mr Allen said that Mr Dewar had incorporated into his valuation allowances for “superfluity” at both stage 1 (in terms of the simple substitute) and stage 2 (in terms of his further allowances for over-capacity). Mr Allen accepted that it was appropriate to consider 28 a substitute building, especially in the case of Sovereign which was built in the 1970s and extended in the late 1980s. He considered, however, that in the case of both centres Mr Dewar’s claim that very substantial further allowances should be made for over-capacity at stage 2 was totally unfounded. He said this for two main reasons. Firstly, stage 2 was intended to allow adjustment (in the words of the Guidance Notes on the Contractor’s Basis, prepared by the Joint Professional Institutions’ Rating Forum): “to reflect certain deficiencies in comparing the actual property with the ‘new’ property costed at stage 1”.[121]On the basis that the landlord and the tenant were agreed on the nature of the simple substitute building (stage 1), he saw no reason why the landlord would concede, “in comparing the actual property with the ‘new’ property” an additional allowance for any over-capacity issue, as there was no evidence that the actual hereditament would be used to any lesser extent than the substitute hereditament.[122]Secondly, even if it were felt appropriate to make further allowances for this matter beyond stage 1, Mr Dewar would have to demonstrate that the current usage of the centres was a disadvantage in terms of value. Mr Allen believed that he had not done this. In his view, six factors pointed firmly to no further allowance being made. Firstly, the usage of the centres met or exceeded the usage expected of them prior to construction/extension (which was close to the AVD). Secondly, it was not reasonable to expect full usage of these facilities (let alone all facilities) all of the time. No evidence had been put forward that centres had been designed for use in this way. Thirdly, the appeal properties were performing either at, or well above, average usage as at the AVD, as evidenced by Mr Warren’s evidence on the utilisation of his own company’s facilities. Fourthly, no similar usage allowance had been agreed or determined in the case of the large number of leisure centres whose 1990 assessments had been settled. There was no data to show usage in each of these centres, but Mr Allen would have expected them to show a range of usage broadly in line with the subject centres. Fifthly, he was not aware of any ratepayer having raised the issue of over-capacity prior to the VT that led to these appeals, even though Mr Dewar and other surveyors had taken the assessments of various leisure centres to tribunal, in some cases with the assistance of counsel. The conclusion that he drew from this was that local authorities had not, until now, instructed their valuers that the level of usage at the centres was considered to be a matter that may cause a reduction in value. Finally, a capital valuation of Sovereign, carried out by Wilks, Head & Eve in 1994, was prepared on a depreciated replacement cost (DRC) basis without any usage allowance. There was no evidence of any widespread usage allowances in capital valuations of leisure centres undertaken on the DRC basis.[123]Mr Allen also disagreed with Mr Warren’s approach. He said that Mr Warren had taken the Health and Safety Executive - derived maximum pool capacity (of 162 in the case of the 25 metre pools) and made his adjustments of 38.3%, then assumed this usage for every hour of operation, seven days a week and 50 weeks a year. This would be the equivalent of assuming the pool always contained about 100 people throughout the whole of its opening hours for all the year. Even compared to the maximum theoretical continuous capacity of 162 people, this level of usage was clearly unrealistic. Each person would only ever have 29 3.25 square metres of water. Such a level of usage was plainly incompatible with the nature of the demand profile for leisure centres of this type (which was fundamentally of peaks and troughs), and also the requirements of local authorities to run a balanced programme of events.[124]We agree with Mr Allen’s comments on this aspect of the valuations and are in no doubt that Mr Dewar’s suggested allowances for under-utilisation are entirely misconceived. As Mr Holgate put it, he has confused “full utilisation” of the leisure centres and their facilities with “optimum utilisation” thereof. There is no evidence that either appellant has ever aspired to “full” usage, in the sense of reaching full capacity throughout the period of operation of the centre. Rather, both appellants have sought a balance between seeking income and furthering accessibility and their various social objectives, which Mr Messenger characterised as “an optimum approach”.[125]Judged against that benchmark, both leisure centres have clearly been a success in terms of demand and usage and have been so viewed by the appellants. Accordingly, no allowance is justified under the head of under-utilisation or over-capacity, beyond that which results from the deployment of an appropriately sized and costed substitute building in the case of Sovereign. Stage 3[126]Land values are agreed. At the end of stage 3 the valuer should have reached a figure that represents the capital value of the subject hereditament. Mr Anderson in his submissions suggested that at that point the valuer should pause and ask himself by reference to all the evidence available whether he has arrived at his goal. We accept that it is appropriate to do this. Mr Dewar derives support from indications of sale prices of a number of leisure facilities that had been provided to Mr Messenger. In particular he relied on Kettering Leisure Village, described as a multi-purpose leisure complex built by a private investor at a cost of £11m in 1992 and sold by the receiver for £750,000 in 1995; and Waterwold, Stoke on Trent, an indoor waterpark developed by Rank Entertainment Ltd in 1990 at a cost of £5m and sold in 1999 for £0.9m. These sale transactions represented 7% and 18% of cost respectively and were to be compared with the relativity between his stage 1 cost and his stage 3 value for the appeal hereditaments. The stage 3 values were between 25% and 35% of the stage 1 costs.[127]We derive no assistance from these sale transactions. There is nothing to suggest that any local authority would have been interested in buying these particular facilities for the same socio-economic purposes that induced the appellants to operate their leisure centres. Sold in the private sector their sale prices could be expected to reflect their potential profitability. We have no evidence, therefore, that suggests that the values we have reached at the end of stage 3 do not properly represent the capital values of the appeal hereditaments at the antecedent valuation dates. Stage 4 30[128]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.[129]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. Stage 5[130]The value that is reached at the end of stage 4 is a ceiling value. It represents an annualisation of the capital value of the hereditament that the tenant is assumed to be capable of providing for himself as an alternative. In negotiation with the landlord he will not pay more than this amount – any suggestion that he would do so would, we think, probably imply that the value of the land at stage 3 was too low – but the hypothetical negotiations might result in a lower rent. These negotiations fall to be considered at stage 5. At this stage the valuer must make any further adjustments that appear to him to be justified, so as to come out at the rateable value. This stage is potentially important in a contractor’s valuation. The contractor’s basis, though proceeding in formalised stages, is not a magic formula for reaching a rateable value independently of any exercise of valuation judgment. It is at stage 5 that the valuer must look at all relevant factors that have not so far been reflected in the valuation and must make such allowances as may be appropriate, so that he is satisfied that the resulting figure is what would have been agreed on the statutory hypothesis. We can envisage that there could be evidence, relevant at stage 5, that would reasonably cause a valuer to make a substantial reduction. For example, he might be satisfied that the authority could not afford, or would not be prepared to pay the rent arrived at by stage 4. We return to these considerations shortly. Alternatively, there might be available rental evidence that was insufficient for use on a comparative basis or to justify the application of the shortened 31 profits basis, but might still be sufficient to cause a valuer to conclude that the local authority would not pay more than a certain amount per m2, or more than a particular proportion of its outgoings. In the present case, however, there is no rental evidence at all.[131]Two particular matters, in our judgment, fall to be considered at Stage 5 in the present valuations. Firstly there are the assessments of other hereditaments. Mr Messenger has sought to show that the disputed assessments of local authority leisure centres are substantially out of line with those of other classes of hereditament. Mr Allen, for his part, relied on agreed assessments of other local authority leisure centres in support of his valuations of the appeal hereditaments. The second matter is to the extent, if any, to which constraints on these councils’ expenditure would have resulted in their negotiating a rent at a lower level than the value reached at the end of Stage 4.[132]We have considered earlier the very extensive range of other classes of hereditament on which Mr Messenger placed reliance. He relied on them principally as instances of the application of the shortened profits method of valuation. The actual percentages of gross income that had been applied to reach rateable values were, however, the foundation for the 7% that Mr Messenger said should be applied in the case of the appeal hereditaments and other local authority leisure centres. We have earlier concluded that there is no reason why the local authority’s motivation in providing other types of facility would be the same as that in providing a leisure centre and that there is wholly insufficient evidence before us to explain the relationship between the rents of theatres and ice-rinks (the categories on which Mr Messenger principally relies) and their total outgoings. For the same reasons we find that the assessments of these other types of hereditament are of no evidential value at stage 5 of the contractor’s basis valuation; and, while we have regard to the opinion of Mr Messenger, as a very experienced valuer, about the comparative over-assessment of local authority leisure centres, since there is, as we find, insufficient evidence to support this view, it is not a matter that causes us to make deductions at stage 5.[133]Mr Dewar relied on certain agreed assessments for private leisure centres - Pinnacle Leisure Centres operated by Wates Leisure Ltd and the David Lloyd Centre in Eastbourne. We were told very little about the Pinnacle Leisure Centres, although it appears that most of them have squash courts and some have playing fields. The David Lloyd Centre in Eastbourne originally consisted of indoor tennis courts, but later a swimming pool, bowling alley and a hotel were added. Mr Dewar said that the assessments of the Pinnacle Leisure Centre devalued to between £27.67 and £35.65 per m2. In the 1990 list the original buildings in the David Lloyd Centre devalued at approximately £25 and £30 per m2; and the 1995 assessments, which took account also of the new buildings, devalued to a similar figure. His amended valuations of Goldsmiths devalued to £21.77 per m2 in 1990 and £18.45 per m2 in 1995; and, of Sovereign, £20.57 per m2 in 1990 and £15.08 per m2 in 1995. As a result of this comparison he saw no need to make any adjustments at Stage 5 of his valuation.[134]It does not seem to us that anything useful is to be derived from the assessments of private leisure centres. They are commercial establishments and there is no suggestion that a local authority would contemplate operating them. Their rental values are likely, therefore, to be a reflection of their potential profitability. They provide no guide to what a local 32 authority would pay by way of rent for a leisure centre that it operated for socio-economic reasons.[135]Mr Allen placed reliance on the fact that in the 1990 list the assessments of some 256 wet, wet and dry, or dry leisure centres outside London and a further 41 in London had been agreed. All had been agreed on the contractor’s basis and, when analysed in terms of rateable value per square metre gross internal area, adjusted for location, they supported his valuations of Goldsmiths and Sovereign. Mr Messenger said that these settlements should be accorded no evidential weight. He had himself settled a number of the appeals, but in all cases the settlements represented substantial reductions on the list figures and provided substantial cash refunds for the ratepayers, thus enabling them to reduce revenue subsidies in the year of settlement. The reductions agreed were 30% or more, and the refunds available to the councils were of great significance since they were under extreme budgetary pressure. It had taken 3 years to establish the consortium that was now backing the present appeals, and the vast majority of appeals in the 1995 list remained outstanding.[136]In the light of Mr Messenger’s evidence, which we accept on this point, we think that there is a substantial possibility that the attraction of the cash refund that a settlement would provide to a revenue-constrained council will have influenced decisions to settle and the levels of the assessments agreed. For this reason we do not regard the agreed assessments of other local authority leisure centres as reliable comparables.[137]We turn to consider whether, and, if so, to what extent, constraint on the expenditure of these local authorities would have reduced the hypothetical rent below the value reached at the end of Stage 4. The case for the appellant councils was that the financial constraints would have led them to bargain hard in the hypothetical negotiations and the comparative negotiating strengths of the parties would have led to agreement on a rent below that value.[138]Mr Allen said that, since there was only one facility to rent, the premises were suitable for the local authority’s socio-economic purposes, and there would be only one bidder, the local authority itself, there was equivalence of supply and demand. We do not agree that the factors Mr Allen mentioned necessarily put the parties on an equal bargaining footing. It is certainly true that the landlord has effectively no choice in the matter. Either he lets to the local authority, or he receives no rent. But the position of the local authority is different. It is under no statutory duty to provide such a facility. There must necessarily be some limit to the amount that it is prepared to pay to retain the leisure centre. It will not pay an infinite amount. An escalation of costs beyond a certain point would force it to conclude that retention of the facility would no longer be justified and it would close it. Where that point is will depend, it seems to us, on the degree of constraint on the authority’s finances, and the relative importance that it attaches to the maintenance of the facility compared with the other services that place demands on its finances. Mr Allen recognised that “there is a balance that a local authority has to strike between competing financial and social objectives.”[139]As for the process of negotiations between the local authority and the hypothetical landlord, the evidence is that at each of the antecedent valuation dates each of these local authorities could have afforded rents at the end of Stage 4 levels, although in order to do so it 33 would have had to cut down on the level of some of its services and/or to raise charges. That each authority would have been reluctant to cut down the level of services or to raise charges can readily be assumed, but there was no clear evidence on the comparative importance of the various services provided by the appellant authority. Certainly, we can see no evidence to suggest that either authority would have been so reluctant to take the necessary steps to find the money elsewhere that it would have closed the leisure centre rather than pay the rent demanded. On the contrary, it is clear that each authority attached considerable importance to the services provided by its leisure centre as a popular recreational amenity for its residents. In the case of Goldsmiths the centre was seen as having additional social benefits such as the provision of healthy recreation for the young, the discouragement of vandalism and a GP referral service; and Sovereign was seen by Eastbourne as a facility that enhanced the attractiveness of the town to tourists.[140]Miss Henham said that if Wealden council members had been faced by the levels of rent assessed by Mr Allen they would have found them unacceptable and would have sent their officers back to negotiate. But since both parties would be aware of the annualised value of the tenant’s alternative, a mere reluctance, however strong, on the part of the council to pay this level of rent would have been insufficient. Unless the level was unacceptable in the sense that the council would choose to close the facility rather than to pay the rent, the council’s unwillingness to pay the rent demanded would count for nothing. We can see no reason for thinking that the hypothetical landlord would reduce the rent below the annualised value of the tenant’s alternative, so as to deprive himself of income and to subsidise the council.[141]Our conclusion, therefore, on the evidence before us, is that there is no justification for any Stage 5 allowance. The result is that the appeals in relation to Goldsmiths are allowed only to the extent conceded by Mr Allen in his valuations in Appendix 3. Those relating to Sovereign are allowed to the extent shown in our valuations in Appendix 4. We direct that the assessments of Sovereign be altered to £310,000 RV in the 1990 rating list and to £240,000 RV in the 1995 list and that the assessments of Goldsmiths be altered to £112,750 RV in the 1990 rating list (£121,500 RV with effect from 1 May 1994) and £94,500 RV in the 1995 list.[142]It has been agreed that each party shall be responsible for its own costs. Accordingly, we make no order as to costs. Dated 25 September 2001 George Bartlett QC, President 34 N J Rose FRICS 35 APPENDIX 1 SOVEREIGN CENTRE RECEIPTS-BASED COMPARATIVE VALUATION BY R G MESSENGER, BSc, FRICS, IRRV, MCIArb 1990 LIST INCOME £ SUBSIDY £ TOTAL £ Year to 31.10.1986/1987 220,496 93,196 313,692 1987/1988 191,891 195,664 387,555 1988/1989 224,945 188,155 413,100 1989/1990 1,092,419 148,450 1,240,869 Note: the receipts figures for the years 1986, 1987, 1988 clearly do not reflect the material change of the new extension and by 1.4.90 the trading pattern had been considerably enhanced. I have therefore, in preference to an average, adopted the 1989/1990 receipts and toned them back by an RPI factor of 1989 1989 = 115.2/ 1987 = 101.9 = 1.13 Relevant receipts figure £1,240,869 toned back RPI 1.13 = £1,098,114 1,098,114 @ 7% = £76,867 SAY £76,850 1995 LIST INCOME £ SUBSIDY £ TOTAL £ Year to 31.10.1991/2 806,960 286,736 1,093,696 1992/93 833,528 254,828 1,088,356 1993/94 903,015 255,450 1,158,465 Calculation of Average Total ÷ 3 = Relevant receipts figure £1,113,506 £1,113,506 @ 7% = £77,945 SAY £78,000 36 GOLDSMITHS CENTRE RECEIPTS-BASED COMPARATIVE VALUATION BY R G MESSENGER, BSc, FRICS, IRRV, MCIArb 1990 LIST INCOME £ SUBSIDY £ TOTAL £ 1986/1987 220,357 148,462 348,819 1987/1988 221,382 238,591 459,973 1988/1989 210,994 266,282 477,276 Calculation of Average Total ÷ 3 = 428,689 Relevant receipts figure £428,689 @ 7% = £30,008 SAY £30,000** (** ALSO REFLECTS MATERIAL CHANGE AS AT 1994) Note: Taking 1987 as a base year, the RPI index on the receipts over the eight years to 1995 gives an indexed figure of 330,080 against actual receipts of 476,387. This would tend to suggest that the centre was performing as to receipts, much better than the RPI by some 44%. However, taking RPI indices year on year against the previous years' receipts, the variance as at 1993, 1994 and 1995 is 15%, 8.6% and 10% respectively on the annual basis. It is not, in my view, persuasive that the alterations to the premises in 1994 led to a material change in receipts over and above a fairly consistent result from looking at the receipts indexed on the RPI. From this, I conclude there is insufficient evidence to support a material change in value for the 1994 appeal. I therefore adopt the 1990 figure for the entirety of the List. 1995 LIST INCOME £ SUBSIDY £ TOTAL £ 1991/1992 318,937 598,809 917,746 1992/1993 374,476 154,715 529,191 1993/1994 416,616 295,025 711,641 Calculation of Average Total ÷ 3 = 719,526 Relevant receipts figure £719,526 @ 7% = £50,366 SAY £50,250 37 APPENDIX 2 SOVEREIGN CENTRE CONTRACTOR’S VALUATION BY I R J DEWAR, FRICS, IRRV, MCIArb As at 1 April 1990 STAGE 1 ERC (Estimated Replacement Cost) £7,349,669 STAGE 2 ARC (Adjusted Replacement Cost) Adjustments:(a) Functional Obsolescence/fragmentation (Simple modern substitute) £5,055,397(b) Utilisation/over-capacity allowance 50.00%(c) Age allowances 4.75%(d) Technical obsolescence 3.00% Total Allowances 57.75% - £2,919,488 £2,135,903 STAGE 3 Add land value agreed at £225,000 £225,000 £2,360,903 STAGE 4 Decapitalisation 6% to Rateable Value £141,654 STAGE 5 Allowances and adjustments:- “stand back and look” to reflect (i) comparison with comparables on a £m2 basis (ii) ability to pay RV £141,500 As at 1 April 1995 STAGE 1 ERC (Estimated Replacement Cost) £6,486,348 STAGE 2 ARC (Adjusted Replacement Cost) Adjustments: (a) Functional Obsolescence/fragmentation (Simple modern substitute) £4,430,905 (b) Utilisation/over-capacity allowance 50.00% (c) Age allowances 8.50% (d) Technical obsolescence 4.00% Total Allowances 62.50% - £2,769,315 £1,661,590 STAGE 3 Add land value agreed at £225,000 £225,000 £1,886,590 STAGE 4 Decapitalisation 5½% To Rateable Value £103,762 STAGE 5 Allowances and adjustments:- “stand back and look” to reflect (i) comparison with comparables on a £m2 basis (ii) ability to pay RV £103,750 38 GOLDSMITHS CENTRE CONTRACTOR’S VALUATIONS BY I R J DEWAR, FRICS, IRRV, MCIArb As at 1 April 1990 STAGE 1 ERC (Estimated Replacement Cost) £2,010,366 STAGE 2 ARC (Adjusted Replacement Cost) Adjustments: (a) Functional Obsolescence/fragmentation (Simple modern substitute) £1,935,144 (b) Utilisation/over-capacity allowance 50.00% (c) Age allowances 2.00% (d) Tile allowance 2.00% Total Allowances 54.00% - £1,044,977 £890,167 STAGE 3 Add land value agreed at £25,000 £25,000 £915,167 STAGE 4 Decapitalisation 6% to Rateable Value £54,910 STAGE 5 Allowances and adjustments:- “stand back and look” to reflect (i) comparison with comparables on a £m2 basis (ii) ability to pay RV £55,000 As at 1 May 1994 STAGE 1 ERC (Estimated Replacement Cost) £2,084,982 STAGE 2 ARC (Adjusted Replacement Cost) Adjustments: (a) Functional Obsolescence/fragmentation (Simple modern substitute) £2,084,982 (b) Utilisation/over-capacity allowance 50.00% (c) Age allowances 2.00% (d) Tile allowance 2.00% Total Allowances 54.00% - £1,125,890 £959,092 STAGE 3 Add land value agreed at £25,000 £25,000 £984,092 STAGE 4 Decapitalisation 6% to Rateable Value £59,045 STAGE 5 Allowances and adjustments:- “stand back and look” to reflect (i) comparison with comparables on a £m2 basis (ii) ability to pay RV £59,000 39 As at 1 April 1995 STAGE 1 ERC (Estimated Replacement Cost) £1,841,207 STAGE 2 ARC (Adjusted Replacement Cost) Adjustments: (a) Functional Obsolescence/fragmentation (Simple modern substitute) £1,841,207 (b) Utilisation/over-capacity allowance 45.00% (c) Age allowances 4.50% (d) Technical obsolescence 1.50%(e) Repair - tiles to pool 2.00% Total Allowances 53.00% - £975,839 £865,368 STAGE 3 Add land value agreed at £25,000 £25,000 £890,368 STAGE 4 Decapitalisation 5½% to Rateable Value £48,970 STAGE 5 Allowances and adjustments:- “stand back and look” to reflect (i) comparison with comparables on a £m2 basis (ii) ability to pay RV £49,000 40 APPENDIX 3 SOVEREIGN CENTRE VALUATIONS BY P S ALLEN, BA(Hons) MRICS 1990 Rating List Effective Date 1/4/90 Stage 1 Estimated Replacement Cost (ERC) Actual Building Agreed floor areas and unit costings (inclusive of location factor of 1.08) m2 £/m2 £ ERC Leisure pool/changing 1,711 1,190 2,036,090 Original pool and café 3967 877 3,479,059 Sports Hall 1,199 496 594,704 6,877.0 888.4 6,109,853 Adopt Simple Substitute Building Total floor Area 5,712.5 888.4 5,074,985 Agreed additions for externals a) services 91,600 b) car park 277,475 c) access road 107,315 d) car park barrier 15,400 e) playground 20,950 f) landscape 58,925 571,665 5,646,650 Agreed addition for fees at 10% 564,665 6,211,315 Stage 2 Adjustment of the ECV at stage 1 to reflect “age and obsolescence” Allowance of 4.75% overall to reflect “age” 295,037 Allowance of 3% for functional/technical obsolescence 186,339 5,729,938 Stage 3 Estimation of the value of the land Agreed at 225,000 5,954,938 Stage 4 Decapitalisation Relevant statutory decapitalisation rate 6.0% 357,296 Stage 5 Adjustment (if necessary) to reflect what the tenant would be willing or able to pay No allowance Total £357,296 Estimated RV Say £357,000 41 1995 Rating List Effective Date 1/4/95 Stage 1 Estimated Replacement Cost (ERC) Actual Building Agreed floor areas and unit costings (inclusive of location factor of 1.05) m2 £/m2 £ ERC Leisure pool/changing 1,711 1,050 1,796,550 Original pool and café 3,967 774 3,070,458 Sports Hall 1,199 438 525,162 6,877.0 784.1 5,392,170 Adopt Simple Substitute Building Total floor Area 5,712.5 784.1 4,479,171 Agreed additions for externals a) services 80,850 b) car park 244,860 c) access road 94,700 d) car park barrier 13,600 e) playground 18,500 f) landscape 52,000 504,510 4,983,681 Agreed addition for fees at 10% 498,368 5,482,049 Stage 2 Adjustment of the ECV at stage 1 to reflect “age and obsolescence” Allowance of 8.5% for “age” 465,974 Allowance of 4% for functional/technical obsolescence 219,282 4,796,793 Stage 3 Estimation of the value of the land Agreed at 225,000 5,021,793 Stage 4 Decapitalisation Relevant statutory decapitalisation rate 5.5% 276,199 Stage 5 Adjustment (if necessary) to reflect what the tenant would be willing or able to pay No allowance Total £276,199 Estimated RV Say £276,000 42 GOLDSMITHS CENTRE VALUATIONS BY P S ALLEN, BA(Hons), MRICS 1990 Rating List Effective Date 1/4/90 Stage 1 Estimated Replacement Cost (ERC) Agreed floor areas and unit costings (inclusive of location factor of 1.08) m2 £/m2 £ ERC Dry Ground Floor 1,710 523 611,910 First floor 400 523 209,200 Wet Ground Floor 859 956 821,204 First Floor 97 956 92,732 2,526 687 1,735,046 Agreed area 2,426 687 1,666,662 Agreed additions for externals a) building services 32,860 b) access road 29,800 c) veranda 17,800 d) landscape 12,100 92,560 1,759,222 Agreed addition for fees at 10% 175,922 1,935,144 Stage 2 Adjustment of the ECV at stage 1 to reflect “age and obsolescence” Allowance of 2% to reflect pool tiles disability 38,703 Allowance of 2% overall to reflect physical and functional obsolescence 38,703 1,857,738 Stage 3 Estimation of the value of the land Agreed at 25,000 1,882,738 Stage 4 Decapitalisation Relevant statutory decapitalisation rate 6% 112,964 Stage 5 Adjustment (if necessary) to reflect what the tenant would be willing or able to pay Adjustment not necessary in this case Total £112,964 Estimated RV Say £112,750 43 1990 Rating List Effective Date 1/5/94 Stage 1 Estimated Replacement Cost (ERC) Agreed floor areas and unit costings (inclusive of location factor of 1.08) m2 £/m2 £ ERC Dry Ground Floor 1,170 523 611,910 First floor 529.7 523 277,033 Wet Ground Floor 859 956 821,204 First Floor 97 956 92,732 2,655.7 1,802,879 Agreed additions for externals a) building services 32,860 b) access road 29,800 c) veranda 17,800 d) landscape 12,100 92,560 1,895,439 Agreed addition for fees at 10% 189,544 2,084,983 Stage 2 Adjustment of the ECV at stage 1 to reflect “age and obsolescence” Allowance of 2% to reflect pool tiles disability 41,700 Allowance of 2% overall to reflect physical and functional obsolescence 41,700 2,001,584 Stage 3 Estimation of the value of the land Agreed at 25,000 2,026,584 Stage 4 Decapitalisation Relevant statutory decapitalisation rate 6% 112,595 Stage 5 Adjustment (if necessary) to reflect what the tenant would be willing or able to pay Adjustment not necessary in this case Total £121,595 Estimated RV Say £121,500 44 1995 Rating List Effective Date 1/4/95 Stage 1 Estimated Replacement Cost (ERC) Agreed floor areas and unit costings (inclusive of location factor of 1.08) m2 £/m2 £ ERC Dry Ground Floor 1,170 462 540,540 First floor 529.7 462 244,721 Wet Ground Floor 859 844 724,996 First Floor 97 844 81,868 2,655.7 1,592,125 Agreed additions for externals a) building services 29,000 b) access road 26,300 c) veranda 15,700 d) landscape 10,700 81,700 1,673,825 Agreed addition for fees at 10% 167,383 1,841,208 Stage 2 Adjustment of the ECV at stage 1 to reflect “age and obsolescence” Allowance of 2% to reflect pool tiles disability 36,824 Allowance of 4.5% overall to reflect “age” 82,854 Allowance of 1.5% for functional/technical obsolescence 27,618 1,693,911 Stage 3 Estimation of the value of the land Agreed at 25,000 1,718,911 Stage 4 Decapitalisation Relevant statutory decapitalisation rate 5.5% 94,540 Stage 5 Adjustment (if necessary) to reflect what the tenant would be willing or able to pay Adjustment not necessary in this case Total £94,540 Estimated RV Say £94,500 45 APPENDIX 4 SOVEREIGN CENTRE, EASTBOURNE 1990 RATING LIST CONTRACTOR’S BASIS VALUATION BY THE LANDS TRIBUNAL Stage 1 Estimated Replacement Cost (ERC) Adopt simple substitute building m2 Mr Allen’s area 5,712m2 Less diving pool 126 competition and teaching pool hall 39 dry changing area 77 viewing areas 41 reception area 90 internal walls 82 455 5,257m2 Total floor area 5,257m2 @ £888 per m2 = £4,668,216 Reduction for external envelope 5,257m2 @ £52 per m2 -273,364 Reduction for internal finishes 5,257m2 @ £18 per m2 -94,626 Total building costs £4,300,226 Add external works - agreed 571,665 £4,871,891 Professional fees @ 10% - agreed 487,189 ERC £5,359,080 Stage 2 Adjustment of ERC to reflect age and obsolescence Age Allowance 4.75% Functional/technical obsolescence 3,00% Total allowances 7.75% 415,329 4,943,751 Stage 3 Land value agreed 225,000 5,168,751 Stage 4 Statutory Decapitalisation rate 6% = £310,125 Stage 5 Adjustment NIL £310,125 RV as at 1/4/90 Say £310,000 46 SOVEREIGN CENTRE, EASTBOURNE 1995 RATING LIST CONTRACTOR’S BASIS VALUATION BY THE LANDS TRIBUNAL Stage 1 Estimated Replacement Cost (ERC) Adopt simple substitute building m2 Mr Allen’s area 5,712m2 Less diving pool 126 competition and teaching pool hall 39 dry changing area 77 viewing areas 41 reception area 90 internal walls 82 455 5,257m2 Total Floor Area 5,257m2 @ £784 per m2 = £4,121,488 Reduction for external envelope 5,257m2 @ £46 per m2 -241,822 Reduction for internal finishes 5,257m2 @ £16.50 per m2 -86,740 Total building costs £3,792,926 Add external works - agreed 504,510 £4,297,436 Professional fees @ 10% - agreed 429,744 ERC £4,727,180 Stage 2 Adjustment of ERC to reflect age and obsolescence Age Allowance 8.5% Functional/technical obsolescence 4.0% Total allowances 12.5% 590,898 4,136,282 Stage 3 Land value agreed 225,000 4,361,282 Stage 4 Statutory Decapitalisation rate 5.5% = £239,870 Stage 5 Adjustment NIL £239,870 RV as at 1/4/95 Say £240,000 47