Rates and rating — Public house — Approved guide for rating valuation of licensed premises — Turnover valuation — Relevance of guide and comparables — Whether actual and prospective profits figures relevant — Lands Tribunal simplified procedure
The appellant acquired the appeal property, a
detached public house, in 1993 for £155,000. It was entered in the 1995 rating
list with a rateable value of £7,000. Following a proposal by the appellant,
and the submission of accounts, the respondent valuation officer altered the
rateable value to £4,900 with effect from 26 March 1997. In September 1997 the
appellant made a further proposal to alter the rateable value. Following an
appeal, in November 1998 the local valuation tribunal confirmed the rateable
value. The appellant appealed, contending that in the four years since he had
acquired the property he had made a loss and that the approved guide, a guide
to rating valuation agreed between the valuation office and the relevant trade
organisations, was impossible to apply by fine tuning when no profit
information was available; he suggested the council tax banding method or a
nominal value.
£500. The banding methods for council tax purposes could not be applied. The
accounts of an actual occupier will not necessarily accord with those of the
hypothetical tenant, however they form a useful starting point. On the
evidence, the hypothetical tenant would not have anticipated that he would be
able to operate the appeal property at a profit. The valuation officer had not
fine-tuned the approved guide in the light of the actual profit figures.
The following cases are
referred to in this report.
Benjamin (VO) v Anston Properties Ltd [1998] 2 EGLR 147; [1998] 19 EG 163;
[1998] RA 53
Bradford-on-Avon Assessment Committee v White [1898] 2 QB 630
Cartwright v Sculcoates
Union [1899] 1 QB 667
Consett Iron Co Ltd v North West Durham Assessment Committee [1931] AC 396;
[1931] All ER Rep 62; (1931) 29 LGR 231
Dawkins (VO) v Ash
Bros & Heaton Ltd [1969] 2 AC 366; [1969] 2 All ER 246; [1969] 2 WLR
1024; (1969) 67 LGR 499; [1969] RA 205
Dodds v South
Shields Poor Law Union Assessment Committee [1895] 2 QB 133
Edinburgh Street
Tramways Co v Lord Provost of Edinburgh [1894]
AC 456
Grant v Knaresborough
Urban Council [1928] Ch 310
London County Council v Churchwardens of Erith Parish and Dartford Union Assessment
Committee [1893] AC 562; [1891-94] All ER Rep 577
Marylebone Cricket Club v Morley (VO) (1959) 175 EG 11; 6 RRC 258, LT
Mersey Docks and Harbour Board v Birkenhead Assessment Committee [1901] AC 175; [1900] 1 QB
143; [1900-03] All ER Rep 27; 17 TLR 444, HL
R v West Middlesex Waterworks Co (1859) 1 E&E 716; 28 LJMC
135; 32 LTOS 388; 23 JP 164
Rank Organisation Ltd v Billet (VO) (1958)
172 EG 285; 4 RRC 15; 51 R&IT 650
Robinson Bros (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937]
2 KB 445; [1937] 2 All ER 298, CA; affirmed sub nom Robinson Bros (Brewers)
v Durham County Assessment Committee (Area No 7) [1938] AC 321; [1938] 2
All ER 79, HL
The appellant appeared in
person; the respondent valuation officer, Peter David Griffiths arics, appeared in person with leave of
the tribunal.
Giving his decision, MR NJ ROSE FRICS said: This is an appeal by the occupier
of a public house and premises known as Red Hart Inn, Llanvapley, near
Abergavenny, Monmouthshire NP7 8SN (the appeal property), against the decision
of East Wales Valuation Tribunal (the LVT) determining the assessment in the
1995 rating list at £4,900.
Mr James Wallace Sharp, the appellant, appeared in
person and gave evidence. The respondent valuation officer, Mr Peter David
Griffiths arics, appeared in
person with leave of the tribunal and gave evidence.
Following an application by the appellant, the
tribunal directed that the simplified procedure provided for in r 28 of the
Lands Tribunal Rules 1996 should apply to this appeal. Towards the end of the
hearing, the appellant produced a detailed rebuttal of matters raised in the
respondent’s expert report. Having regard to the informality of proceedings
conducted in accordance with r 28, and with the agreement of the parties, I
permitted the respondent to submit written representations on this document
following the hearing. The contents of those submissions, and of the
appellant’s reply thereto, have been taken into account in preparing this
decision.
Facts
The respondent helpfully prepared a statement of
facts. Substantial parts of this document were agreed by the appellant during
the course of the hearing. From this agreement, and from the evidence, I find
the following facts.
The appeal property is situated within the village
of Llanvapley, at the side of the B4233 (Abergavenny to Monmouth) road,
approximately four miles east of Abergavenny.
Llanvapley consists of 34 dwellings. Only one
village resident uses the appeal property daily; four use it once a week and
two about once every four to six months. The position as to use by the local
inhabitants has changed little in the past five years. While there is some
summer bed and breakfast accommodation in the surrounding area, it produces
little trade for the appeal property. Very little tourist trade is generated
during the summer months, as the Llanvapley area falls between the tourist areas
that lie to the west of Abergavenny and mainly to the east of Monmouth. There
is an increase in the summer trade, but it is very fragile. As a result of a
major marketing effort by the appellant, the customer catchment area is now
between two and 30 miles away.
The appeal property is a composite hereditament
for rating purposes. It comprises a two-storey detached public house of
traditional construction with a car park to the side. There is a beer garden
with picnic benches to the rear.
The ground-floor accommodation is situated around
a central servery. On one side it comprises a lounge bar, with seating for
about 24 people, with a small games room with pool table and gaming machine
behind. To the other side of the servery is a second bar, with seating for
about 12, and a dining area, suitable for about 32 covers. Also on the ground
floor are ladies’ and gentlemen’s toilets, and a catering kitchen/food
preparation area, with commercial standard cooking equipment, including
freezers.
There are no letting bedrooms, and the residential
accommodation, which is not included in the rating assessment, is situated on
the first floor.
The freehold interest in the appeal property and
the residential upper part was purchased by the appellant in October 1993 for
£155,000.
The appeal property was entered in the rating list
that came into force on 1 April 1995 as ‘public house and premises’ with a
rateable value of £7,000.
Following receipt by the respondent of the
appellant’s accounts and in response to a proposal by the appellant dated 24
April 1995, the respondent altered the rating list to RV £4,900 with effect
from 1 April 1995 by way of a valuation officer’s notice dated 26 March 1997.
On 9 September 1997 the appellant submitted a
further proposal to alter the rating list. The stated grounds were: ‘the
alteration made by the valuation officer on 26 March 1997 was inaccurate’.
The respondent did not consider the proposal to be
well founded and the matter was referred to the LVT, which heard the resultant
appeals. By a decision dated 6
value of £4,900 with effect from 1 April 1995.
On 3 December 1998 the appellant gave notice of
appeal to this tribunal against the decision of the LVT. The substantive
grounds of appeal were as follows:
The assessment is incorrect and excessive. The
decision ignores the case law which has evolved and in terms of public interest
the current legal position in relation to non-domestic rating generally and
public houses in particular.
During 1993/1994 the valuation office agency
sought representations from the licensed trade on the appropriate basis of
valuing public houses in England and Wales for the purposes of the 1995
revaluation. Those consulted included the Brewers & Licensed Retailers Association,
the Association of Licensed Multiple Retailers, the Regional Licensed
Victuallers Associations, the Association of Licensed Free Traders and the
National Federation of Licensed Retailers. Following negotiations centrally
with representatives of the licensed trade, the valuation office issued an
approved guide for the valuation of public houses (the approved guide). This
document was formally agreed by the Brewers & Licensed Retailers
Association, but not by the other bodies that had been consulted. The
valuations for the 1995 rating list were carried out nationally in accordance
with the principles set out in the approved guide.
The method of valuation set out in the approved
guide involved determining percentages of the wet and dry fair maintainable receipts
to arrive at the rateable value. All public houses were valued by the valuation
office by the same method, irrespective of whether they were owned or occupied
by a brewer, licensed retailer or free trader.
The approved guide provides a framework for the
consistent agreement of assessments. It has no statutory basis, and is not
binding on individuals, the LVT or this tribunal.
All subsequent agreements of public house rating
assessments within the area covered by the Newport valuation office were in
accordance with the approved guide. The industry and its professional advisers
have generally accepted the guide as a framework. As at March 1999, only 483
appeals (1.3%), out of the 36,824 made in England and Wales during the first
year of the 1995 rating list in respect of licensed properties, remained
outstanding.
Case
for the appellant
Mr Sharp explained that he was not a professional
valuer. He had, however, formerly been a director of a subsidiary company of
one of the largest hotel groups in the UK.
Moreover, while the appeal property was his
family’s first public house, its above average competence was clearly
demonstrated by the property’s inclusion in four publications in which it had
never previously appeared. These were the Which Guide to Country Pubs, The
Good Pub Guide, the AA Best Pubs and Inns, and the CAMRA Good
Beer Guide. Of 1,126 public houses listed in the Cardiff area of Yellow
Pages, only 19 (1.6%) were listed in the AA Best Pubs and Inns Guide.
The appeal property also won the ‘best kept small village pub in Gwent’
competition in 1997 and 1998. This all indicated that the appellant was of
above average competence in the industry.
Nevertheless, the appellant had incurred a
substantial loss in every year since purchasing the appeal property. The
relevant figures were as follows:
|
|
1994 |
1995 |
1996 |
1997 |
|
|
£ |
£ |
£ |
£ |
|
Sales |
93,887 |
92,814 |
104,500 |
98,642 |
|
Less: cost of sales |
45,834 |
43,152 |
53,460 |
53,486 |
|
other direct costs |
4,000 |
4,100 |
7,089 |
3,623 |
|
Gross Profit |
44,053 |
45,562 |
43,951 |
41,533 |
|
Less: Inland Revenue permitted deductible expenses |
||||
|
Wages |
11,596 |
17,954 |
13,759 |
14,756 |
|
Premises costs |
9,756 |
8,954 |
11,001 |
7,716 |
|
Repairs |
10,547 |
11,455 |
12,072 |
13,810 |
|
Motor |
6,958 |
2,594 |
6,223 |
7,387 |
|
Travel |
350 |
150 |
658 |
14 |
|
Admin |
2,652 |
4,036 |
1,941 |
3,817 |
|
Adver, & Promo, |
2,560 |
2,837 |
5,535 |
5,399 |
|
Legal & prof, fees |
410 |
nil |
1,325 |
nil |
|
Bad debts |
nil |
nil |
nil |
50 |
|
O/draft interest |
4,671 |
2,239 |
3,593 |
1,424 |
|
Business Loan interest |
7,000 |
7,120 |
6,257 |
6,796 |
|
Bank charges |
1,500 |
1,026 |
1,500 |
850 |
|
Depreciation |
4,529 |
4,339 |
6,493 |
8,664 |
|
Misc, exp, |
1,602 |
2,012 |
3,758 |
2,099 |
|
Total |
64,131 |
64,716 |
74,115 |
72,782 |
|
Partners, x3 labour |
|
|
|
|
|
[notional] |
45,000 |
45,000 |
45,000 |
45,000 |
|
Partners NI |
4,500 |
4,500 |
4,500 |
4,500 |
|
Profit/[loss] |
[69,578] |
[66,654] |
[79,664] |
[80,749] |
For the years ending 31 December 1994 and 1995,
the appellant’s accounts were certified, although this was not legally
necessary. Since then, he had been unable to afford the services of an
accountant. Nevertheless, the accounting information provided had been
extracted from his annual tax returns. In July 1998 the accounts and invoices
were examined in detail by an HM Customs & Excise VAT officer, who
expressed himself to be entirely satisfied.
The appellant purchased the appeal property at
auction in October 1993. At that time, it was closed with no available trading
record. He therefore sought information from his own bank, which was already
holding a mortgage on the property, although through a different branch. It was
the information and assurances he received from this source that persuaded him
to take the risk of purchase. He was told that the reason for the sale after a
short period of ownership was that the landlord and his partner had split up
and the sale was necessary for the financial settlement. He found out later
that this was only part of the story.
Two weeks after completion of the purchase,
bailiffs arrived regarding VAT unpaid by the previous owner. That owner was
declared bankrupt soon after completion of the sale, despite having had a long
and respected track record in the public house trade in the Abergavenny area as
a landlord of other establishments. After the arrival of the bailiffs, local
customers started to tell the appellant about the previous history of the
property. It was several years before a detailed picture of the previous 20
years emerged. Between 1973 and the appellant’s purchase in 1993 there were
seven owners, of whom five were bankrupted by ownership of the appeal property.
Of the two not so affected, one, who was mainly responsible for the alterations
to the building, managed to leave with a financial loss after 12 months in the
mid-1970s. The other bought the property from the receiver in the 1980s, but
sold it again for considerable profit at the height of the property boom that
occurred at that time. The following two owners both succumbed to bankruptcy.
Had the appellant been aware of the history of
bankruptcy attaching to the appeal property, he would not, under any
circumstances, have purchased it in 1993. Indeed, he would not now advise
anybody to buy a country public house unless the turnover was at least £5,000
per week, exclusive of VAT. Otherwise, there would be no prospect of making a
reasonable profit. He referred to various public houses in the surrounding area
that had ceased to trade.
He had not sold the property because he was stuck
in a very difficult position. If he had done so, it would then have been
necessary to purchase two houses for the families who occupied the upper part.
It was not physically possible to separate the residential section from the
public house and simply close down the latter. He had continued to hope that he
would eventually be able to reduce the outgoings significantly, as well as
substantially reducing the loan. It should then be possible to continue on the
basis of a minimal profit from the public house, together with two pensions and
income from savings.
The appellant produced an extremely comprehensive
proof of evidence, followed by a lengthy rebuttal of observations made by the
respondent in his expert report. I intend no disrespect to him when I say that
I think his case may be summarised fairly briefly, as follows. Ideally, rating
assessments should be based on rental evidence. Where, as in the case of public
houses, there is a lack of reliable rental evidence, the law lords have ruled
that the primary factor influencing the tenant’s bid is the potential profit to
be earned from a particular establishment. If large operators of licensed
premises chose not to provide the valuation office with detailed information on
profits, and if the valuation office chose simply to base its rating valuations
of such premises on a percentage of turnover, that was a matter for them.
However, the approved guide had not been agreed with the whole of the licensing
trade, and it was not binding on the appellant. It had not been prepared in
accordance with established legal principles, and, indeed, made no mention of
them. It failed to reflect the fundamental impact that profit (or lack of profit)
must have on the hypothetical tenant and thus on rateable value.
He referred to the suggestion in the approved
guide that:
The choice of the percentage to be applied to the
fair maintainable wet receipts for each individual valuation is again a matter
of judgment. This allows for the ‘fine tuning’ of the valuation to reflect the
profitability of the house, probably best represented by the level of prices
charged and the significance of the expenses required to maintain the
particular type of trade being carried on, eg staffing costs, maintenance,
incentives, marketing, provision of entertainments etc in relation to the fair
maintainable receipts adopted.
He suggested that it was impossible to ‘fine-tune…
to reflect profitability’ when no profit information was obtained. It was
impossible to ‘fine-tune… to reflect… the level of prices charged’ in the
absence of information on prices and gross margins. Finally, it was impossible
to fine-tune to reflect the various expenses required, when no information was obtained
as to the level of those expenses.
The appellant referred to various extracts from Ryde
on Rating and the Council Tax. In particular, he referred to Benjamin
(VO) v Anston Properties Ltd [1998] RA 53*; Dodds v South
Shields Poor Law Union Assessment Committee [1895] 2 QB 133; Cartwright
v Sculcoates Union [1899]1 QB 667; [1900] AC 150; Bradford-on-Avon
Assessment Committee v White [1898] 2 QB 630; Robinson Bros
(Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee
[1937] 2 KB 445; [1937] 2 All ER 298; [1938] AC 321; [1938] 2 All ER 79†; Rank
Organisation Ltd v Billet (VO) (1958) 4 RRC 15; Mersey Docks and Harbour
Board v Birkenhead Assessment Committee [1900] 1 QB 143; [1901] AC
175; R v West Middlesex Waterworks Co (1859) 28 LJMC 135; Edinburgh
Street Tramways Co v Lord Provost of Edinburgh [1894] AC 456; Grant
v Knaresborough Urban Council [1928] Ch 310; Dawkins (VO) v Ash Bros & Heaton Ltd [1969] 2 AC
366; Marylebone Cricket Club v Morley (VO) (1959) 6 RRC 258; and Consett Iron Co Ltd
v North West Durham Assessment Committee [1931] AC 396.
*Editor’s note: Also reported at [1998] 2 EGLR
147
†Editor’s note: Sub nom Robinson Bros
(Brewers) Ltd v Durham County Assessment Committee (Area No 7)
He submitted that there was no possibility of
finding a hypothetical tenant to lease the appeal property. The history of the
past 25 years showed that it was ‘doomed to failure’. Nevertheless, while the
total lack of profits from the property could support a claim for a nil
assessment, such an approach was not in accordance with the decision of the
House of Lords in Consett.
There were two possible methods of arriving at
rateable value that had some form of quantitative basis, reflected rural
property values and recognised the failure of the appeal property to make a
profit. The first was to extend the existing council tax banding from the upper
floor to include the whole building in band G (£120,000-£240,000). The
rationale for this proposal was that:
it is a well established fact that domestic
residences are being used for business purposes outwith the non-domestic rating
system. At the end of the day the Red Hart Inn is a house, albeit part of it is
open to the public.
Further, council tax band G was arrived at because
the appeal property was in the balance sheet at £145,000. However, in view of
the massive internal restructuring that would be required to convert the
property back to a domestic residence, the appellant considered that the lower
band F may be more appropriate. He asked the tribunal to consider applying band
F in reaching a rateable value.
Should the tribunal find itself unable to agree to
this proposal, the appellant suggested that it should set the rateable value at
the difference between band B and band G. The band B rate payable for the
first-floor accommodation should be deducted from the band G rate payable. He
suggested that the appropriate calculation should be as follows:
1995 non-domestic multiplier — 39p
|
council tax band |
amount payable\ multiplier = estimated RV |
||
|
G |
£577.25 |
39p |
£1,480 |
|
Less B |
£269.38 |
39p |
£690 |
|
RV of the business part of appeal property |
£790 |
||
Finally, if neither of these suggestions was
acceptable, he submitted that the tribunal should determine a nominal
assessment of RV £500. He supported this figure by reference to the Raven Inn
at Swansea, and the Earl Francis and the Earl George at Sheffield, where rents
of £250, £813 and £813 respectively were payable, as well as to the decision in
Consett.
Case
for the respondent
Mr Griffiths has experience in general practice
since 1967, first in London and then in South Wales. He joined the valuation office
agency in 1979. Since 1988 he has had special responsibility for the valuation
of licensed property for rating in the Newport valuation office, including the
valuations for the 1990 and 1995 rating lists and the subsequent settlement of
appeals.
In 1998 he was appointed the licensed property
liaison valuer for Wales. His predecessor in that post had undertaken the
initial analysis of rental information for licensed premises in respect of the
1995 rating list. The respondent had conducted the negotiations in respect of
the first appeals to be listed nationally for hearing by the valuation
tribunal.
Free houses such as the appeal property had been
valued, for rating purposes, on the basis of a percentage of turnover in the
1990 rating list, the 1973 valuation list and, possibly, even earlier. Turnover
was used as the unit of comparison between one property and another. Properties
owned by brewers, on the other hand, had been valued by reference to volume.
It became apparent in 1990 that, as a result of changes
in the industry, the valuation of brewer-owned properties by reference to
volume was no longer sustainable, and it became necessary to find a new method
of valuing public houses. Consultation with the industry and prior agreement of
assessments was not possible. In view of the lack of consensus between the
industry and the valuation office, it proved difficult to maintain the 1990
rating list. It was therefore felt that it would be helpful if a measure of
agreement for the 1995 list could be reached, without prejudice to the right of
appeal. A number of organisations with an interest in the matter were asked for
their comments.
In July 1994 the council of the Brewers &
Licensed Retailers Association, which represents the majority of the industry,
endorsed a new basis for the valuation of public houses, which had been
negotiated by its property panel and the valuation office agency. This
valuation framework was incorporated into the approved guide issued by the
valuation office agency in October 1994. The other organisations that had been
consulted did not feel able to bind their members to accept a particular
valuation formula. Since the 1995 rating list came into effect, however, none
of those organisations had made representations in respect of the valuation
scheme itself.
The guide did not break new ground. It merely set
out a little more formally the percentages of turnover that were appropriate
for different houses. It was compiled from an analysis of rental information.
Although such information was not available in the way it was for shops and
offices, there was a considerable amount of rental evidence nationwide. Such
evidence included rents of many different types and was very variable in
quality. In addition, a number of accounts were obtained and analysed for a
cross-section of properties, particularly those with lower turnovers.
The valuation officer had a statutory duty to
prepare a rating list on a fair basis at a particular date. He must therefore
analyse what evidence was available to him, if possible secure a consensus
within the valuation profession, prepare and publish the list and then maintain
it. The approved guide had resulted from this approach. It applied the method
that had for many years been used for valuing free houses, namely to use
turnover as the unit of comparison and apply a range of percentages to turnover
in order to arrive at rental value. To assist in securing consistency, the
guide suggested the percentages that should be applied to different levels of
turnover, based on an analysis of the rental evidence.
The test of a rating list was whether it resulted
in agreement. A very high proportion of appeals made nationally had been
settled. These settlements had been reached with surveyors acting for
individual traders and large operators, as well as unrepresented ratepayers.
Valuation was not a precise process, but if sufficient people agreed a general
level of values, that level constituted the market.
The respondent explained the operation of the
approved guide. The valuation consisted of two basic elements, the fair
maintainable receipts and the appropriate rental percentage.
The first valuation judgment required was to
ascertain the fair maintainable receipts for each income stream. These would
usually comprise wet trade (receipts from all intoxicating liquor, soft drinks
and incidental bar sales such as crisps, nuts etc) and dry trade (receipts from
the sale of all foods, excluding wines and liqueurs, and from letting
accommodation in those cases where a public house utilised six or less bed
spaces for letting purposes).
Receipts from other sources not included in the
wet and dry receipts were also considered. These would include tobacco sales,
admission charges, room hire and takings from amusement-with-prizes machines,
video and vending machines, juke boxes, pool tables, etc. In many cases,
however, they would not require to be specifically quantified.
In determining the fair maintainable receipts,
regard was had to the actual receipts, adjusting where appropriate for over- or
under-trading due to the personality and business acumen of the actual
licensee. The figures adopted represented the annual trade considered to be
maintainable as at 1 April 1993, having regard to the physical nature of the
property and its location, on the assumption that the business would be
proficiently carried out by a competent publican responding to the normal
trading practices and competition of the locality.
Differential rental percentages were then applied
to the wet and dry receipts, having regard to the type of business and
profitability of the house. The ranges of rental percentages applicable to wet
trade were determined by the physical characteristics of the house, the nature
of its locality and the type of trade. These ranges were contained in three
bands and were of a general nature, as follows:
|
upper |
— good |
|
middle |
— good |
|
|
— |
|
|
— poor |
|
lower |
— poor |
Having established the appropriate band, a range
of percentages into which the valuation fell was determined, the choice being a
matter of valuation judgment.
Similarly, there was a range of valuation
percentages for dry trade. The percentage to be applied to dry fair
maintainable receipts was a matter of valuation judgment and should reflect the
type of catering, and, where receipts were combined, accommodation.
Generally speaking, high prices (especially in
comparison with the product), little or no competition, good demand for all
sessions on all days, a separate restaurant or clearly defined eating area,
characteristics of house and location generating demand for attractive cuisine,
and higher profitability were all factors indicating that a percentage above
the mean was appropriate. Discounted prices to buy in custom, low prices,
especially in comparison with the product, considerable local competition, no
special eating area, limited menu and/or restricted availability reflecting
demand, pre-packed rolls and sandwiches etc, to provide nominal food presence,
and low profitability were factors indicating that a percentage below the mean
was appropriate.
In most cases, the sum of the rateable values
attributable to the wet and dry income streams would provide the total rateable
value to be entered into the rating list. In every case, it was appropriate to
take an overview of the valuation and to consider each house on its merits.
The approved guide was issued to enable valuers
representing licensees and brewers to appreciate the concept behind the
agreement for public houses and to calculate rateable values. Both the
valuation officer, ratepayers and ratepayers’ agents were trying to establish
the rental value of the public house. The analysis of rents, from which the
percentages in the approved guide were derived, showed a wide variation, and
this was reflected in the bands by a 2% rental spread at most levels of fair
maintainable receipts, within which the rental percentage could be determined.
The rateable value to be determined should
represent the rent that was likely to be agreed by a tenant fresh on the scene,
in friendly negotiations, by the ‘higgling of market’.
The respondent then explained how he had used the
contents of the approved guide to arrive at the rental value of the appeal
property.
First, he had estimated that the fair maintainable
receipts as at 1 April 1993 were £84,000. This was based on his experience, and
was rather less than the figure of £93,887 actually achieved by the appellant in
1994. Of the £84,000, he had assumed that the amount attributable to wet trade
was £58,000. For this level of turnover, the approved guide suggested that the
lowest appropriate percentage for houses in the lower band (3) was 5.32%. In
the case of houses in the upper band (1), the highest percentage suggested was
7.82%. In preparing his valuation, he had decided to apply a rate of 6.35%.
This was closer to the lower end of the range suggested by the guide. It
reflected his overall view of the quality and location of the appeal property.
The figure of fair maintainable receipts adopted
for dry trade was £25,000. At this level, the percentages suggested by the
guide ranged from 4.75% to 5.75% and he had adopted 5.00%. His valuation was as
follows:
|
Intoxicating |
£58,000 |
|
£3,683 |
|
Food |
£25,000 |
|
£1,250 |
|
Gaming Machine |
£1,000 |
|
|
|
Total |
£84,000 |
|
£4,933 |
|
|
|
|
say |
The respondent did not submit any rental evidence
to the tribunal. He referred to the maxim ‘vacant and to let’ as being a
well-established rating principle following London County Council v Churchwardens
of Erith Parish and Dartford Union Assessment Committee [1893] AC 562.
He produced details of the agreed assessments of
17 public houses in Gwent. These had all been based on modest levels of fair
maintainable trade, and had been valued at percentages consistent with those he
had adopted for valuing the appeal property. The percentages used in his
valuation reflected the fact that the appeal property was at the poorer end of
the range, but that his list of comparables included worse houses.
He also produced a schedule showing the total
settlements in the Newport area of licensed property appeals under the 1995
list. This may be summarised as follows (excluding properties in Islwyn, which
is no longer covered by the Newport office):
|
Properties |
|
484 |
|
Appeals |
agreed |
127 |
|
|
withdrawn |
142 |
|
Appeals |
agreed |
52 |
|
|
withdrawn |
40 |
|
|
|
361 |
In cross-examination, the respondent was asked how
many profit and loss accounts had been sent to those who prepared the approved
guide. He replied:
I don’t know, but I am sure some were. Not many
profit and loss accounts are usually supplied.
Shortly afterwards he added:
We use turnover as a unit of comparison, because
the trade uses it as a way of comparing like with like. Rental value is fixed
by the market, not by reference to the profits earned.
Decision
The appellant, Mr Sharp, has put forward three
possible methods of determining the rateable value of the appeal property. The
first two are based on a calculation derived from banding for council tax purposes.
I am satisfied that the use of such banding is not appropriate for non‑domestic
rating purposes. The rateable value of a non-domestic hereditament is defined
in Schedule 6 para 2(1) of the Local Government Finance Act 1988, as amended,
as:
an amount equal to the rent at which it is
estimated the hereditament might reasonably be expected to let from year to
year [if the tenant undertook] to pay all usual tenant’s rates and taxes and to
bear the cost of the repairs and insurance and the other expenses (if any)
necessary to maintain the hereditament in a state to command [that] rent.
By para 2(1A) of Schedule 6, the rateable value of
a composite hereditament is defined as:
an amount equal to the rent which, assuming such
a letting of the hereditament as is required to be assumed for the purposes of
sub-paragraph (1) above, would reasonably be attributable to the non-domestic
use of the property.
I do not consider that either of the ‘banding’
methods suggested by the appellant adequately reflects this definition, and I
discount them.
The appellant’s alternative assessment is rateable
value £500. In his statement of case, he referred to the decision in Consett
as justifying a reduced figure of rateable value where premises had been
operating at a loss. At the hearing, he also sought to support this figure by
reference to three rents paid for premises in Swansea and Sheffield. He did not
produce full details of any of these lettings. Such information as was
available did not suggest that these were rack-rents agreed for comparable
public houses in or about 1993, and I place no reliance on them.
The respondent valuation officer, Mr Griffiths,
bases his proposed rateable value of £4,900 on the approved guide. The
appellant, on the other hand, suggests that that document is unhelpful and
fundamentally flawed. In my judgment, it is significant that, although the
respondent personally valued nearly 500 public houses in the Newport area for
the 1995 list, he has not considered it appropriate to refer the tribunal to a
single rent or set of accounts. In his observations on the appellant’s
statement of case, the respondent referred to the availability of rental
evidence throughout England and Wales as follows:
A significant number of public houses are rented,
but in many cases there is some connection with the brewer either by a
traditional tie or a more modern ‘entrepreneur’ type of lease. There are
relatively few open market rents at the antecedent valuation date on all fours
with the rating hypothesis which involve non-brewery landlords.
The difficulties faced by valuers of licensed
properties, resulting from the paucity of reliable rental evidence, were
considered by the House of Lords in 1900 in Cartwright. That case
related to the rating assessment of a public house, as determined by an
arbitrator who had found as a fact that:
the rent which the tenant of a tied public house
actually pays to his landlord is always less than the rent which the same tenant
might reasonably be expected to pay for the same public house if it were not so
tied; but that the difference between the two rents is so uncertain in amount
and so difficult to estimate, in absence of evidence as to the trade actually
done on the premises, that the rent actually paid for a tied public house is
(in my judgment) very untrustworthy evidence of the rent which might be
expected to be paid for the same public house if it were not so tied.
The appellant in Cartwright contended,
among other things, that the house should be valued without reference to the
trade previously done there. Lord Morris said that the arbitrator:
asked himself almost the very first question that
the hypothetical tenant would ask, namely, is this a house doing a good business
or a bad business… That is the very first question that a hypothetical tenant
would put to himself: What have been the profits that have been made in it?
Because that is the best proof as to whether it is doing a good business or
not…
It is said that this would be an inquisitorial
inquiry, a mischievous one, and several other adjectives are applied to it. I
do not see how it is inquisitorial if the parties themselves are ready to bring
the evidence forward. There is no force put on a publican to produce his books;
he is not in this inquisition threatened with the screw, and if he chooses not
to bring forward his books he need not do so, and the arbitrator is then
obliged to forage about for the purpose of ascertaining in the best way he can
under those circumstances what the profits would be. As I have said, that
question, in my opinion, is one of the most important factors in arriving at a
conclusion as to what a sensible man would pay as rent for the premises.
Lord Shand said:
It may be that in a case of this class it is not
competent to prove, as the Courts have held in the case of Dodds, the
amount of the actual detailed profits made by the tenant in the particular
house in bygone years. The true ground for so holding is, I think, that such
proof is or might be of an inquisitorial character. I can very well understand
that on the part of the tenants it may be a very reasonable objection for them
to make to evidence of that kind, that it would rip up affairs which they are
not bound to disclose to the public in questions of this kind. If it were not
so, it seems to me that such evidence would be admitted as an important element
in ascertaining what trade had been done in the house; for really it appears to
me that this would be the element of all others which a tenant might be
expected to take into view in fixing the rent he ought to give for the
premises.
Finally, Lord Davey said:
If you are to take into account the fact that the
premises command a trade, you must surely ask what trade. Is it a large trade,
or is it a small trade? And I do not know myself any better test of what trade
they may be expected to command than the trade which they actually do command.
It is not that you rate the profits, it is not that you rate the man’s skill
and judgment or discretion in the mode of carrying on the business, but you
have to ascertain what sort of a trade the hypothetical tenant, as he is
called, may reasonably expect to be able to carry on on those premises as an
element in determining the rent he would be willing to offer.
It is clear from the present case that the
difficulties that confront rating valuers in dealing with public houses today
are similar to those that were faced by their predecessors a century ago, and
which were considered in Cartwright. There is little reliable evidence
of rents or profitability in respect of the vast majority of public houses. In
an effort to overcome this problem, the valuation office agency has based
public house assessments on the approved guide. Although the respondent suggested
that rental value is not fixed by reference to profits, the approved guide
amounts, in my view, to valuation by a truncated profits method. In my
judgment, if properly applied, the guide is not inconsistent with the
observations of the House of Lords in Cartwright. I am therefore unable
to accept the appellant’s submission that it is an invalid document. Moreover,
the high level of settlements that have been based on the guide suggests that
practitioners have found that it offers a very useful valuation tool.
Having obtained details of the turnover of a
particular house, the approved guide assumes that the tenant will be able to
pay a percentage of that turnover by way of rent. Such a percentage is arrived
at by reference to graphs that provide a range of suggested percentages for
each valuation band. It is important to note that this document is described as
a guide. It makes it clear that it should be interpreted with the following
general consideration in mind:
No valuation should be merely a rigorous
application of arithmetic but must be open to adjustment by a competent valuer
having regard to the individual nature of each property and its location.
The respondent professed to accept this in his
evidence, when he said that it was always necessary to take an overview of the
valuation and consider each house on its merits. Nevertheless, it appears that
he did not consider that such an overview should extend to the dismal profits
record of the appeal property. His comments on the appellant’s statement of
case included the following observations:
The personal financial
circumstances of the actual occupier are not relevant…
Despite the appellant’s suggestion that the
business is incapable of making a profit it appears from the accounts that a
significant bank loan was obtained to fund the purchase of the property in
1993…
The property was purchased in 1993 and has traded
to the present day. Prior to that time there appears to have been no difficulty
in finding occupiers willing to trade, albeit it is alleged there is a history
of bankruptcy.
The accounts of the actual occupier will not
necessarily accord with those of the hypothetical tenant. Nevertheless, it is
clear from Cartwright that they will form a useful starting point for
the valuer when he prepares the accounts of the hypothetical tenant. This is
particularly so in the case of the appeal property, since the respondent
accepts that they have been occupied by an operator of above average
competence.
As for the purchase in 1993, that related to the
freehold interest in the appeal property, which included a substantial upper
part, used for domestic purposes and excluded from the premises that require to
be valued. The bank loan that was granted to fund that purchase is, therefore,
of little relevance for present purposes.
Moreover, the appellant’s evidence, which I
accept, is that there is no available profit information in respect of the
period prior to his purchase in 1993. In the following four years, the
accounts, accepted by the Inland Revenue, showed an average gross profit of
£43,772 and outgoings averaging £68,502. Apart from a reference to the cost of
repairs, at no time did the respondent suggest which other elements of the
appellant’s outgoings were excessive.
In preparing the accounts of the hypothetical
tenant, it is necessary to identify which of the outgoings actually incurred
should be left out of account to reflect the approach of a tenant from year to
year, as opposed to the freeholder. On this basis, the business loan interest
and possibly the bank charges — which averaged £8,012 in the appellant’s
accounts — would be reduced or possibly even eliminated.
Assuming no bank loan and no bank charges whatever
would reduce the average outgoings to £60,490, producing a deficit of £16,718
before allowing for salaries for the appellant and his family. It is true that
this calculation has been based on outgoings that were incurred between 1994
and 1998, whereas the valuation date is 1 April 1993. This is, however,
counterbalanced, in my view, by the fact that the calculation assumes a gross
profit of £43,772, derived from total average sales of £97,460, whereas the
parties have agreed that the fair maintainable receipts in 1993 were only
£84,000.
On the evidence before me, therefore, I conclude
that the hypothetical tenant would not have anticipated that he would be able
to operate the appeal property at a profit, still less produce a divisible
balance sufficient to justify an annual rent of £4,900.
In the course of his evidence, I asked the
respondent how he had reflected the losses incurred by the appellant when
preparing his valuation. He replied by referring me to the assessments that had
been agreed for 17 ‘comparable’ public houses in Gwent. He said that, in common
with the appeal premises, all of these houses had their problems, they were all
old houses and his valuation was consistent with the agreed assessments of
these other, similar, hereditaments.
The circumstances in this appeal are not
dissimilar to those that confronted this tribunal in Rank. In that case,
the appellant, which operated a cinema, referred to the trading accounts for
the previous four years, all of which showed a loss. He expressed the view that
no tenant would take the premises if they were in the market, vacant and to
let. The expert witness for the valuation officer, on the other hand, valued
the property on the basis of a price per seat, by reference to assessments
agreed elsewhere. He thought that:
the accounts basis was unreliable and should only
be used where there was no alternative.
In his decision, the member (Mr HP Hobbs frics) said:
A sitting tenant can be considered as one of the
hypothetical tenants, and here I think he is probably the only hypothetical
tenant, so what I have to decide is what rent would the sitting tenant be
willing to pay for these premises knowing that his accounts were showing
losses, but deciding to hold on in the hope of better times. I think he would
be prepared to pay a substantial rent but am very doubtful whether he would be
influenced by the rents — or assessments — of other cinemas; his concern is
with the potentialities of this cinema and whether or not there is a chance of
it paying its way in the future.
I would respectfully agree with that approach. The
respondent says that the appeal premises are no worse than the 17 other public
houses in the area whose assessments have been agreed on a basis consistent
with his valuation. He also accepts that the appellant is a publican of above
average ability. The evidence of the accounts of the appeal property is, in my
view, unequivocal. In view of this, and in the absence of any clear guidance
from the respondent as to how the property could be expected to produce a profit,
I attach more weight to the appellant’s accounts than to the respondent’s
settlement evidence.
I would add that, in my judgment, the respondent’s
suggestion that a comparison of public houses by reference to their turnover is
analogous to a comparison of shops by reference to rents in terms of zone A is
not justified. The valuer is required to assess rental value. In the case of
shops, he often has evidence of rents paid for other similar properties. He can
analyse those rents by reference to a unit of floor area and then apply that
analysis directly to the property to be valued, making adjustments for
differences between the respective premises and lease terms. Turnover may also
be used as a method of valuation, but it is only one ingredient in a calculation
of rent by the profits method. It is thus a very much less direct means of
comparison than one by reference to actual rents paid. Hence the qualification
that the respondent very properly made in his evidence, namely the need for the
valuer to take an overview of the situation — or, in other words, to stand back
and consider the reliability of his valuation — is of even more significance in
this case than usual.
None of the evidence that has been submitted has
persuaded me that a properly advised hypothetical tenant, contemplating taking
a lease of the appeal property in April 1993, would have anticipated making a
significant profit at any time in the future. In suggesting a rental value of
£500, the appellant has relied on Consett. That case concerned the
rateable value of certain coal mines. It was an appeal to the House of Lords
from an order of the Court of Appeal affirming an order of the Divisional Court
upon a special case stated by the Court of Quarter Sessions. The Quarter
Sessions had found as a fact that, at the time when the rates appealed against
were made, each of the appellants’ properties was being worked at a loss, and
had been so worked between the middle of 1925 and 31 March 1928. Conditions in
the coal trade in September 1927 were extremely bad. The only basis on which
anyone could have been found who might have entered into a tenancy of one or
more of the subject properties, in or about September 1927, would have been on
the assumption that his tenancy would continue for a term of years, and in the
hope that conditions of trade would improve during that period:
so that he would be on the right side on the
whole on the average of the whole period of his tenancy.
Quarter Sessions did not accept the appellants’
contention that the rateable values should be reduced to nil or nominal
amounts. They decided, however, that the ratepayers should be given
considerable relief to reflect the bad state of the coal trade.
In his judgment in the House of Lords, Lord Sankey
LC said:
the correct statement of the law may be put as
follows. There may be circumstances which prevent the occupier of a coal mine
from using it for the purpose of producing coal, and if there are such
circumstances he may be entitled to have excluded from consideration, in fixing
the amount of the assessment, the expectation that at some future time
circumstances will change so as to allow him to use it for that purpose. But
where, as in this appeal, a colliery is actually being worked by the occupier
for the production of coal, the expectation of better trade subsequent to the
year of assessment is a consideration which may be taken into account in
arriving at the true assessment.
As I have said, the evidence in this case does not
suggest to me that there is a real likelihood that trade at the appeal property
will improve, in the foreseeable future, to such an extent as to persuade a
hypothetical tenant to pay a significant annual rent. Against that background,
I do not consider that the appellant’s suggested annual rental value of £500 is
too low.
I should add that, in answer to a question from
me, the appellant agreed that an assessment of £4,900 was unexceptionable if
the approved guide was an acceptable basis of valuation. I am satisfied,
however, that that answer was inconsistent with his criticism that the
respondent had not ‘fine-tuned’ the valuation as he was required to do by the
approved guide.
Finally, the appellant gave as the reason why he
continues to operate the appeal property, despite the continuing losses, the
fact that it is all part of a composite hereditament, which provides a home for
him and his extended family. It is, in my view, not appropriate to reflect this
benefit in a valuation under para 2(1A).
The appeal is allowed. I direct that the
assessment of the appeal hereditament in the 1995 rating list shall be altered
to rateable value £500, with an effective date of 1 April 1995.
In proceedings determined in accordance with r 28
of the Lands Tribunal Rules 1996, no award is made in relation to costs, except
in circumstances that the tribunal regards as exceptional. No such
circumstances have arisen in this case, and, accordingly, I make no order as to
costs.
It only remains for me to express my appreciation
to both parties for the great care they have taken in preparing their cases,
and the clarity and courtesy with which they presented them.
