PHILIP SPENCE (H M Inspector of Taxes) v LEONARD COBRIN TMA/110/2003

UPPER TRIBUNAL
LANDS CHAMBER
TMA/110/2003Case No TMA/110/2003
Between
PHILIP SPENCE (H M Inspector of Taxes)ApplicantLEONARD COBRINRespondent
Before
P R Francis FRICSTim Mould (instructed by the Solicitor to the Inland Revenue) for ApplicantDavid Southern (instructed by Vantis Tax Ltd) for RespondentVenue Procession House, 110 New Bridge Street, London EC4V 6JLDate 7 June 2005Hearing 15 March 2005Property: 297-303 Edgware Road, London, NW9Catchwords: TAX – Capital Gains Tax – former garage showrooms and workshops – value as at 31 March 1982 – likelihood of planning permission for alternative development – discount to reflect fact that no planning consent existed - value determined at £517,500 - Capital Gains Tax Act 1979, s150
[1]This is a reference under section 47(1) of the Taxes Management Act 1970 to determine the open market value of the freehold interest in 297-303 Edgware Road, London, NW9 (“the subject premises”) as at 31 March 1982 for Capital Gains Tax (“CGT”) purposes. The Inspector of Taxes puts the value at £292,500; Mr Cobrin, the respondent taxpayer, says it should be £844,000.[2]Timothy Mould of counsel appeared for the applicant and called John Alexander MRICS who produced expert valuation evidence. David Southern of counsel appeared for the respondent taxpayer whom he called to produce evidence of fact together with Michael Lock, a chartered accountant, who produced a statement giving his opinion as to the basis upon which he considered the value should be calculated.[3]Before turning to the facts, I give reasons for a procedural decision made prior to the hearing. This reference was made by the Inspector of Taxes as long ago as October 2003, and following the taxpayer’s failure to respond to correspondence and orders, it was directed that the application should be heard unopposed. However, following a late application by the respondent, which was not opposed by the applicant, permission was given in an order of 12 January 2005 for the taxpayer to file and serve valuation evidence by 11 February 2005. Following a further application, that time limit was extended to 4 March 2005 by an order dated 16 February 2005. No such evidence was forthcoming, and in accordance with clause (3) of the 16 February order, the taxpayer was thus debarred from calling valuation evidence. At the beginning of the hearing, a request was made to adduce a valuation, and to call one Robert Rose as an expert valuer. Permission was refused on the grounds that the respondent had repeatedly failed to comply with the Tribunal’s orders, and with no prior notice having been given to the applicant, it would be inappropriate to allow such evidence to be introduced at this late stage. Facts[4]The parties had not produced a statement of agreed facts. However, from the applicant’s comprehensive expert valuation report and the factual statements I find the following facts.[5]The subject property, known formerly as Hay Lane Service Station, comprised, in the late 1970s, a petrol filling station and garage and occupied a rectangular plot at the corner of the main A5 Edgware Road and Hay Lane in Colindale, North London. The site, which had vehicular access from both roads, had an area of 0.124 hectares (0.306 acres) and was in a prominent position adjacent to shops, housing and a cinema. Immediately to the north (on the opposite side of Hay Lane) was a factory and beyond that a large motor showroom and workshops – Henly’s Jaguar. The freehold of the subject site was owned by Shell UK, and in 1974 when the respondent entered into a 50/50 business arrangement on the premises with one Thomas Joyce, the principal activity under the terms of the licence was to promote and sell 2 Shell products. There was also permission to carry out motor repairs and services, and sell used cars.[6]The nearby site, which was much larger and owned and operated by the Henly’s Group, also sold Shell petrol (as did all Henly’s outlets) and with two Shell filling stations operating in competition in such close proximity, Mr Cobrin and his partner were advised by Shell in 1979 that the licence was to be relinquished on the subject land. At this point, Mr Joyce chose to retire and Mr Cobrin acquired the freehold from Shell in February 1980 for £67,000 subject to a covenant that no petrol of any brand would be sold from the site. He continued to trade in used car sales and servicing and obtained a licence to operate an MOT test centre.[7]During the period 1980 to 1987, a considerable amount of redevelopment was taking place in the vicinity including, in 1986, the conversion of the adjacent cinema into a billiard hall which, by 1987, had become a 24 hour operation. Following subsequent increases in vandalism to his property and on-site vehicles, the respondent decided to move his business to another nearby but less prominent location. Upon advice from a local commercial agent, Michael Berman & Co, Mr Cobrin sought and obtained, in February 1988, planning permission for the complete redevelopment of the subject land with a four-storey terrace of 6 B1 use-class offices/light industrial research units. The land was then offered to the market and immediately sold, with the benefit of the planning permission, for £1,153,000 on 26 May 1988. The development, modified by a consent dated September 1988 and now known as Watling Gate, was completed in 1991. The completed building comprises 5 self-contained office/B1 units on three and four storeys with a basement car park. The parties are agreed that there was a reasonable prospect that planning permission for such a development would have been forthcoming at the relevant date, 31 March 1982. The Statutory Provisions[8]Section 96 of the Finance Act 1988 made a change to Capital Gains Tax by providing for a re-basing to 31 March 1982, so that only gains or losses accruing after that date (on assets acquired on or before that date) were subject to a charge. Therefore, for the purposes of computation of CGT the base cost was the value of the land as at 31 March 1982, and under section 150 of the Capital Gains Tax Act 1979, that value is the open market value. The disposal was recorded on Mr Cobrin’s tax return for 1988/89 at a base cost of £844,000. The Inspector of Taxes issued a Notice of Assessment on 28 December 1990 at a base cost of £450,000 (although, in this appeal, that value has been amended to £292,500) and the respondent issued an appeal to the Division of General Commissioners on 4 January 1991. The Notice of Reference to the Lands Tribunal was made by the Inspector under the Taxes Management Act 1970 (“TMA”) (which applies to proceedings for 1995/96 tax year and earlier years) as amended by the Finance Act 1996 (for subsequent proceedings). Section 47(1) of the TMA states:
“(1) If and so far as the question in dispute on any appeal against an assessment to tax…on chargeable gains…is a question of the value of any land, or of a lease of land 3 (a) if the land is in England or Wales the question is to be determined by the Lands Tribunal…”
Issue[9]The sole issue for my determination is the price which the land might reasonably be expected to fetch on a sale in the open market at the relevant date. Applicant’s Case[10]Mr Alexander, who has now retired, was a senior valuer at the Harrow office of the Valuation Office Agency and has over 35 years experience in capital and rental valuations of most types of property, including development sites throughout the Greater London area. He produced a lengthy and comprehensive report setting out the background to the case, the basis upon which he had prepared his valuation and his conclusions. In considering what the site would sustain in terms of redevelopment options, Mr Alexander said that the only relevant local plan in existence at the material date was the Middlesex County Council Map (“MCM”) of 1965. The site is shown as within an area zoned for residential purposes, but with shopping frontage to Edgware Road. However, bearing in mind the types of development that had been permitted in the immediate vicinity, he said he had assumed for the purposes of his valuation that the plan would have been considered but not strictly adhered to in respect of applications that were not absolutely in accordance with the zoning. In his view an application for the type of development that had actually occurred “would have had a reasonable chance of success, notwithstanding the zoning for residential use with shopping frontage”. That development, at the time, would have fallen within Class II (Office) and Class III (Light Industrial) of the Town and Country Planning Use Classes Order 1972.[11]From a statistical analysis of the local market in the period 1979 to 1988 (by reference to the “Deals, Prices and Rents” sections of the Estates Gazette for the relevant years), Mr Alexander concluded that the level of activity for offices in 1982 was considerably less than had been the case in 1979. The situation worsened in the mid 1980s, but there was evidence, by the number of reported transactions, that the market had improved again by 1988 when the property was sold with the benefit of planning permission. However, despite the poor market in 1982, he thought that the proposed use would be that which would have created the highest development value for the property.[12]Due to the absence of an actual sale of the subject property, or of comparable sites within the immediate vicinity in 1982, Mr Alexander said that he had had to look farther afield – to neighbouring centres such as Harrow and Wembley, Stanmore, Hendon and Finchley. As residual valuations can be notoriously inaccurate, he said, and are not generally favoured by the Lands Tribunal (other than as a ‘check’ method), he had adopted a process of analysis of sales of development sites that had taken place over that wider area using the following process: 4(a) Taking the sale price achieved for an office development site and dividing it by the net lettable area subsequently constructed on it, to give a site value per square metre of built space. As the sales occurred between 1980 and 1985, adjustments were made to arrive at an equivalent site value per sq m at March 1982.(b) Analysing rents achieved on other offices in the area (suitably adjusted) to arrive at an equivalent rental value, per sq m, likely to have been achieved on the developments eventually built on the sites in (a) above.(c) Calculating, for each development site in (a) a ratio of site value per sq m of built space to the rental value per sq m from (b) by dividing the former by the latter. For example: Address Sale price per sq m of built offices (adj) Estimated rental value Ratio Valiant house, 365 High Road, Wembley £373 per sq m £90 per sq m 4.1 (Col 2 divided by col 3) The site upon which Valiant House was eventually built was sold at £580,000 for 0.121 ha (0.298 acre) on 8 December 1980 to Townsend Thoresen Properties Ltd and 1,553 sq m of offices were constructed. This gives the site value of £373 per sq m of built space. The District Valuer’s market report for the period 1979 to 1983 shows static new office rents of £90 per sq m throughout the period.[13]On this basis, Mr Alexander said he was able to calculate the full development value of the subject land (on the assumption that planning permission existed) by multiplying the amount of built space a developer would have anticipated being able to construct (the 1,558.5 sq m that was actually built) by the site value per sq m arrived at by multiplying the estimated rental value by the ratio referred to above.[14]Having analysed 7 site sales and 10 lettings of completed office developments, and applying the appropriate adjustments for the subject land (including consideration of locational differences, facilities, parking etc) he was able to conclude that the appropriate ratio to be used was the same as the one that the Valiant House analysis created (4.1). The overall ratios had ranged from 3.4 to 5.7. In his view the rental value of the completed offices on the subject land would be £70 per sq m, giving a site value per sq m built space of £287 – say £290.[15]The valuation therefore becomes 1,558.5 sq m x £290 = £451,965, say £450,000. However, Mr Alexander said, the subject site did not have planning permission in 1982, and in accordance with the practice of the Lands Tribunal (see Honeychurch v McKenna (Inspector of Taxes) (1997) 37 RVR 270) it was appropriate to make a reduction for risk. As the circumstances here were very similar to those in the quoted case, he felt that the 35% discount the Tribunal adopted in that should be applied here. This gave a valuation at 31 March 1982 of 5 £290,000. In response to a question from me, Mr Alexander said that he had carried out a residual valuation as a check, and it supported his conclusions. However, such a calculation was not available, and was not produced.[16]Regarding the respondent taxpayer’s accountant’s suggestion that the correct way to value the land was to simply adjust the sale price in 1988 by the amount by which the Richard Ellis Monthly Index had grown in the interim, Mr Alexander said this was wholly inappropriate. The index related to value trends for buildings, not sites. Site values, he said, were the ‘left-over’ or ‘residual’ amounts. As office values rise, site values can rise much more rapidly because any surplus value generated by increased rental values went straight to the value of the land.[17]In cross-examination, Mr Alexander admitted that he had first received instructions from the Inspector of Taxes in 1990, but the first draft of a proposed proof of evidence for Lands Tribunal proceedings was not produced until 1997. In that draft, he had valued the subject land at £490,000 and had not applied any discount for the fact that planning permission for the proposed redevelopment did not, in fact, exist in 1982. He said that it was as a result of the Honeychurch case, and Valuation Office Agency guidelines that, in his revised report that was produced in November 2004, he adopted the discount to reflect the fact that planning permission did not exist, and there was only hope value in the site.[18]Mr Alexander explained, in response to a suggestion that his method of analysis of comparables produced yields averaging 24%, that due to the fact the site value per sq m excluded development costs, it was not possible to establish a yield. The methodology he had chosen, he said, was purely a device for analysing sales and establishing an appropriate value for the subject land. He accepted that his suggested estimated rental value for the offices that had been built on the subject land, at £70 per sq m, was in the lower reaches of the range of rental values that his researches had revealed. Respondent Taxpayer’s Case[19]Mr Southern pointed out that it was normal in cases such as this for the reference to the Lands Tribunal to be made by the Commissioners, but here the reference had been made by the Inspector of Taxes some 13 years after the initial assessment, and 7 years after their first indication that the matter was to be referred. This had, of course, created difficulties in terms of researching and providing reliable valuation evidence. It was the respondent’s case that Mr Alexander’s valuation exercise was no more than a flight of fancy in that it produces a conclusion that is untenable and wholly speculative. A safer and more pragmatic approach was to rely upon the Richard Ellis Monthly Index to scale back from 1988 to 1982 values, to relate the capital values of Mr Alexander’s first four comparables (of land sales) to the equivalent area of the subject land, and also to consider the price achieved for the MFI site in Edgware Road in 1983 and adjust it to reflect the smaller area of Hay Lane Service Station.[20]Mr Cobrin explained that during the late 1970s the fact that there were two almost adjacent Shell filling stations, one of which was operated by a large multi-site group, meant 6 that it was inevitable his licence would eventually be revoked. This happened in November 1979 but, he said, the area manager of Shell who broke the news to him appreciated that the loss would seriously affect the business. Shell would no longer have any use for the site and, to reflect Messrs Cobrin and Joyce’s past loyalty and performance, Mr Cobrin said the company was prepared to offer them the freehold of the site at a very substantial discount. Shell thought the site was worth £500,000 to £600,000 but agreed to sell for £67,000. Despite Mr Joyce’s decision to retire, Mr Cobrin proceeded to purchase the site on his own, and the sale was completed in February 1980.[21]He then went on to establish an MOT service centre on the site, and continued the used car sales and a workshop business. Mr Cobrin said that from 1980 onwards he regularly received approaches for the site and was aware of its potential for redevelopment from the amount of building that was being undertaken in the vicinity, including the redevelopment of the Henly’s premises which had been sold to MFI for new offices, a store, other retail units and a multi-storey car park for £7.4 million in 1983. He acknowledged however, that that site was very substantially larger than his own. He said he was happy to continue running his business which was reasonably profitable, but following the change of use of the adjacent cinema to a 24 hour billiard hall in 1986/87 and increases in vandalism, decided it was time to sell. His agent recommended a firm of architects who subsequently obtained planning permission for the comprehensive redevelopment of the site, and the site was then sold in April 1988 for £1,153,000.[22]Mr Cobrin accepted in cross-examination that the delays in bringing this matter to fruition were not solely those of the Inspector of Taxes and that he had not, at any stage, obtained expert valuation advice. He said that even though he could have approached the agent who sold the subject land for him for advice, he thought that obtaining an accurate retrospective valuation would be difficult, and that he and his accountant, Mr Lock, by using the Richard Ellis Monthly Index, “were on the right track”.[23]Mr Lock is a chartered accountant who has been practising for about 50 years. He said he was first approached by the respondent in 1988 to deal with his accounting, taxation and general financial affairs and his first task was to prepare his tax return for 1988/89 and the Hay Lane Service Station accounts (trading having ceased in May 1988) for that tax year. The accounts were prepared by one of Mr Lock’s senior managers who also acted for a number of larger clients who had substantial property portfolios, and where the Richard Ellis Monthly Property Index had been used. It was considered appropriate, bearing in mind a Capital Gains Tax computation was required in respect of the subject land, to utilise that index in this case. The All Property Capital Value Index was 147.3 in 1982 and 201.2 in May 1988. Thus, values in 1982 were 73% of those that applied at the sale date. 73% of the 1988 sale price is £844,000 and that was the figure that the respondent is arguing for, Mr Lock said.[24]He said that separate valuation advice was not obtained as it was considered that the use of the Richard Ellis Index was sufficient for the purposes, and he was aware that the Inland Revenue used indexation in certain circumstances. 7[25]Mr Southern summarised by saying that the matter should be decided upon the facts rather than opinion. The purchase price in 1980 was very substantially less than market value whereas full value was achieved in the 1988 sale. It was inconceivable that the value in 1982 cou8ld be as little as £450,000, let alone the “revised” figure of £292,500 as promulgated by the District Valuer. Whatever value is found to be correct, no discount should be applied to reflect the lack of planning permission at the relevant date as the likelihood of obtaining it was virtually certain. Conclusions[26]I have no difficulty with Mr Alexander’s methodology despite it being somewhat unusual in valuation terms, and I accept that on this basis it is not possible to establish a yield. Whilst it is disappointing that he did not make available a copy of his residual check valuation, I am satisfied that the analysis of comparable site sales and rental values was comprehensive and, in the circumstances, appropriate. However, and as pointed out by counsel for the respondent, I have some difficulty in coming to terms with his conclusion that £70 per sq m was an appropriate estimated rental value. The comparable evidence, and particularly that relating to Valiant House in Wembley (which was virtually identical in size to that which was built on the subject land) clearly indicates to me that £90 per sq m would have been likely to be achieved. This is especially so as, in my judgment, a prominent development fronting Edgware Road in Colindale, North London would be every bit as likely to achieve at least as good as, if not better, rent than in Wembley.[27]Using the ratio of 4.1 that Mr Alexander suggested, and a rental value of £90 per sq m gives an equivalent sale price per sq m for the subject land of £369 per sq m, or £575,085 – say £575,000 for the site based upon what was developed on it. This is close to the price achieved for Valiant House (£580,000) and despite the fact that the valuation date is 2 years after Valiant House was sold, I can see no reason why there should be any adjustment. Indeed, Mr Alexander said in his report that no adjustment in rental values was required over that 2 year period, as substantiated by his own office records.[28]Having concluded that the open market value of the subject land, with planning permission, was somewhat more than the figure promulgated by Mr Alexander, I now turn to the question of what, if any, discount should be applied to reflect the fact that a prospective purchaser of the land in 1982 would have had to apply for consent. In this regard, I note that the parties are in agreement that such permission as was eventually granted could reasonably have been expected. Mr Alexander referred to Honeychurch and said that the circumstances there were very similar. In that case, which was also for Capital Gains Tax purposes and related to a site upon which development could have been anticipated but for which planning permission was not yet in existence, and which was also sold in 1988, the Tribunal considered a 35% discount to be appropriate. However, I note from that decision that it was considered that there was somewhat more risk than in the instant case in that the local plan, which eventually designated the land for residential development, had not yet been prepared. It was held that a prospective purchaser would build into his discount a percentage to allow for the fact that he may have his initial application refused, but was likely to succeed on appeal. 8[29]In my judgment the circumstances relating to the subject land, and the likelihood of planning permission appear to be much more clear cut. I also note that in his initial valuation, Mr Alexander applied no discount at all, and it is only in the later stages of this convoluted matter, that he has chosen to apply one. In my view, a prospective purchaser, who will undoubtedly be a developer, would not expect to pay full market value for a site upon which the time and cost of making an application had to be taken into account. However, the amount of discount he would apply in circumstances where, as the parties have agreed, there is a very strong likelihood of consent being granted and where the market is competitive would, I think, be relatively small. In the absence of any other evidence I consider 10% to be an appropriate discount.[30]I therefore determine that the market value of the freehold interest in the subject land as at 31 March 1982, under section 150 of the Capital Gains Tax Act 1979, was £575,000 less 10% ie £517,500. This decision determines the substantive issue in this case and will take effect when, and not before, the question of costs has been decided. At that point the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 and order 61 rule 1(1) of the Civil Procedure Rules will come into operation. A letter on costs submissions is enclosed with this decision. DATED 6 April 2005 (Signed) P R Francis FRICS 9 ADDENDUM[31]I have received submissions on costs from the parties. The applicant acknowledged that the respondent was successful in obtaining a reduction in his Capital Gains Tax liability due to the value of the subject premises being determined at some £225,000 more than its own expert’s opinion. Whilst the respondent had, therefore, been successful, the applicant said that there were a number of reasons why the Tribunal should exercise the discretion that it has under rule 52(1) of the Lands Tribunal Rules 1996 and it relied particularly upon para 20(2) of the Tribunal’s Practice Directions which were revised on 4 January 2005.[32]Firstly, the respondent had not been successful in the whole of his claim. The valuation methodology of the applicant’s expert had been accepted and no reliance had been placed by the Tribunal on Mr Cobrin’s suggested use of an index. Further, the respondent’s conduct before the hearing had resulted in there being no choice but for the applicant to pursue the matter to a hearing. Indeed, the respondent’s failure to appoint his own valuer had prevented any opportunity for negotiations and Mr Cobrin’s repeated failure to comply with Lands Tribunal orders resulted in him being debarred from adducing any such evidence at the hearing.[33]Finally, the respondent’s claim had also been exaggerated by a factor significantly more than the difference between the applicant’s figure and that determined by the Tribunal. All these factors, it was contended, rendered it appropriate that I should either determine that the respondent pay all the applicant’s costs or, alternatively, at least 60% of them. However, if I were to make an award of costs against the applicant, it was suggested that any such award should be reduced by about 75% to take account of the above submissions.[34]The respondent said that as he had been substantially successful, costs should follow the event and that Mr Cobrin should have either all of his costs or at least 80% of them. Whilst it was accepted that Mr Cobrin had been responsible for some of the delays during the 16 years since the disposal of the property, the conduct of the applicant had also contributed significantly to those delays, and, right up to the commencement of the hearing, they had refused to negotiate. Finally, the respondent said that it was the applicant whose claim had been exaggerated in that the Tribunal had not accepted the level of discount for the absence of planning permission, as promulgated by Mr Alexander.[35]It was clear to me at the hearing that the conduct of both the applicant and the respondent had contributed to the not inconsiderable delay in the matter coming before the Lands Tribunal, and no one party could take all of the blame. However in my view, the fact that Mr Cobrin had failed to retain his own expert in valuation matters undoubtedly had a considerable impact and I consider it only right, therefore, that although he was successful by a large margin, he should not receive all of his costs.[36]There are certainly, in my judgment, no grounds for awarding the applicant its costs, and I therefore determine that the applicant shall pay 75% of the respondent’s costs, such costs to be the subject of a detailed assessment by the Registrar if not agreed. 10 DATED 7 June 2005 (Signed) P R Francis FRICS 11