Compensation for acquisition of land – Waste tip – Valuation method – Whether capitalisation of net annual receipts – Whether comparables relevant – Whether capitalisation of notional royalties
The claimant company was the owner of an 18ha
waste tip with the benefit of permitted development rights for the tipping of
pottery manufacturers’ waste without planning restrictions and with a
waste-disposal site licence. In December 1993 the acquiring authority took
possession of about 8ha of the tip for the construction of a highway. The loss
of the 8ha reduced the tipping volume from 944,000m3 to 687,000m3, of which
33,200m3 was injurious affection and severance. The claimant sought £1m, plus
some small items of disturbance and the residual value of the land, as compensation
for the land taken and injurious affection and severance; this was based on the
net annual income a purchasing operator would derive from tipping 60,000 tonnes
pa for the tip life of 7.5 years. The acquiring authority’s valuer spoke to
£235,000 derived from three exercises: in two of these he used comparable
transactions; in the third he capitalised the annual income that an owner would
obtain from leasing the tip on royalty payments on the amount tipped.
disturbance and £4,500 for the residual value of the land. The appropriate gate
price at date of entry was £4.50 per tonne, the evidence for which was derived
from the actual charges made by the claimant. The capitalisation of the net
annual income was a potentially acceptable valuation method in the absence of
any other method. However, because the net income reflected profit and risk in
carrying on a business, the net annual income could not be seen as representing
the annual value of the land. It was not possible to produce a reliable
valuation based on the comparables. The valuation method of the claimant’s
valuer was preferred; a gate price of £4.50 and operating costs of £1.50 per
tonne were appropriate, producing a net income per tonne of £3. The
capitalisation rate was 20% and the resultant capital sum deferred one year.
The following cases are referred to in this
report.
Blue Circle Industries plc v West Midlands County Council [1989] RVR 34
Houghton Concrete Ltd v Wigan Metropolitan Borough Council [1989] RVR 224
McEwing (D) & Sons Ltd v Renfrew County Council (1959) 11 P&CR 306; 1960 SLT
140
Shraff Tip Ltd v Highways
Agency [1999] 2 EGLR 205
Wimpey (George) & Co Ltd v Middlesex County Council [1938] 3 All ER 781
Michael FitzGerald (instructed by Kent Jones &
Done, of Stoke-on-Trent) appeared for the claimant; Christopher Lewsley
(instructed by the Treasury Solicitor) represented the acquiring authority.
Editor’s note: A
further issue raised in this case was subsequently heard by the tribunal, and
its decision on that point was reported at [1999] 2 EGLR 205. This report
relates to the substantive hearing.
Giving the decision of the tribunal, MR GEORGE BARTLETT QC, president,
said:
Introduction
This is a claim for compensation under the Land
Compensation Act 1961 in respect of the compulsory acquisition of part of an
18ha waste tip at Longton in the Potteries. The claimant company was formed in
1921 by some of the local pottery manufacturers for the purpose of acquiring and
operating the tip, and it is today in the ownership of eight of them, including
such well-known names as Josiah Wedgwood & Sons Ltd, Royal Doulton Ltd and
Spode Ltd. The land was acquired as a tip for "shraff" – pottery
waste consisting of flawed and damaged products – and the moulds and pitchers
used in the casting of pottery. From 1923 onwards it has been used for this
purpose. Up to 1987 tipping was restricted to the shareholder companies. Since
then, apart from a period from 1990 to 1993 when tipping was again restricted,
waste from non-shareholder companies has been accepted.
In 1992 the A50 Trunk Road (Blythe Bridge to
Queensway Stoke-on-Trent) Compulsory Purchase Order (WMRT no 2) 1992 was made
and about eight of the 18ha were acquired by the Highways Agency. Entry was
made on 14 December 1993. At the date of notice to treat, the site had the
benefit of permitted development rights for the tipping of pottery
manufacturers’ waste without planning restrictions and a waste disposal site
licence issued in 1978. The licence also permitted the disposal of builders’
waste together with a maximum of 5% by volume of paper, cardboard, plastic and
similar material. It is agreed that the loss of the 8ha has reduced the tipping
volume of the tip from 944,000m3 to 687,000m3 (a reduction of 256,700m3) and at
issue in these proceedings is the value of the tipping space that has been
lost. Of the amount lost, 33,200m3 may be classed as injurious affection and
severance, although no importance attaches to this.
Under the claimant’s waste-disposal site licence
tipping was limited to 375 tonnes a day, which in practice meant an annual
limit of 90,000 tonnes. The licensed land excluded the area that at that time
it was envisaged would be taken for the road, but in the event rather more land
than this excluded area has been acquired. The claimant company’s requirement
is for 30,000 tonnes pa, and the parties both approach the question of
compensation on the basis that a sale of the land acquired would have proceeded
on the assumption that the purchaser would be able to use the balance of the
90,000 tonnes and thus would tip at the rate of 60,000 tonnes pa. At that rate
the 256,000m3 would be used up in 7.5 years.
In addition to the matters we have so far referred
to, which are either agreed or not in dispute, the parties are also agreed that
the average "in situ density" is 1.75 tonnes per cubic metre
(that is to say, 1.75 tonnes of tipped material would, when compacted, occupy
1m3 of air space), and that an appropriate royalty for waste disposal at
leasehold sites at the date of valuation is between 20% and 30% of gate
receipts.
The approach of the claimant’s valuer is to
establish what net annual income a purchasing operator would derive from the
60,000 tonnes pa and to capitalise this amount by taking 7.5 years’ purchase at
an appropriate percentage. The acquiring authority’s valuer produces a
valuation derived from three different exercises. In two of these he applies to
the 256,000m3 volume a price per cubic metre derived in each case from a
comparable transaction. In his third exercise, he capitalises the annual income
that he thinks would be derived by an owner who leased the tip in return for
royalty payments on the amount tipped. The valuation of the claimant’s valuer
is £1m (plus small amounts to reflect disturbance and the residual value of the
land after tipping). The acquiring authority’s valuer’s figure is £235,000
including disturbance.
Claimant’s valuation
Evidence for the claimant was given by Mr KJ Bate
frics ceng mimine fgs, a partner in Wardell Armstrong, mining, minerals,
engineering and environmental consultants. Mr Bate’s valuation was as follows:
|
(i) |
Volume |
256,000m3 |
|
(ii) |
Tipping capacity |
49,225 tonnes (256,700m3 |
|
(iii) |
Rate of tipping |
60,000 (90,000-30,000) |
|
(iv) |
Life, say |
7.5 years |
|
(v) |
Gate price, say |
£5 to £7 per tonne |
|
(vi) |
Operating costs, say |
£1.50 per tonne |
|
(vii) |
Net income per tonne |
£3.50 to £5.50 |
|
(viii) |
Annual income, say |
£210,000 to £330,000 |
|
YP 7.5 years at 20% = |
|
|
|
Present |
£781,200 |
|
In the light of this he considered that a sale of
the land would be likely to raise a figure of, say, £1m in the open market. In
addition, he was of the opinion that the residual value of the 8ha was
approximately £10,000, which represented a value of £4,500 at the date of
entry; and that there should also be added a sum for disturbance amounting to
£5,176.48.
Of the ingredients of the valuation, (i), (ii),
(iii), (iv) and (vi) were either agreed or not disputed. Disagreement arose on
(v), the gate price; and it was a fundamental point at issue whether it was
appropriate to capitalise (vii), the annual net income, in order to arrive at
the open market value of the land. We consider these matters below.
Mr Bate placed reliance on two comparable
transactions. The first of these was the sale by tender of a licence for
tipping on land off Pepper Street, Silverdale, Newcastle-under-Lyme. This
devalued, he said, to a price per cubic metre of tipping space of £2.95, which
when applied to the space at Shraff Tip gave a figure of £757,158; but he
thought that there were significant reasons why Shraff Tip would have attracted
a better price. Mr Bate’s second comparable was the acquisition under
compulsory powers of part of a shraff tip owned by H&R Johnson at Tunstall,
Stoke-on-Trent, which was agreed on the basis of a price per tonne of £9 and
supported, he said, his range for the subject land of £3.50 to £5.50 per tonne.
We consider the evidence relating to these below.
Acquiring
authority’s valuation
Evidence for the acquiring authority was given by
Mr PG Hand ARICS, who, during the last 26 years, has been employed in the
Valuation Office as a mineral valuer. His valuation was, as we have said,
derived from three separate exercises. The first, (a), was based on an
agreement of August 1995 in pursuance of which land at Ridley Lane, Ulnes, near
Leyland in Lancashire was transferred to Lancashire Waste Services Ltd. The
land contained tipping capacity amounting to 1,265,000m3 of air space. The
price paid was £556,000, plus £385,000 compensation to the tenant farmer, and
other costs amounted to £165,840, making a total cost for the site of
£1,106,840. It was acquired by a company that was already tipping on the other
side of Ridley Lane, and based on its rate of tipping on that site, about
150,000m3 pa, the land transferred would have a life of about eight years. The
site had a full waste disposal licence for domestic, commercial and industrial
waste, which was worth more than the restricted categories applicable on the
subject land. The cost per cubic metre of air space was £0.88 and applying this
price to the air space at Shraff Tip gave a value of £225,900. This was Mr
Hand’s valuation (a).
Mr Hand’s second valuation exercise, (b), was
based on another comparable, the transfer of land containing 250,000m3 tipping
space at Sandy Lane, Whirley, near Macclesfield in Cheshire, approximately 20
miles north of the subject land. The purchase price was £200,000 and the date
of the transaction was 3 November 1994. A waste disposal licence had been
granted in March 1990 and permitted a maximum monthly disposal of 350 tonnes of
asbestos and 2,000 tonnes of inert fill, equivalent to 28,200 tonnes pa. The
licence had been surrendered in June 1991 but a new licence had been applied
for and the proposed licence would permit tipping up to 250,000 tonnes pa,
giving the tip a life of 1.75 years. Dividing the purchase price of £200,000 by
the air space of 250,000m3 gave a price of £0.80 per cubic metre. Applying this
to the Shraff Tip 256,700m3 air space gave a figure for compensation of
£205,360. Since the Sandy Lane site did not have the benefit of a site licence
Mr Hand thought it appropriate to add by way of disturbance compensation an
amount to reflect the costs, deferred for 10 years, of obtaining planning
permission and a site licence on a replacement site. This amount he put at
£12,400 to give a total of £217,760.
Mr Hand’s third valuation exercise, (c), was on
the basis of a capitalisation of the royalties that, in his view, the right to
tip on the site would achieve. These royalties, he said, would be based on the
anticipated gate price for the waste received. He referred to Houghton
Concrete Ltd v Wigan Metropolitan Borough Council [1989] RVR 224 in
which the tribunal had awarded compensation on the basis of a capitalised
tipping rental. In the light of his assessment of the evidence on gate prices
(which we consider elsewhere), Mr Hand thought that to take a gate price of
£8.00 per cubic metre would not be unreasonable and that it would be reasonable
to take 25% of gate receipts to arrive at an appropriate royalty. In
capitalising the annual income he thought that a risk rate of 20% was
appropriate. Accordingly his valuation was:
|
Capacity |
256,700m3 |
|
Input |
60,000 tonnes pa |
|
which at |
34,285m3 pa |
|
Life of |
7.45 |
|
Annual |
£68,570 |
|
YP 7.45 |
|
|
Capital |
£254,703 |
However, Mr Hand went on, since no agreement for
another party to tip 60,000 tonnes pa was in place at the date of entry, it
would not be unreasonable to allow for 12 months’ delay in setting up such an
agreement, so:
|
PV of £1 |
£212,252 |
As with his valuation (b), Mr Hand then added
£12,400 in respect of disturbance to produce a total of £224,652.
Of his three valuation bases, Mr Hand said that he
placed greater weight on (a) and (b) than on (c). Set out together they gave
the following figures:
(a) £225,900
(b) £217,760
(c) £224,652
He considered that a reasonable valuation would
therefore be £225,000, but to this should be added a further £10,000 to reflect
the residual value of the land and the disturbance referred to by Mr Bate. His
final figure, therefore, was £235,000.
While the facts relating to the Ridley Lane and
Sandy Lane comparables were, subject to what we say later, not in dispute, Mr
Bate did not accept that it was appropriate to place reliance on them as Mr
Hand had done or at all; and as far as valuation (c) was concerned, while it
was agreed that the appropriate royalty for leasehold sites was between 20% and
30%, Mr Bate did not accept that it was appropriate to value on the basis of a
capitalisation of such receipts, and the gate prices themselves were a matter
in issue.
Issues
The issues between the parties upon which, in our
judgment, the outcome of this case depends are these:
(i) The conclusions (if any) to be drawn from the
comparables. Mr Bate relies on his two comparables as confirmation of the end
figure of his valuation. Mr Hand’s valuations (a) and (b) are based directly on
his two comparables.
(ii) The appropriate gate price to assume. The
gate price is a crucial ingredient of Mr Bate’s valuation; and it underlies Mr
Hand’s valuation (c).
(iii) The valuation method to be used.
The comparables
Pepper Street
Mr Bate’s first comparable was the sale by tender
of a licence for tipping off Pepper Street, Silverdale, Newcastle-under-Lyme.
The land is about 5km west of Newcastle-under-Lyme and 10km from Shraff Tip.
The licence was for the period up to 28 October 2006. The date of the
successful tender was 20 September 1991 and the price was £155,000. The vendors
reserved the right for a period of five years to tip waste (other than tyre
casings) up to a maximum of 2,000 tonnes each year subject to a payment by the
vendors of £10 per tonne for carbon black and £5 per tonne for all other waste.
The waste-disposal site licence, dated 14 April 1977, provided that:
The type of waste for which the site is licensed
is classed as factory arisings including paper, rubber including tyres, wood,
tins, hardcore, filter cake etc and shall not exceed 200 tonnes per week.
The agent’s particulars stated that the vendors’
surveyors:
have estimated that the net capacity of the site
excluding topsoil filling necessary to cover the material tipped is
approximately 60,000m3.
Mr Bate said that the amount paid needed to be
adjusted to reflect the fact that the date of offer was 22 months before the
Shraff Tip date of entry. Adjustment on the basis of the RPI brought the amount
to £161,975. In addition, he understood that it was necessary to spend about
£15,000 on the site infrastructure, and adding on this amount would produce
£176,975 as a reasonable assessment of the total purchase price. This was the
amount, he said, which was paid for 60,000m3 of tipping facility, and it
equated to a purchase price of £2.95 per cubic metre of air space.
Although he relied on the transaction as evidence
of the value placed on tipping space when sold in the open market, Mr Bate did
not suggest that it was to be analysed in terms of his own valuation approach
or that it provided evidence of that approach being applied by the parties when
tipping space was sold. The reliance that he placed on it was in terms of the
price per cubic metre of £2.95. Applied directly to Shraff Tip, this unit price
would produce a value of £757,158. In his opinion, however, Shraff Tip would
have been likely to have attracted a better unit price, since it was better
situated in relation to demand, had a higher permitted tipping rate (375 tonnes
per day as compared with 200 tonnes per week), was the sale of the freehold,
had a greater capacity, and had no reservation to the vendor.
Mr Hand did not dispute the facts relating to
Pepper Street. He thought, however, that little weight should be attached to
the transaction because it was a sale by sealed tender rather than a negotiated
purchase, and the company that made the successful offer, Linkwaste (UK) Ltd,
had no experience of transactions in this field. Moreover, he said, the company
had been advised by Mr Bate’s firm, Wardell Armstrong, and within about three
months, on 1 April 1992, it had applied to have the maximum tipping rate increased
from 200 tonnes per week to 360 tonnes per day, indicating in its application
that the remaining capacity of the site was 200,000m3. Dividing Mr Bate’s
adjusted purchase price by this amount gave a price per cubic metre of £0.88
rather than Mr Bate’s £2.95. In the event, the tip had been filled quickly –
within 3.5 years – which suggested that, although it was less centrally
situated in relation to the Stoke conurbation, there was no shortage of demand.
In addition, there had been a quantity of Etruria marl on the site that was
available for capping of the tip and for sale. In an exchange of
correspondence, which Mr Hand produced, Linkwaste confirmed that in making its
tender offer for the site it had assessed its potential; that it envisaged that
Etruria marl and other materials could be extracted for use as daily cover,
capping material, and for sale; and that the company saw the site as an
opportunity to develop into the waste industry and gain relevant experience.
In our judgment, the Pepper Street sale does not
provide useful comparable evidence. The fact that the two valuers devalue the
purchase price at £2.95 and £0.88 per cubic metre is indicative of the
uncertainties attendant on any analysis of this transaction. While it is
reasonable to infer that the purchaser had regard to the prospect of exploiting
a capacity above the 60,000m3, it is not possible, in our view, to identify any
particular figure or range of figures as representing the parties’ view at the
time of the transaction. In these circumstances, we do not think anything
useful can be derived from the sale.
H&R Johnson
The second transaction upon which Mr Bate relied
was the acquisition under compulsory powers of part of a shraff tip owned by
H&R Johnson at Tunstall, Stoke-on-Trent, some 10km from the subject land.
Date of entry was June 1996. The capacity acquired was 3,900m3, and the
compensation paid by the acquiring authority, Staffordshire County Council, was
£75,000, of which £61,425 was said to represent the capacity acquired. The
price per tonne was agreed at £9, which was based on a gate price of £14 per
tonne less an allowance for running the tip (£3 per tonne) rates (£0.50 per
tonne) and final restoration costs (£1.50 per tonne). Mr Bate considered that
it supported his range of £3.50 to £5.50 per tonne for the subject land.
Mr Hand, for his part, considered the transaction
to be of no assistance. It was not a market transaction, it related to a very
small amount of capacity, and the council’s valuer was not experienced in mineral
valuation. The gate price of £14, Mr Hand pointed out, was very much higher
than the £5 to £7 contended for by Mr Bate in relation to Shraff Tip. At £6 a
tonne the profit would be £1 and not the £9 that was agreed. For our part we
accept these comments, and we cannot regard the H&R Johnson settlement as
useful evidence.
Ridley Lane
We have set out above Mr Hand’s evidence on Ridley
Lane and the reliance he placed upon it. Mr Bate pointed out that the site was
some 60 miles from the subject land, and there was no evidence from Mr Hand on
supply and demand for tipping in the area. The tipping capacity quoted was
gross capacity, and in his experience cell bunds, floors, daily cover and
capping would occupy 15% to 20% of the gross volume. The site had not been
marketed, and the purchaser already had a licence to occupy part of the land,
which gave him a strong negotiating position. Mr Bate did not regard it as a
useful comparable transaction.
Sandy Lane
On Mr Hand’s other comparable, Sandy Lane, Mr Bate
said that the Sandy Lane tip suffered from significant problems arising from
previous tipping operations on the land. The waste management application had
indeed stated:
Clearly there remains a risk to health and indeed
a pollution potential exists to ground water from the incident rain water
percolating through the already deposited materials.
At the date of the transaction, said Mr Bate, the
site did not have the benefit of any waste disposal licence and the extant
planning permission was for significantly less than the 200,000m3 referred to
by Mr Hand. Thus the price paid for the site was on the basis of a speculation
on the right to receive a cashflow, subject to planning and licensing. The
purchaser would have known that the cashflow would be unlikely to commence for
a number of years, and, in fact, four years after the transaction no tipping
had begun.
We agree substantially with Mr Bate’s strictures
on the Ridley Lane and Sandy Lane comparables. Apart from the general
difficulties associated with comparing sites on the simple basis of £ per cubic
metre of air space (a matter we deal with below), each of them has obvious
shortcomings as a comparable. Both are far removed from the subject land. There
must be considerable doubt as to whether the Ridley Lane transaction was at a
true market price. There appears to be a similar degree of uncertainty about
tipping capacity at Sandy Lane to that in the case of Pepper Street, and
problems from contamination are clearly significant.
Gate prices
Mr Bate derived support of his valuation figure of
£5 to £7 per tonne both from the gate prices charged by the company at the tip
itself, and also from three surveys that his firm had carried out of gate
prices at other tips in October 1992, December 1994 and August 1995. At the
date of entry, the company’s prices were quoted as amounts per skip or per
truck of particular sizes. In order to enable a conversion of these prices to a
price per tonne, a survey had been carried out in October 1993, which showed
that the average density of material received at the tip was 0.6 tonnes per
cubic metre. Using this rate of conversion, Mr Bate calculated that an average
charge of £5 was levied at the date of entry for each tonne of material
received. Prices at that time had been reduced from those in March 1993, when
the average charge was £7.73 per tonne; and by April 1995 they had been
increased to £6.18 per tonne. However, because in his view the tip was operated
for the benefit of the constituent companies rather than in a fully commercial
way, he thought it right to look at gate prices elsewhere to determine a
realistic rate to apply.
In the survey carried out in October 1992, 13
waste disposal contractors within a 25-mile radius were approached and three
responded. These quoted prices for shraff in volume terms, ranging from £2.33
to £7.90 per cubic metre. Mr Bate said that, applying his 0.6 conversion rate,
these prices averaged £6.67 per tonne. In December 1994 10 companies were asked
to quote prices for shraff, and, of the eight that accepted shraff, written
responses were received from three, with oral replies from the rest. Prices
were variously quoted in terms of £ per tonne, £ per cubic metre and £ per
cubic yard. Those quoted in volumetric terms ranged from £5.26 to £12.00 per cubic
metre. When these were converted to prices per tonne using the 0.6 factor, the
overall range was from £8.63 to £19.67 per tonne and the average was £13.78. In
August 1995 nine loads were taken to three sites and prices ranging from £7.92
to £16 per tonne were charged, the average being £13.69.
From this survey material Mr Bate concluded that
the £5 charged by the company at the date of entry was below the market level.
The evidence of tipping prices charged at other locations showed a range of
£6.50 to £13.50, although the £13.50 was not to be regarded as the relevant
market indicator as the competition from transfer stations at the date of entry
would have exerted a moderating influence. He considered it reasonable to
assume that the site could have operated a pricing policy ranging from £5 to £7
per tonne.
Mr Hand’s view was that the likely gate receipts
were £8 per cubic metre of air space, or £4.50 per tonne using the agreed
conversion factor of 1.75. He derived his figure from an analysis of actual receipts
at Shraff Tip, from his own experience, and from three other sources. The first
of these other sources were the prices charged by the company to the road
contractors (Birse and Christiani Keir) that constructed the road on the land
acquired. Some 200,707m3 was sold at an average price of £5.65 per cubic metre,
although he agreed that, since the company incurred no costs in relation to the
quantity tipped, it would be reasonable to add £1.50 to this price. The second
further source was a discussion with Poplars Waste Management, which operates
two sites in Staffordshire. This suggested prices from £5.25 to £7 per cubic
metre. The third further source consisted of the prices quoted at Pepper Street
in October 1994 – £4.50 per tonne for shraff and £6 per tonne for industrial
and commercial waste. As far as the results of Mr Bate’s surveys were
concerned, Mr Hand took issue on a number of points, but in particular he
disagreed with the 0.6 density factor for material delivered. He said that 1.2
was the rate taken and agreed for rating purposes and he produced a paper
suggesting a range of densities for different types of waste.
In our judgment, the best evidence of the gate
prices that it would have been likely to achieve on the subject land at the
date of entry are to be derived from the actual charges made by the company. It
appears clear to us from the statement prepared on behalf of the company that
from March 1993 onwards prices were being charged on a commercial basis, and
the reduction that was made in the course of that year was a response to the
increased competition from the transfer stations. We do not find the survey
material relating to other sites to be of any real assistance. They exhibit a
very wide range of prices, which seems to us to be unsurprising in view of the
importance of transport costs in waste disposal. Mr Bate said that these were
about £0.30 per tonne per kilometre, and this would suggest that the
geographical relationship between a tip and its sources of demand could have a
very substantial influence on the prices that it was able to charge. It is
likely that the range of materials covered by its licence could also affect the
prices charged.
Transport costs seem to us to have a further
significance. The prices charged by the company have related to local demands –
from the member companies in and near Longton itself and from the road
contractors. If tipping at 60,000 tonnes a year were to be achieved on the
subject land it is inferable that trade would have to be attracted from further
afield, and this would exert a downwards pressure on the prices that the
company would be able to charge. In these circumstances we think that the
appropriate gate price to assume at the date of entry would be £4.50 per tonne.
Valuation method
Mr Bate’s valuation method was said by Mr Hand to
be wrong because it attributed the entire capitalised net income to land value,
leaving nothing for trading profit and the value of the operator’s business.
Reliance was placed on George Wimpey & Co Ltd v Middlesex County
Council [1938] 3 All ER 781 and D McEwing & Sons Ltd v Renfrew
County Council 1960 SLT 140 for the proposition (on which there was no
disagreement) that compensation was not recoverable for loss of profit. An
operator, Mr Hand said, would want a trading profit to reflect the fact that he
would be using his expertise, contracts and plant and machinery to run an
operation involving considerable risks; and furthermore he would need to
finance the purchase of the land and would have either to pay, or to forego,
interest on the purchase price.
Mr Bate’s response to this criticism was twofold.
First, he said that his was an approach that had been followed by the tribunal
in Blue Circle Industries plc v West Midlands County Council
[1989] RVR 34 and was in practice adopted by tipping operators, and he relied
on two letters he had received, from HJ Banks & Co Ltd and Leigh
Environmental Ltd, expressing agreement with his method of valuation. Second,
he said that an operator would purchase a tip out of his own assets, and only a
relatively small proportion of the annual income would be needed to provide a
sinking fund for re-establishment of the purchase price at the end of the
tipping period. An allowance for interest charges would accordingly be
inappropriate.
It is clear that the net annual income in Mr
Bate’s valuation represents the amount that is derived by the operator from the
conduct of his business and the use of his assets, including the land. Since it
must include whatever appropriately reflects his own profit and risk in
carrying on his business, this net income obviously is not to be seen as
representing the annual value of the land. Mr Bate is not capitalising a rental
value but is seeking, through a capitalisation of annual net income, to reach a
capital value for the principal asset that is employed in the business. As a
method of valuation, the weakness in his approach, it seems to us, is not that
it necessarily fails to take account of the operator’s profit and risk, but
that it fails to do so explicitly. It may be possible to get from the net
annual income of the business to the capital value of the land in a single
step, but, if this is to be done, the single judgmental figure involved in the
step – the rate % – must derive from a series of judgments on particular
matters, which would, in our view, have to include an appropriate allowance for
operator’s profit and risk. It is not possible to know how much, if anything,
has been allowed for this.
We note, however, that this was the method of valuation
adopted by the tribunal in the Blue Circle case, although there was then
no disagreement between the parties as to the appropriateness of applying it.
We also accept Mr Bate’s evidence that it is a method commonly used by tipping
operators in evaluating sites. Despite its shortcomings, therefore, we regard
it as a potentially acceptable approach in the absence of any other method
that, in the light of the evidence available, may be considered reliable.
Mr Hand’s principal valuations were based on his
Ridley Lane and Sandy Lane comparables. We have considered above these
comparables and those relied on by Mr Bate – Pepper Street and H&R Johnson.
Our conclusion is that it is not possible to produce a reliable valuation on
the basis of the comparables referred to by the valuers. All the comparables
were analysed on the basis of a straightforward price per cubic metre of
tipping space. However, such an analysis seems to us to be of little if any
practical use in circumstances where the amount that a purchaser would be
prepared to pay for tipping land must depend on a number of factors, which may
vary widely from site to site. Thus the evidence shows that the level of gate
prices varies considerably from site to site and, as we have said, these are
likely to be location-sensitive, as well as being related to the range of
materials covered by the site licence. It appears that the cost of tipping and
restoration can vary widely from site to site. Thus, while £1.50 per tonne was
the agreed total cost for Shraff Tip, Mr Bate gave as the equivalent figure for
his H&R Johnson comparable £5 per tonne, a figure that we did not
understand Mr Hand to contest. Contamination may be a considerable problem on
some sites but not on others. The number of years of tipping at the rate
permitted by the licence may vary considerably. It was in recognition of the
importance of this variable that both Mr Bate’s valuation and Mr Hand’s
valuation (c) (the capitalisation of royalties) incorporate an appropriate
years’ purchase; but a valuation based on a simple price per cubic metre leaves
it out of account. There is no evidence to suggest any similarity between the
subject land and the comparables in terms of the basic factors crucial to a
valuation of the land – gate receipts, cost of tipping and restoration,
contamination and other problems, and tipping rate. Nor is it possible to make
allowances for such differences as are identified so as to produce from the
bare price per cubic metre for the comparables a price per cubic metre that can
be seen to be appropriate. We therefore conclude that a valuation based on
comparables cannot appropriately be made in the present case.
Mr Hand’s alternative valuation approach is to
capitalise the royalties that he says would be payable for tipping on the
subject land. He bases himself on the agreement between the parties that
"Appropriate royalty for waste disposal at leasehold sites at the date of
valuation is between 20% and 30% of gate receipts." We find it surprising
that royalties should be related to gate receipts in such a narrow percentage
band when the other element of net income, the cost of tipping and restoration,
is clearly capable of varying widely from site to site. No evidence of sales of
land on which royalties were payable was adduced, and we infer that such sales
take place in a different market from that which would apply in the
hypothetical transaction that has to be envisaged here. We accept Mr Bate’s
view, with which we do not understand Mr Hand to disagree, that the purchaser
in such a transaction would be an operator and not an investor. We note that Mr
Hand attaches less weight to his royalty valuation than to those based on
analyses of his comparables. For our part, we do not consider that in the
present case a capitalisation of royalties would be a sound approach to
valuation.
In the circumstances, we have concluded that Mr
Bate’s valuation approach is to be preferred in the light of the evidence that
is available.
Tribunal’s valuation
The parties both approach their valuations on the
assumption that a purchaser would assume that he would be able to tip at the
rate of 60,000 tonnes pa, and we adopt this figure, although we think that its
achievement would depend on a gate price substantially lower than that assumed
by Mr Bate. As we have said, we believe that the gate price upon which a
purchaser would be likely to base his calculations would be £4.50 per tonne.
This contrasts with the £6 per tonne that underlies Mr Bate’s end figure of
£1m. In the absence of any more compelling evidence, we accept that Mr Bate’s
risk rate of 20% is sufficient to comprehend an appropriate allowance for
operator’s profit and risk, and we adopt it. We bear in mind, however, that at
the time of valuation no licensed tipping rate on the subject land itself was
established. A purchaser would take account of this and also of the need to
enter into some working arrangement with the claimant company, and to devise
what could well be somewhat complicated procedures, to enable both parts of the
tip to be operated to their full extent. We think that he would allow for this,
as Mr Hand suggests, by assuming a 12-month deferment of the start of tipping.
We think it appropriate to allow for this at the same 20% rate. Our valuation
is thus as follows:
|
(i) |
Volume |
256,000m3 |
|
(ii) |
Tipping |
449,225 tonnes |
|
(iii) |
Rate of |
60,000 (90,000-30,000) |
|
(iv) |
Life, |
7.5 years |
|
(v) |
Gate |
£4.50 per tonne |
|
(vi) |
Operating |
£1.50 per tonne |
|
(vii) |
Net |
£3 |
|
(viii) |
Annual |
£180,000 |
|
YP 7.5 years at 20% = |
|
|
|
Present |
£669,600 |
|
|
Defer 1 |
£555,768 |
|
|
Add |
|
|
|
(a) for |
£5,176 |
|
|
(b) for residual value |
£4,500 |
|
|
Total |
£565,444 |
|
Accordingly we determine the amount of
compensation payable to be £565,444 plus surveyor’s fees under Ryde’s Scale.
Legal costs on the purchase of the land taken and interest on the compensation
are the subject of specific statutory provisions.
This decision determines the substantive issue
raised between the parties and the tribunal’s award is final. The parties are
invited to make submissions as to the costs of this reference and a letter
accompanies this decision as to the procedure for submissions in writing. Any
order that is made as to costs will form an addendum to this decision.
The right of appeal under section 3(4) of the Lands Tribunal Act 1949 and Rules
of the Supreme Court Ord 61 will not arise until the decision has been
completed by the determination of the question of costs.
Addendum on costs
We have received representations on costs. The
acquiring authority will pay the claimant’s costs of the reference. Such costs,
if not agreed, will be the subject of a detailed assessment on the standard
basis by the Registrar of the Lands Tribunal in accordance with r 44.4 and r
44.7 of the Civil Procedure Rules. The procedure laid down in r 52 of the Lands
Tribunal Rules 1996 will apply to such detailed assessment.
