CLOCKFAIR LIMITED v CHRISTOPHER FRANK HARRINGTON (Valuation Officer) RA/19/2003

UPPER TRIBUNAL
LANDS CHAMBER
RA/19/2003Case No RA/19/2003
Between
CLOCKFAIR LIMITEDApplicantCHRISTOPHER FRANK HARRINGTON (Valuation Officer)Respondent
Before
N J Rose FRICSJ P Scrafton for Appellantsolicitor for AppellantDavid Forsdick (instructed by Solicitor’s Office, HM Revenue and Customs) for RespondentVenue Procession House, 110 New Bridge Street, London, EC4V 6JLHearing 30-31 January 2006Property: Casino and Premises, 10 Castle Hill, Dudley, West Midlands, DY1 4QQCatchwords: RATING – valuation – 2000 rating list – casino – comparables – relevance of previous valuation for capital gains tax purposes and agreed assessments in previous lists – rebus sic stantibus to be valued as a casino and not as a snooker hall – appeal dismissed.
[1]This is an appeal by the ratepayer, Clockfair Limited, against the decision of the West Midlands (West) Valuation Tribunal, confirming the assessment in the 2000 rating list of a casino at 10 Castle Hill, Dudley, West Midlands, DY1 4QQ (“the appeal hereditament”) at RV £82,500.[2]Mr J P Scrafton, solicitor, appeared for the appellant. He called one expert witness, Mr E Rodgers FRICS IRRV, a director of Allison, Rodgers and Marlow Limited, chartered surveyors of Solihull. Mr Rodgers is the son of a well-known Birmingham bookmaker and has had 25 years rating experience, dealing with a wide variety of properties. Mr David Forsdick of counsel called the respondent valuation officer, Mr C F Harrington MRICS IRRV, to give expert evidence on his own behalf. Mr Harrington has been employed by the valuation office and then the valuation office agency since 1977, dealing with all types of landed property for a variety of public purposes. He has worked for the past four years in the VOA’s central specialist rating unit, with responsibility for the valuation for rating of leisure properties throughout the West Midlands. For the previous ten years he worked in the Kidderminster valuation office, dealing principally with rating work, mainly within the Dudley Metropolitan Borough area.[3]Mr Rodgers considered that the correct assessment for the appeal hereditament was RV £35,000. Mr Harrington supported the figure of £82,500 determined by the VT. On 6 February 2006, in company with the two experts, I inspected the appeal hereditament both externally and internally. I also viewed the exterior of certain other casinos which had been referred to as comparables. Facts[4]The parties prepared a statement of agreed facts. In the light of that statement and the evidence I find the following facts. The Metropolitan Borough of Dudley forms part of the West Midlands conurbation. The town of Dudley is one of several commercial centres within the Borough. At the 2001 census, the population of Dudley Metropolitan Borough was 305,155. The population of Dudley and its immediate suburbs was 191,919. The town is approximately 9 miles west of Birmingham. The appeal hereditament is situated on the northern edge of Dudley town centre, on Castle Hill, opposite Dudley Castle and Zoo. It is a detached, single storey building constructed of brick outer walls, partly rendered, under a felted Belfast roof. Originally built before 1940, it was occupied for many years as a garage and car showroom. In the early 1980s the premises were altered and converted to a snooker hall. Some further alterations were carried out in 1994 and the use changed to a casino. The casino was altered internally in 1997 and again in late 1999. The latter alterations were designed to increase the area of the gaming hall and office space and to provide further wc accommodation including disabled facilities, and a valet kitchen. 2[5]The appeal hereditament has a gross internal area of 999m2 (954.5m2 net internal). The accommodation is arranged as follows: Entrance porch. Reception area with cloakroom to the rear. Lounge area, with plastered walls and ceiling with inset lighting, carpeted concrete floors with raised seating area and a bar to one side. Catering kitchen to the rear of the bar, fully equipped and having fully tiled walls, non-slip flooring and fluorescent strip lighting. Beer store to rear of kitchen (with double timber access doors to the outside). Dry goods store and two further small storage cupboards. Manager’s office, off the main lounge, which has plastered walls and ceiling with fluorescent strip lighting. Ladies and gentlemen’s wcs with access to the lounge. Gaming machine area at the rear of the lounge and open to it, with a further raised seating area adjacent to it. Restaurant fitted out in a beamed farmhouse style having access from the gaming machine area. Main gaming area reached through glazed partition doors from the rear of the machine area. The gaming room has papered, plastered walls, plastered ceiling and a carpeted concrete floor. The gaming tables are individually illuminated in addition to the general lighting of the room. Within the gaming room there is a seating area to one side with a valet kitchen off and at the rear is a further raised card area. Male and female wcs at the rear of the gaming room with a disabled wc adjacent to the valet kitchen. Cashier’s office and general administration offices to the side of the gaming room. Store room in a rear corner of the building. Staff rest room with changing rooms, leading off the gaming room, which lead through to staff wc.[6]The majority of internal walls are of light stud partitions. The appeal hereditament has full gas fired hot water radiator central heating and air conditioning to the main public areas via cassette units. All main services are connected. There are areas for car parking on each side of the building with a total of 36 spaces.[7]When its use changed to that of a casino in 1994, a large area at the rear of the property was left as storage with external access only. The property then had no air conditioning. During the period up to 18 April 1997 air conditioning cassettes were added and an office was converted from part of the rear storage area. Further works of alteration were carried out in 1999 to extend the gaming hall into the majority of the storage area. Further wcs (including disabled wcs), enlarged offices, and a new valet kitchen were provided. These works were 3 completed on or about 1 December 1999. This remained the physical condition of the premises as at 1 April 2000.[8]On 1 April 2000 the appeal hereditament was the only casino in Dudley. At that date the nearest competing casinos were the Gala in Wolverhampton and the Grosvenor in Walsall, which were both approximately five miles distant. 1990 Rating List[9]On 28 March 1995 the rating list was altered to show the appeal hereditament as casino and premises with an assessment of RV £48,750 and an effective date of 1 December 1994. The previous entry in the list had described the hereditament as snooker club and premises, with an RV of £22,850 effective from 1 April 1990. On 21 April 1995 Messrs Ekins, acting on behalf of the appellant, made a proposal to alter the rating list. Mr Rodgers dealt with the matter at Ekins. On 15 February 1996 the VT gave its decision on the resultant appeal. It allowed it in part by reducing the assessment to RV £37,000. The appellant gave notice of appeal to the Lands Tribunal and the case was subsequently settled by consent order at RV £25,000. 1995 Rating List[10]The assessment of the casino as at 1 April 1995 was in the list at £58,500. On 15 July 1998 the valuation officer altered the assessment to £46,250 with an effective date of 18 September 1995. Following the consent order for the 1990 rating list, the 1995 rating list appeal was agreed at RV £30,000. On 19 January 2000 the valuation officer altered the 1995 rating list following alterations to the premises and revised the assessment to RV £40,000, the effective date being 1 December 1999. 2000 Rating List[11]The assessment appearing in the compiled 2000 rating list was RV £82,500. By a proposal dated 3 May 2000 Mr Rodgers, now at Allison, Rodgers and Marlow Limited, made a proposal on behalf of the appellant seeking an unspecified reduction in rateable value with effect from 1 April 2000 on the grounds that the rateable value in the list at that date was inaccurate and stating that the assessment was “excessive and bad”. On 19 January 2001 the valuation officer altered the list to increase the RV to £90,000 on the ground that the value shown in the original entry had failed to take account of the alterations completed on or about 1 December 1999. On 1 July 2003 the VT issued its decision on the resultant appeal, confirming the assessment of the appeal hereditament at RV £82,500. 4 Appellant’s case[12]Mr Rodgers prepared valuations of the appeal hereditament on three different bases in order to arrive at its rental value. The first valuation, which he described as the statistical approach, was founded on the agreement which disposed of the appellant’s appeal against the 1995 list assessment. He referred to the assessments of four other casinos in the West Midlands – the Grosvenor Casino, Bentley Mill Way, Walsall; the Stanley Casino, Stafford Street, Walsall; the Gala Casino, Whitmore Street, Wolverhampton and the Gala Casino, Hill Street, Birmingham. He assumed that the value of the appeal hereditament bore the same overall relationship to the values of these four casinos in the 2000 list as it had done in the 1995 list. He therefore analysed the assessment of each casino in the 2000 list and applied to the resultant price per m2 the relativity which the value of that casino had borne to the value of the appeal hereditament in the 1995 list. This exercise produced equivalent rental values for the appeal hereditament ranging from £31.52 to £53.08 per m2 of net internal area – the basis of measurement which had been adopted in the 1995 list. Mr Rodgers calculated that the average of these equivalent values was £41.24 per m2 and this, applied to a net internal area of 954.5m2, produced a value for the appeal hereditament of approximately £39,000.[13]In his written report Mr Rodgers accepted that “averaging is not always an entirely helpful exercise in rating valuation” and, in oral evidence in chief, he described it as not a particularly good valuation method. He placed more weight on a valuation of the freehold interest in the appeal hereditament which had been prepared for capital gains tax purposes by the district valuer as at 12 August 1996. At that time the property was subject to an internal repairing lease for 25 years from 13 October 1994 at a rent of £21,000 per annum exclusive, subject to a rent free period of 6 months. Mr Rodgers assumed that the district valuer was “quite happy that the 1996 rental value of the property was £21,000 on an internal basis”. To that figure Mr Rodgers added 10% for external repairs and £9,000 for fitting out works and arrived at a rental value in 1996 of £32,100. He considered that this value increased by 10% between 1996 and 1 April 1998, the antecedent valuation date (“the AVD”) and arrived at a rent of £35,310, which he rounded down to £35,000.[14]Finally, Mr Rodgers thought it appropriate to value the appeal hereditament having regard to the values of snooker halls. He said that the agreed assessment in the 1995 list was equivalent to £31.43 per m2, which was similar to the tone of the list in Dudley for snooker halls. He had agreed the 2000 list assessment of a snooker hall, situated on the first floor above a casino in West Bromwich, at £32.50 per m2. He continued:
“Bearing in mind that the Gaming Board will only allow there to be in existence one Gaming Certificate in respect of any one hereditament, this is a case in which there would only be one bidder for the property. It would be sensible, therefore, to expect a casino operator to pay slightly higher than the alternative use as a snooker hall so I adopt £35.00 psm.”
[15]Mr Rodgers applied the figure of £35.00 per m2 to the net internal area of the appeal hereditament and arrived at a value of £33,500. 5[16]He asked the Tribunal to determine the assessment of the appeal hereditament at RV £35,000. He considered that the District Valuer’s capital gains tax valuation “based as it was on open market rental evidence and adjusted to the statutory terms as I have adjusted it, represents the best evidence of value for rating of the appeal hereditament at the appropriate date. The other exercises demonstrate that my favoured approach is not extreme in either direction.” Valuation Officer’s case[17]Mr Harrington said that, in the absence of any rental evidence for the appeal hereditament at the AVD, he had had regard to rental evidence and to the 2000 list assessments of other casinos in the West Midlands. He considered that the settled assessments which, with one exception, had all been discussed with the respective occupiers’ agents, had established a tone of the list for such casinos. He produced details and devaluations of the 2000 list assessments of twelve casinos in the West Midlands which he considered to be comparable. He also produced details and analyses of the rents paid for seven of those casinos. He explained that, when properties had been rented on a shell basis he had added varying percentages for fitting out. These ranged from 25% for high quality fit-outs carried out close to the AVD to 5 to 15% for fitting out of older conversions. The percentage adopted also had regard to whether the property included large ancillary areas which were fitted out to a lower standard.[18]In arriving at his valuation of the appeal hereditament, Mr Harrington had considered how it fitted in with the tone of the list. The basic (“shell”) rate which had been applied to the other casinos varied from £60 to £107.50 per m2 of gross internal area. After the adjustment for fitting out, the agreed assessments ranged from £65.96 to £133.92 per m2. Mr Harrington summarised the various advantages and disadvantages of each of the comparables. He concluded that the appeal hereditament was at the lower end of the range of values but not at the bottom. He considered that a value of £72 per m2 shell plus 15% fit-out fairly reflected the position of the appeal hereditament within the hierarchy of the West Midlands casinos. His valuation, therefore, was as follows: GIA 999m2 @ £82.80 per m2 = £82,717 £72 per m2 shell plus 15% fit-out Rateable value say £82,500 Conclusions[19]The two experts approached the valuation of the appeal hereditament in entirely different ways. Mr Rodgers placed the greatest weight on what he termed the history of the property, namely its agreed RV in the 1995 list and the district valuer’s CGT valuation as at August 1996. He also had regard to the basis which had been adopted in the 2000 list for assessing snooker halls in the area. Although he also adopted a statistical approach, it is clear that he placed little reliance on that method. Mr Harrington did not consider that any of Mr Rodgers’s 6 approaches were helpful, and based his valuation on what he suggested was the established tone of the 2000 list for casinos in the West Midlands.[20]I start by considering Mr Rodgers’s valuation methods, and deal firstly with the CGT valuation. This was his preferred approach and formed the primary basis of his valuation at £35,000. The background to the CGT valuation was as follows. In January 1994 the freehold interest in the appeal hereditament was owned by Messrs M and D Shine and Mrs S Shine. They were considering granting an occupational lease of the property to a company with which they were connected. They therefore instructed two firms of surveyors to report on the open market rental value of the property on the basis of a new 25 year full repairing and insuring lease with five yearly upwards only rent reviews and on the assumption that the landlord would convert it to a casino. Both firms submitted their reports in January 1994. Keith Cardale Groves’s figure was £21,000 per annum and Messrs Ekins reported at £21,500. The latter valuation was prepared by Mr Rodgers himself. In the light of this advice a lease was granted to the appellant for 25 years from 13 October 1994 at a commencing rent of £21,000 per annum, subject to a six months rent free period and with the lessee responsible for internal repairs only. On 12 August 1996 the freehold interest was sold to the appellant and, since this was a transaction between connected parties, the district valuer was asked to advise whether the sale price of £265,000 represented full market value. In the course of the current proceedings, but not until after the VT hearing, the district valuer’s manuscript valuation calculation sheets were disclosed. Under the heading “valuation” the district valuer said:
“Est CMRV say as passing £21,000 (“shell” rent). YP 12.5 £262,500 “Shell” rent seems not too unreasonable for internal areas only ie no external repairing liabilities and excluding all internal F and F for use as a casino. £22/m2. [“Normal” lease for building FRI say cRV at say £40/50,000 pa] ”
[21]Mr Rodgers pointed out that the valuation of £262,500 was used by the Inland Revenue to calculate the CGT liability on the sale of the freehold interest, based on values in 1996. He continued “I must therefore assume that the respondent [Mr Harrington] is quite happy that the 1996 rental value of the property was £21,000 on an internal basis”.[22]I do not accept that conclusion, for the following reasons. Firstly, the district valuer’s observation that the rent of £21,000 “seems not too unreasonable” fell well short of an unqualified endorsement of that figure. Secondly, and more importantly, I do not consider that the passing rent of £21,000, which had been agreed between connected parties in October 1994, provides a helpful starting point for calculating the rental value of the appeal hereditament at the AVD. At the latter date, and also on the effective date, 1 April 2000, the appeal hereditament was fitted out as a casino. It is apparent from the district valuer’s calculation sheet that he considered that the rental value of the property as at August 1986, 7 fitted as a casino and on a normal lease, was between £40,000 and £50,000 per annum. Mr Rodgers sought to adjust the “shell” value of £21,000 to reflect the cost of fitting out the property as a casino, and the cost of external repairs, by adding £9,000 and £2,100 respectively. In fact, logic dictates that the latter figure should have been deducted from the rent, not added to it, because a tenant would clearly reduce its rental bid if its repairing responsibilities were increased. Assuming Mr Rodgers’s allowance of £9,000 for fitting out is correct, the correct analysis as at the AVD would therefore be “Shell rent” £21,000 Deduct 10% for externals £ 2,100 £18,900 Add for fitting out £ 9,000 Rental value of fitted out casino £27,900[23]It is clear, however, that the district valuer’s opinion of the rental value of the fitted out property some 20 months before the AVD on a full repairing basis was between £40,000 and £50,000. In my opinion, therefore, the rent of £21,000, which was agreed for the appeal hereditament between connected parties in 1994, is a wholly unreliable starting point for calculating its rental value as a casino at the AVD.[24]The second historical matter on which Mr Rodgers placed considerable reliance was the consent order for the 1990 list assessment, entered into in 1998, following which it was agreed that the assessment in the 1995 list should be reduced from the original figure of £58,500 to £30,000. The consent order was signed shortly before a Lands Tribunal hearing, at which evidence was to have been given by the two experts who gave evidence before me in the present appeal. Mr Rodgers pointed out that, before the consent order was signed, both parties had obtained “full professional advice in matters of both valuation and law”. He added that the agreement showed that the parties “agreed that Castle Hill Casino is a minority casino in a fairly poor location and fairly poor building. This Lands Tribunal agreement established beyond doubt that Castle Hill Casino was not the same as the other casinos in the West Midlands that were in better buildings and in better locations.”[25]Mr Harrington said that his decision to agree the RVs in the 1990 and 1995 lists at £25,000 and £30,000 respectively was driven largely by the CGT valuation. The solicitor who was advising him in connection with the Lands Tribunal reference was very concerned that that valuation, which had been prepared by a valuer who worked in the same office building as Mr Harrington, would cast doubt on Mr Harrington’s own, much higher figures. Mr Harrington said that he did not agree with the CGT valuation, but he had accepted the legal advice he was given at the time. For the purposes of the present appeal, however, he considered that the rating assessments which had been agreed with other rating surveyors in respect of other casinos in the West Midlands, on the basis of values as at 1 April 1998, were of more assistance than a valuation prepared at an earlier date and for a different purpose, albeit relating to the same property. 8[26]I agree with Mr Harrington on this issue. This is the first occasion when the CGT valuation has been considered by a court or tribunal and I have found that it is an unreliable basis for a rating valuation for the purposes of the 2000 list. The Inland Revenue solicitor’s caution in 1998 was perhaps understandable in view of the discrepancy in valuation levels adopted in Mr Harrington’s office for CGT and rating purposes. Nevertheless, I agree with Mr Harrington that, with the benefit of all the information now available, the district valuer’s CGT valuation was too low. It follows that the assessment agreed for the 1995 list, which was largely based on the CGT valuation, was also too low. I therefore obtain no assistance from the agreed 1995 list assessment.[27]Mr Rodgers’s third valuation approach was by reference to the value of snooker halls. The question of what potential uses may be taken into account when preparing valuations for rating purposes was considered by the Court of Appeal in Williams(VO) v Scottish and Newcastle Retail Limited and Another [2001] RA 41, to which both parties referred before me. That case arose from a decision of this Tribunal (George Bartlett QC, President and Peter Clarke FRICS), which contained the following general conclusions: “The rebus sic stantibus rule identifies for the purpose of valuation the hereditament, the physical changes which may be made to it, and the mode or category of occupation. The rule rests on the concept that what has to be determined in rating is the value to the occupier of his occupation of the hereditament, measured by the rent on an assumed yearly tenancy. In carrying out a valuation under the rating hypothesis the following assumptions are to be made about the hereditament:(a) that the hereditament was in the same physical state as on the material day. Alterations which the hypothetical tenant might make to the hereditament may be taken into account if, taken overall, they are minor. All other prospective alterations to the hereditament are to be ignored;(b) that the hereditament could only be occupied for a purpose within the same mode or category of purpose as that for which it was being occupied on the material day. Any prospective change of use outside that mode or category is to be ignored. In determining to what mode or category a particular use belongs it is the principal characteristics of the use and the methods of valuation commonly applied by rating surveyors to which regard must be had; and shops, offices and factories serve as examples. Some uses may not fall within any such broad category, however, and are to be regarded as sui generic. Any evidence relating to the rents or assessments of other hereditaments may be taken into account provided it is relevant to the valuation. There is no rule that evidence relating to another hereditament is irrelevant if that other hereditament is in a different mode or category of occupation”.[28]In the Court of Appeal Robert Walker LJ, with whom Hale and Aldous LLJ agreed, said at p.63: “68. In my view the Lands Tribunal was plainly right in concluding that Parliament has, in para 2(3) to (7) of sch 6 to the 1988 Act, recognised that ‘mode or category of occupation’ is a material factor in valuation for rating purposes, so confirming that the rebus sic stantibus principle has a second limb, user, in addition to its first limb, physical condition. Indeed counsel for the valuation officer did not dispute this … 9[74]Turning to the first limb of the rule, I consider that the Lands Tribunal was clearly right, following Fir Mill, to allow for the possibility of minor alterations in the hereditament on the occasion of its hypothetical letting. The absurdity of any other view appears vividly from the circumstances of these appeals, with numerous very well-known retail chains seeking to establish their identities and brand loyalties by distinctive fascias and fittings installed in uniform, featureless units. The first limb cannot be applied so rigidly as to prevent (for instance) Burger King being considered as a possible bidder in competition with McDonald’s (which occupies a large unit just opposite the City Fayre/City Duck).[75]Counsel for the valuation officer criticised the test of ‘minor’ alterations as being imprecise, which indeed it is. But the Lands Tribunal was in my view right to prefer it to drawing the line at a suggested distinction between structural and non structural alterations, which would be even less satisfactory. On the Lands Tribunal’s formulation both limbs do raise issues of fact and degree which will in the first place be matters for negotiation between the valuation officer and the ratepayer’s surveyor. If the valuation officer and the surveyor cannot agree, they will be issues of secondary fact for the appropriate tribunal…”[29]In his oral evidence in chief, Mr Rodgers said that no major works were carried out to the appeal hereditament when it was converted from a snooker hall to a casino in 1994. He suggested that the works carried out involved little more than removing the snooker tables and replacing them with gaming tables. In the light of that evidence Mr Scrafton submitted that the appeal hereditament fell to be valued on the basis that it was available for use as a snooker hall in accordance with what Robert Walker LJ described as the first limb of the rebus sic stantibus principle. In the course of the hearing, agreed plans were produced showing the layout of the property both before its conversion to a casino and on 1 April 1995. These showed that the following changes were made, starting from the rear of the building: walls enclosing private snooker room removed and resulting space partially used to form office, cashier’s office and valet kitchen; wall constructed across width of snooker hall, dividing store at rear from gaming hall; layout of customers’ and staff wcs altered; kitchen doubled in size. In addition Mr Harrington said, and I accept, that it was clear from an internal inspection of the current layout that these changes had necessitated alterations to the electric lighting and plumbing systems.[30]When the property was inspected by Keith Cardale Groves in January 1994 it was still in use as a snooker club. On the second substantive page of their valuation report, Keith Cardale Groves reported their understanding that the property would be converted by the landlord to provide a casino. They added: “From the plans supplied and following our inspection we understand the following accommodation will be provided (we would stress that considerable conversion works will have to be carried out and we should be asked to re-inspect on completion). (Emphasis added).[31]In the light of the evidence, I find that the appeal hereditament would have required substantial works of alteration to be carried out to make it suitable for use as a snooker hall, not just minor alterations. It follows that it should be valued on the basis of its availability for 10 casino use and not as a snooker hall and that it is not necessary for me to decide whether those two uses fall within the same mode or category of occupation.[32]In the course of cross-examination Mr Rodgers was asked for his opinion of value, assuming he was approaching the exercise without the historical background on which he relied, and assuming the property had to be valued as a casino. He replied that, on that basis, there was nothing wrong with Mr Harrington’s figure. I reached the same conclusion, following my inspection of the appeal hereditament and Mr Harrington’s comparables. In the light of that, and my findings that the historical background is unreliable and that the appeal hereditament should be valued as a casino, I am satisfied that the appeal must be dismissed. I confirm the assessment of the appeal hereditament in the 2000 rating list at £82,500.[33]The parties are now invited to make representations as to costs, and a letter relating to that accompanies this decision, which will take effect when but not until the question of costs has been determined. 7 April 2006 N J Rose FRICS Addendum on costs[34]I have received an application for costs from the respondent valuation officer. He submits that, since he was successful in defending his valuation and his interpretation of the point of law which was in dispute, there is no basis upon which the appellant could displace the application of the ordinary rule that the successful party should be awarded its costs. The appellant has not sought to put forward any argument to contest that submission, which seems to me to be unanswerable.[35]The appellant will pay the respondent’s costs of the appeal, to be determined in default of agreement by the Registrar of the Lands Tribunal on the standard basis. 19 May 2006 N J Rose FRICS 11