Independent day school in NW London–Contractor’s basis of valuation–‘Clarification’ of this method by tribunal–Glossary of expressions–In issue (1) appropriate rate per cent to apply to convert effective capital value to annual value, (2) amount of end-allowance for disabilities–Ratepayers’ valuer’s use of investment rate derived from actual transactions of office premises not accepted–Method not wrong in principle but requires much more precise and detailed information about underlying transactions–6 per cent accepted as gross commercial rent–Long discussion on downward adjustment because of particular characteristics of educational institution–Effect of high MLR on discount to reflect difference between advantages of ownership and status of tenant from year to year–‘On rare occasions only is effective capital value to be described properly as a value rather than as an adjusted figure of cost, actual or imaginary’–No sufficiently clear guidance from earlier cases that 3 1/2 per cent is established appropriate rate–Factor described as ‘consideration to make ends meet’–Relative bargaining power of hypothetical landlord and tenant–Tribunal adopts rating authority’s 5 per cent–LVC’s end-allowance of 6 per cent not disturbed–Admissibility of note in ratepayers’ accounts some years after relevant date about ability to pay additional rates–Rating authority’s appeal allowed–GV substantially increased
Richard Tucker
QC and Richard Hare (instructed by the solicitor for the City of Westminster)
appeared for the appellant rating authority; Anthony Anderson (instructed by
Lovell, White & King) for the respondent ratepayers; and Alan Fletcher
(instructed by the Solicitor of Inland Revenue) for the respondent valuation
officer.
Giving his
decision, MR EMLYN JONES said: Shortly after the second world war the American
community in London recognised the need for an educational establishment for
the sons and daughters of United States citizens based in London which could
offer to students a curriculum geared to the educational system existing in
their home country. Accordingly, in 1951 the American School in London was
established as an independent, non-profit-making educational trust administered
by a board of trustees composed of distinguished members of the diplomatic,
educational, business and professional communities. The school gradually
increased in size and by the end of the 1960s was housed in a number of
separate properties in the West End of London. In 1968, following a series of
transactions, a site of about 3 acres was purchased in Loudoun Road, St John’s
Wood, London NW8, and a new school was built on the site at a cost of something
over £2m. The new school was designed for 1,500 pupils and was first occupied
in part in September 1970.
In the new
valuation list coming into force on April 1 1973 the hereditament was entered
with an assessment of gross value £84,500, rateable value £70,388. On February
19 1974 a proposal was made on behalf of the ratepayers seeking a reduction in
the assessment to gross value £25,000, rateable value £20,805. The valuation
officer of the day objected to this proposal. On March 7 1975 a further
proposal was made by the rating authority whereby it was proposed that the
assessment should be ‘substantially increased.’
Both the ratepayers and the valuation officer objected to this proposal.
On April 4
1977 the appeals arising from these two proposals were heard by the local
valuation court. The court decided that the appeal in respect of the first
proposal should be dismissed and confirmed the assessment appearing in the list
of gross value £84,500, rateable value £70,388. In respect of the second
proposal, which sought an increase in the assessment, the court allowed in part
the appeal of the rating authority and determined an increased assessment of
gross value £96,500, rateable value £80,388.
The ratepayers
now appeal to the Lands Tribunal against the decisions in both appeals. The
rating authority and the valuation officer also appeal, but in respect of the
second appeal only, whereby the assessment in the valuation list was increased.
The contentions now put forward by the parties are as follows. The ratepayers
contend that the assessments are excessive and that the correct value is gross
value £74,000, rateable value £61,638. The respondent valuation officer also
contends that the assessments are excessive as determined by the local
valuation court and puts forward a valuation of £76,000, rateable value
£63,305. The rating authority contend that the assessment determined in respect
of the second appeal arising from their proposal of March 7 1975 is too low and
should be increased to gross value £111,600, rateable value £92,972. By order
of the Registrar of the Lands Tribunal the
The parties
are agreed on a number of matters. In particular, it is agreed that the
hereditament is properly to be valued by what is sometimes referred to as the
contractor’s basis of valuation, that is to say, that the annual value is to be
derived from a capital value. They have also agreed that for this purpose the
effective capital value of the site and buildings (including the professional
fees) of the hereditament (including the headmaster’s house at 49 Grove End
Road) is the sum of £2.350m.
It is further
agreed that that agreement is to be without prejudice to the make-up of the
individual elements of the effective capital value and without prejudice to any
other case which may involve the application of a contractor’s basis in the
City of Westminster during the life of the current valuation list. It is also
agreed that the effective capital value should be taken ‘to reflect any age or
obsolescence allowance that would fall to be considered in the valuation on
this basis but not any end-allowance.’
There are thus
only two matters which remain at issue. The first is the appropriate rate per
cent to be applied to the agreed capital value in order to produce annual value
and, secondly, the amount to be deducted as an end-allowance to reflect certain
disabilities which are admitted by all parties to exist.
School’s
unusual design
Before turning
to a consideration of these issues I must say something about the school
itself. It was built during the period 1969-71. The architects were American
but worked in association with a firm of British architects. The school is
built to an unusual design and the following description was recorded in the
Architects’ Journal Information Library in March 1972:
The new
American School in London is a day school designed for 1,500 boys and girls,
the children mainly of itinerant businessmen and diplomats of the US community
in London. It provides a continuity of education of the type which the children
have left at home and prepares for the US colleges to which most will return.
The school is a charitable trust administered by a board of trustees, financed
from voluntary contributions and tuition fees, high by British standards. The
site of 3.2 acres (1.28 hectares) in St John’s Wood was found with difficulty
and is small for a school of this size. It has a British Rail tunnel below its
whole length, crossed at one point by a GLC trunk sewer, both of which facts
are reflected in the relatively high substructure costs. Town planning further
restricted the siting and height of buildings, so a highly condensed building
of three storeys, one part-basement, was necessary to provide the required
accommodation.
From the
outset, therefore, air-conditioning and permanent artificial lighting were
accepted as a means of freeing planning from the constraints of fenestration,
making possible a very compact layout of teaching spaces, with a consequent
saving in circulation space and in the perimeter of external walls. The
reduction in window area also lessens solar gain, glare and heat loss, and
frees wallspace for the display of instructional material.
Open-planning,
much modified by the exigencies of the London Building Act, was adopted in most
teaching areas for its greater flexibility and, wherever possible, circulation
space is combined with teaching space to give maximum utilisation and to
encourage interchange between students and staff at all levels. To overcome the
acoustic problems of open-planning, teaching areas have carpets and acoustic
ceilings which also conceal structure and services, while walls and ceilings
are profiled to eliminate long-range reflections of low-incidence sound-waves.
The air-conditioning system also contributes background noise to reduce the
intelligibility of transferred speech.
The
electrical installation includes some sophisticated aids to teaching
techniques. Audio-visual material from a variety of sources, including live and
closed-circuit television, video-tape recorders and records can be relayed from
a central control room in the library (instructional materials centre) to local
distribution panels in each teaching space and thence to TV monitors or
loud-speakers. The distribution panels can also receive local sources, such as
film projectors and record players. To avoid distracting adjacent classes, the
sound component of any lesson can be transmitted through an induction loop
below the carpet and picked up by the students on receiver headphones.
In addition,
the panels incorporate mastered clocks linked to an automatic class-change
signal, a public address and intercom system, and thermostats and light
switches which enable the teacher to control, within limits, the temperature
and illumination of the immediate environment. A mixture of tungsten and
fluorescent sources provides lighting at about 45 lumens/ft2 (4 lux)
and is designed, with the internal colour schemes, to compensate for the
absence of sunlight.
The exterior
of the school is a straightforward expression of the plan in 2-in hand-made
brickwork and copper, with bronze-anodised aluminium windows.
It will be
seen that this open-planned, air-conditioned and nearly windowless American
school-house has many features not normally encountered in a British
independent day school. Another unusual feature is that most of the site is
covered by buildings. There are a few hard tennis courts and a playground, but
otherwise few facilities for outdoor recreation and no playing fields. As I
have indicated, the school is designed for 1,500 pupils, although in practice
rather more than that number are accommodated. The school is divided into
three, the lower school taking children of both sexes between the ages of 5 and
10, the middle school those between 11 and 14 and the upper school those from
15 to 18. Each school provides for about 500 pupils, but there is no central
assembly hall, nor are the dining and catering facilities designed to
accommodate that number at any one time.
The American
School in London Educational Trust Ltd was incorporated in 1963 and registered
as a charity in September 1964. The directors of the company during the
relevant years between 1972 and 1975 included His Excellency the American
Ambassador, the Consul General at the United States Embassy, and a number of
persons holding senior managerial positions in the business world, for example
in banks and oil companies. For the purposes of acquiring the site of the
school and financing the erection of the school buildings, something over £2m
was raised, partly by loans, by interest-free unsecured debentures and by
donations. At the end of June 1972 there was outstanding a bank overdraft and
short-term loans amounting to £1,176,926. But the accounts at that time
indicate that the school was paying its way out of current income and showing a
small surplus.
For the
appellant rating authority, Mr Tucker called Mr Hubert Bewlay, a past-president
of the Rating and Valuation Association and a rating surveyor with 50 years’
experience. Mr Bewlay has appeared in a number of rating appeals before this
tribunal where valuations on the contractor’s basis of educational
establishments have been in issue. In the present case Mr Bewlay started with
the agreed capital value of £2.350m, to which he applied 5 per cent in order to
arrive at annual value. From this figure he made a deduction of 5 per cent to
reflect ‘disabilities.’ This exercise
produced a valuation in terms of gross value of £111,600. For the ratepayers,
Mr Anderson called G E Grieves FRICS [partner, Herring Son & Daw], whose
experience as a rating surveyor dates from the end of the last war and who has
acted since that time in connection with the rating assessments of over 300
independent schools of different sizes. Mr Grieves applies 3 1/2 per cent to
the effective capital value and adopts a disability allowance of 10 per cent,
to produce an assessment of gross value £74,000. The respondent valuation
officer D J Goodwin FRICS, called by Mr Fletcher, also takes 3 1/2 per cent but
allows 7 1/2 per cent for disabilities and arrives at a gross value of £76,000.
I should add that the local valuation court in their decision, which was based
on an effective capital value of rather more than £2.5m, applied 4 per cent for
annual value, took a separate figure for the headmaster’s house and then
allowed 6 per cent for disabilities.
Glossary of
expressions
I will deal
first of all with the argument put forward in support of different rates per
cent applied by the valuers
may be helpful if I set out a glossary of some of the expressions used during
the course of the hearing which I adopt, particularly since it appears that
some confusion has arisen in earlier cases when these same expressions have
been used.
Minimum
lending rate is the Bank of England’s minimum lending rate, formerly known as
bank rate, and is to be distinguished from the London clearing banks’ base
rate, which is a rate which fluctuates slightly above and below the minimum
lending rate.
‘Market rate’
is used to describe the rate of interest payable on loans raised in the market
by those seeking to borrow money in order to buy property.
The
‘commercial rent’ is the expression used to express the rate per cent to be
applied to effective capital value in order to arrive at gross value.
The ‘net
commercial rent’ is the rate to be applied to effective capital value in order
to arrive at net annual value.
The
‘investment rate’ is the rate per cent representing the return which an
investor can expect to receive on his investment, which in the case of real
property means the rent expressed as a percentage of the capital value.
Effective
capital value is the expression which has been applied by the valuers in the
present case to the agreed figure of £2.350m. As appears from evidence,
however, if is not, strictly speaking, a value, because the final adjustments
made by all three valuers are matters which affect the capital value as well as
the annual value of the hereditament. This figure therefore can more accurately
be described as an adjusted figure of cost, being related to actual
construction costs and site costs and reflecting any age and obsolescence
allowance which might be thought to be appropriate. I was not told of any such
allowance.
Contractor’s
basis
I think it may
be helpful if I attempt some clarification of the valuation method adopted. The
following expressions have been used. The ‘contractor’s test’ is probably
derived from a passage in the judgment of Cave J in the case of R v School
Board for London in the Divisional Court (1885) 55 LJMC 33 where he said:
Interest on
cost is a rough test undoubtedly. It is a test in some cases but it is not a
test in others. If the place is occupied by a tenant, it is not a good test at
all, because the rent which he actually pays is a far better one. If the place
is unlet, it is not at all a good test, because it may be that no tenant would
give anything approaching to the interest on the cost. But if the place is
occupied by the owner himself, then it is in some sense a test, a rough test no
doubt, and only prima facie evidence, but still some evidence, to show what the
value of the occupation is. . . . If he could get a place cheaper, at a less
rent than the interest on the cost comes to, it is to be assumed he would not
go to the expense of building, he would prefer to take the cheaper course and
pay the rent.
At a later
stage the expression ‘contractor’s basis’ came to be used as for example by
Denning LJ in Cardiff Rating Authority v Guest Keen Baldwin’s Iron
and Steel Co Ltd [1949] 1 KB 385 and this method of valuation is so described
in the relevant passages in Ryde on Rating. Armour, which deals with the
law of rating in Scotland, deals with the contractor’s principle and in Liverpool
Corporation v Llanfyllin Assessment Committee [1899] 2 QB 14,
Vaughan Williams LJ referred to the ‘contractor’s theory of rent.’ The idea of the contractor, therefore, is
something which has come down to us from Victorian times and is not entirely
apt in today’s circumstances, where it can be taken to refer either to a
builder who erects a building or to a developer who, in seeking a return, will
be concerned not only with the cost of erection but his own remuneration for
arranging, supervising and financing the development. It is probably too late
now to abandon the name ‘contractor’ and in the instant case I propose to use
the expression ‘the contractor’s basis.’
In Dawkins
(VO) v Royal Leamington Spa Corporation and Warwickshire County Council
(1961) 178 EG 293, 365 461, which was a case dealing with the rating assessment
of local authority schools, the Lands Tribunal said at p 295:
We are left,
therefore, with two other possible methods of assessment. The first is
valuation on the contractor’s basis, which Mr Bewlay described, and which has
often been described, as a valuer’s last resort. The other is assessment by the
formula which we have already mentioned; it derives from the contractor’s
method and we will presently define it.
The use of
the contractor’s basis, last resort or not, is amply supported by the
authorities. In his opening the Solicitor-General pointed to its logic in words
we cannot hope to improve upon: ‘As I understand it, the argument is that the
hypothetical tenant has an alternative to leasing the hereditament and paying
rent for it; he can build a precisely similar building himself. He could borrow
the money, on which he would have to pay interest; or use his own capital on
which he would have to forgo interest to put up a similar building for his
owner-occupation rather than rent it, and he will do that rather than pay what
he would regard as an excessive rent–that is, a rent which is greater than the
interest he forgoes by using his own capital to build the building himself. The
argument is that he will therefore be unwilling to pay more as an annual rent
for a hereditament than it would cost him in the way of annual interest on the
capital sum necessary to build a similar hereditament. On the other hand, if
the annual rent demanded is fixed marginally below what it would cost him in
the way of annual interest on the capital sum necessary to build a similar
hereditament, it will be in his interest to rent the hereditament rather than
build it.
In a reference
to the words used by the Solicitor–General–‘rent . . . fixed marginally below
what it would cost him’–Lord Denning MR said in Cardiff Corporation v Williams
(VO) (1973) 226 EG 613 at p 613:
To that
statement, however, I would make this qualification. The annual rent must not
be fixed so as to be only ‘marginally below’ the interest charge. It must be
fixed much below it, and for this reason: by paying the interest charge on
capital cost, he gets not only the use of the building for its life, but he
gets the title to it, together with any appreciation in value due to inflation:
whereas, by paying the annual rent, he only gets the use of the building from
year to year–without any title to it whatsoever–and without any benefit from
inflation.
Valuers’
evidence
I now turn to
the evidence of the three valuers relating to the question of the appropriate
rate per cent to be applied. Both Mr Bewlay and Mr Goodwin approach the
question by assuming that the hypothetical tenant, in deciding what rent to
pay, would be influenced by an estimate of the cost to him of providing
alternative premises. They both adopt 7 per cent as the market rate at which
money could be borrowed at the relevant date. This represents 2 per cent above
minimum lending rate in the early part of 1972, and Mr Goodwin accepts a
minimum lending rate of 5 per cent as appropriate for the purposes of valuation
in the 1973 valuation list. The two valuers also agree that some adjustment
needs to be made to that figure of 7 per cent in order to arrive at gross value
so that due regard can be paid to the difference between the status of an owner
of property and a tenant from year to year, for the reasons set out by Lord
Denning in the Cardiff case. The owner of the freehold gets the title to
the property, together with any appreciation in its value due to inflation. He
can also do with the property as he wills, carry out alterations and use it as
security for a loan at any time.
In order to
reflect these considerations both valuers reduce the rate to 5 per cent, which
they adopt as the net commercial rent. They then apply 6 per cent as the gross
commercial rent, which is the rate which they consider appropriate to accord to
the terms of gross value whereby the landlord is deemed to carry out the
repairs and the other expenses as specified in the definition of gross value
contained in section 19(6) of the General Rate Act 1967. The evidence before me
was that 6 per cent to gross value was widely applied and adopted for the
purposes of the 1973 valuation lists and for normal commercial premises had
been generally accepted.
The difference
between Mr Goodwin and Mr Bewlay was in the next stage of the valuation. Both
valuers considered that some downward adjustment needed to be made because of
the particular characteristics of the hereditament as an educational
institution. For this purpose Mr Goodwin applied 3 1/2 per cent and Mr Bewlay in
his valuation adopted 5 per cent although in evidence suggested that there
might well be no clear reason why 6 per cent should not be adopted.
Analysis of
actual market transactions
The evidence
of the ratepayers, however, followed a different line. Mr Grieves, who gave
evidence as a rating surveyor, adopted 3 1/2 per cent as did Mr Goodwin, but he
arrived at that figure by a different route, and in the course of evidence he
suggested that he would have been justified in applying 3 per cent. Mr Anderson
also called evidence from N A S Owen FRICS, a senior partner in Mr Grieves’
firm. Mr Owen did not consider the rate at which money could be borrowed.
Instead he took as his starting point the investment rate, which he derived
from a number of reports of actual market transactions where properties which
were let were then sold. Thus the yield was derived from a known rent and a
known capital value. Adopting this approach, Mr Owen arrived at an investment
rate of 5 per cent which he adjusted downwards to ‘4 1/2 per cent to 4 1/4 per
cent’ because his sources were based on a ‘weighted average’ over the whole
country. Since this was a net figure, Mr Owen then recognised the need to
adjust for the hypothetical landlord’s repairing obligations and arrived back at
5 per cent as the commercial rent. In other words, in Mr Owen’s opinion gross
value represented 5 per cent of capital value in the market.
I do not find
Mr Owen’s evidence of any great assistance in this case. In the first place,
the underlying transactions all relate to office premises, which Mr Owen took
to be let on 20-year full-repairing leases with five-year rent review clauses.
Secondly, he knew none of the details of the underlying transactions nor could
he explain to my satisfaction a number of arbitrary adjustments and assumptions
which were a necessary part of the analysis. And finally, I observe that had he
based the analysis on shops or industrial premises, higher rates per cent would
have emerged. None of these three categories seems to me to be necessarily more
suitable as a stepping stone on the way to arriving at the appropriate
investment rate for an independent day school.
In view of
these uncertainties, I do not consider that Mr Owen’s evidence can be taken to
upset 6 per cent as the appropriate rate for gross value in normal cases. At
the same time, in fairness to Mr Owen, I should add that there is, in my
opinion, nothing wrong in principle with his method of valuation. It is not a
valuation on the contractor’s basis as traditionally used, but rather an
attempt to arrive at annual value from capital value, by an analysis of market
transactions relating to actual rents. The interest rate which is arrived at in
this way thus represents the return which a developer would expect rather than
the cost of paying a builder to put up the hereditament. For its successful
application, however, it requires much more precise and detailed information
about the underlying transactions.
I start
therefore by accepting 6 per cent as the commercial rent. This is the figure
put forward by Mr Bewlay and Mr Goodwin and the evidence shows that it is
widely accepted in valuations made on the contractor’s basis for the purposes
of the 1973 valuation list. In the passage quoted from the Solicitor-General’s
opening speech in the Leamington case, there is a reference to the
possibility of the hypothetical tenant using his own capital, ‘on which he
would have to forgo interest to put up a similar building.’ None of the valuers in the present case obtained
any help from looking at the matter in this way. Indeed, it would seem that the
interest which the hypothetical tenant would be likely to forgo must depend
very largely on his personal circumstances, and inevitably provide a less
reliable means of arriving at annual value for rating purposes. I prefer
therefore to follow the approach adopted by Mr Bewlay and Mr Goodwin and seek
to arrive at gross value by having regard to a rate at which money can be
borrowed in the market.
I recognise
that there are fluctuations from time to time in minimum lending rate, the
London clearing banks’ base rate and the market rate as that expression has
been used in the present case. It must be remembered, however, that the
objective in these calculations is to arrive at a rent payable under the
conditions of a hypothetical tenancy from year to year and in my judgment such
a rent remains free of the wider fluctuations in market rate. Whereas in
today’s circumstances interest rates are high, this is largely attributable to inflation;
and the reduction to be applied to market rate in order to arrive at gross
commercial rent must be that much the greater, since there is no protection
against inflation available to a tenant from year to year. The Bank of England
minimum lending rate was standing at 5 per cent in September 1971. On June 30
1972 it was raised to 6 per cent and by the end of that year had risen to 9 per
cent. It then dropped gradually until July 1973. I do not consider that at that
period there were similar variations in rental value. In my opinion, therefore,
during the periods of high minimum lending rate any discount on market rate
required to reflect the difference between the advantages of ownership compared
with the status of a tenant from year to year should be pro tanto
greater.
Taking
therefore 6 per cent as the starting point, I turn to a consideration of the
principal issue which emerges from the evidence of the three rating valuers.
What adjustment downwards is to be made from that gross commercial rent of 6
per cent in order to reflect the characteristics of the appeal
hereditament? At first sight this
appears to be purely a question of fact to be determined in the light of the
evidence in the present case. But counsel for all three parties drew my attention
to a number of other cases where a similar problem had arisen and it was common
ground that the tribunal was properly entitled to pay regard to the guidance
there provided.
Guidance from
‘Cardiff’ and ‘Leicester’ cases
In Cardiff
Corporation v Williams (VO) in the Court of Appeal (1973) 226 EG 613
Lord Denning MR said at page 615:
The Lands
Tribunal has adopted a percentage of 4 1/2 per cent for local authority schools
(see the Leamington case): and 3 1/2 per cent for public schools (see
the Shrewsbury Schools case; and the Eton College case). It seems
to me that this distinction is justifiable for this reason: When the buildings
are occupied by a local authority, the tribunal is entitled to assume that a
local authority is the most likely occupier, and would be under a sense of
compulsion, legal or moral, to rent them at a fair value, seeing that the local
authority gets all its resources from government or from the rates. But when
the buildings are occupied by a public school, the tribunal is entitled to
assume that it is the most likely occupier, that it would be desirous of taking
the premises, but not under the same degree of compulsion as a local authority,
nor at so high a rent, seeing that it has resources which are more limited than
those available to a local authority. So the tribunal is entitled to take 4 1/2
per cent for local authority schools and 3 1/2 per cent for public schools.
Similarly
with colleges for adult students. The actual buildings may be suitable for use
as a college either by a local authority or by a university authority. But,
when they are occupied by a local authority, the tribunal is entitled to assume
that it is the most likely occupier and to pay a rent based on a percentage of
4 1/2 per cent: but that a university authority is not under the same
compulsion and has more limited resources. So that the percentage then should
be 3 1/2 per cent, as in the Leeds University case.
At any rate,
I do not see that the tribunal have gone wrong in law in taking a percentage of
4 1/2 per cent for these buildings. The appropriate percentage in any case is
matter of fact, not law: and we have no jurisdiction to interfere with matters
of fact. It is said that the percentage should be 3 1/2 per cent like the
Oxford Colleges and Leeds University. But why assume that 3 1/2 per cent
was right for them? It may have been
wrong: but, if it was wrong, it was wrong as matter of fact, not as matter of
law.
Apart from
this, I regard it as highly desirable that those who have to make valuations
should have clear guidance as to the way to go about it, even on matters of
fact. The Lands Tribunal have given that guidance by taking 4 1/2 per cent for
local authority schools and colleges, and 3 1/2 per cent for others. I would
not deprive the valuers of that guidance. I would not throw them overboard to
swim in uncharted seas. Whether it be 3 1/2 per cent or 4 1/2 per cent is all
guesswork anyway. As one valuer put it, you are working in a void. So you had
better make some rules to guide those who have to do the work.
Mr Anderson
and Mr Fletcher both rely on this passage as indicating that 3 1/2 per cent is
the appropriate rate to apply in the case of public schools and that the onus
lies on the appellant rating authority to show reason why the Lands Tribunal should
not follow the guidance provided by these other cases. The appeal hereditament,
they say, is an independent day school and although it lacks accommodation for
boarders possesses all the other characteristics of an independent British
public school. They point to the existence in central London of other public
schools catering in the main for day pupils. As Mr Grieves puts it, the
trustees are a non-commercial, non-profit-making charitable institution. They
are the only possible tenants of the appeal hereditament, and the hypothetical
landlord would therefore accept a much lower rent than he would expect from a
commercial tenant, rather than pay the outgoings on empty premises. It is
conceded that on this evidence alone it is not possible to prove that 3 1/2 per
cent is the correct rate, but the respondents submit that the rating authority
have failed to establish that any higher rate is to be taken.
For the rating
authority Mr Tucker referred me to Leicester City Council v Nuffield
Nursing Homes Trust and Another (1979) 252 EG 385, which was one of my
decisions. He referred in particular to a passage at p 389 of the report where
I said:
I will deal
next with the question of the appropriate rate per cent. In my opinion this
should be 6 per cent as suggested by the valuation officer and by Mr Wilks. The
actual ratepayers incurred the actual costs. The building is modern and purpose
built for their requirements. It is true that the greater part of the money
needed for the building of the clinic was raised by subscription, but in the
world of rating we are faced with the statutory requirement that the occupier
must be deemed to be a tenant. He, thus, cannot be the owner and in this world
of make-believe it seems to me to follow as a necessary assumption that the
benefaction is to be made available on an annual basis, for example, by deed of
covenant, in which case it is quite clearly available to pay a rent. [Counsel
for the ratepayers] submitted that in a case where there is only one
hypothetical tenant the element of benefaction may show the non-commercial
nature of the case and, therefore, be relevant to the need of the hypothetical
tenant ‘to make both ends meet,’ see the remarks of Lord Denning MR in Cardiff
Corporation v Williams (VO) (1973) 18 RRC at 23. In my opinion the
facts in the present case show that funds are available on a large scale to
enable the occupier of these premises to pay his way even though he does not
set out to make a profit. I do not think that the hypothetical tenant would be
successful in persuading the hypothetical landlord to let the hereditament to
him on any sort of concessionary basis on the grounds that he, the tenant, was
unable to make ends meet.
I have to say
that the facts in the instant case are strikingly similar to those in the Leicester
case. Here also the ratepayers incurred the actual costs of over £2m in
acquiring the site and putting up the actual building, only two or three years
before the effective date of valuation. It is purpose-built for their
requirements and fully used. The funds have been found and the trustees of the
school are able to pay their way, saddled as they are with the obligation to
pay off the debts incurred in funding the whole development. In the words of
one of the brochures prepared by the ratepayers, the school was established ‘to
meet the need for continuity of American curriculum for the children of those
on business, government or professional assignment in London.’ Over £3m has been raised from one source or
another, and has now nearly all been paid off. Some 100-120 companies have made
donations over the years. In the year 1971-72 over £90,000 was paid out by way
of interest on overdraft, and at one stage interest at the rate of 9 3/16 per
cent was paid on a loan of $500,000.
What grounds
for rent reduction?
How then do
the ratepayers differ from any commercial undertaking which sets out to carry
out a capital development of this sort on borrowed money; and why or on what
grounds would they be able to persuade the hypothetical landlord to reduce the
rent in the circumstances envisaged under the terms of the hypothetical
tenancy? It seems to me that if they
were tenants their income would remain the same and they would not be saddled
with the loan charges which they have actually incurred. Looked at in this
light, it is difficult to see why they should not be able to pay the commercial
rent. If this case, therefore, stood to be looked at in isolation, I would find
it difficult to find compelling reasons to depart from 6 per cent, the accepted
gross commercial rent for other properties.
It is at this
stage, therefore, that it becomes necessary to consider the guidance which has
been given in previous cases and referred to by Lord Denning in the Cardiff case.
Indeed the case for the respondents is based on what they regard as the
established rate of 3 1/2 per cent. They say, in effect, that to abandon that
rate would involve throwing valuers overboard to swim in uncharted seas and
that the evidence of the appellant rating authority provides no sort of
lifeline for the unfortunate swimmer. It would be undesirable to take the
metaphor of the sinking ship too far, but I think it is necessary to examine
rather more closely the seaworthiness of the 3 1/2 per cent ship.
It will be
apparent from what I have said in earlier cases, particularly in the Cardiff
case and the Leicester case and also in Stoke-on-Trent City Council v
McMillan (VO) [1979] RA 359, that in my judgment compelling arguments are
required in order to justify a departure from the accepted commercial rent. In
recent years this appears, almost invariably, to have been taken at 6 per cent.
It was accepted also by the valuers in the Cardiff case, where the issue
was as to whether the appropriate rate was 3 1/2 per cent or 4 1/2 per cent.
Neither party there suggested that any higher rate was appropriate. In my
decision in the Cardiff case, I referred to the shaky origins of 3 1/2
per cent as applied to public schools.
Oxford and
Cambridge Colleges cases
A similar
doubt is created by an examination of the history of the Oxford Colleges
appeals. In Magdalen, Jesus and Keble Colleges, Oxford v Howard (VO)
and the City of Oxford (1959) 173 EG 1134 the valuation officer, Mr Howard,
in his valuation adopted the approach which was first put forward by the
learned recorder at quarter sessions in 1902 when the concept of the
substituted building was introduced. To the capital value arrived at in this
way, Mr Howard applied 3 1/2 per cent, which he felt ‘was fair per cent to take
on a long-term view.’ In the course of
his evidence he apparently stated that 5 per cent was the normal percentage
used for commercial premises when valued on the contractor’s basis.
The Lands
Tribunal in their decision applied 2 1/2 per cent as being half the normal
percentage on the grounds that the provision of university education was not a
commercial venture, and that the money for the erection and improvement of
university buildings is generally provided by benefaction. For these reasons
the tribunal considered that the commercial rate of interest was not
appropriate. The case was subsequently taken to the Court of Appeal, who
referred the matter back to the tribunal in order that the tribunal could state
more fully what they had in mind when using the words ‘the money for the
erection and improvement of colleges is generally provided by
benefaction.’ The tribunal in
reconsidering the matter (at 7 RRC 130) explained the relevance of these words
as being one of the reasons which led the tribunal to the conclusion that
university education was not a commercial venture.
The Magdalen
appeal arose under the 1956 valuation list, but the question of Oxford colleges
came up again following the publication of the 1963 valuation list. In St
Catherine’s, St Hilda’s and Magdalen Colleges, Oxford v City of Oxford
and Howard (VO) (1968) 208 EG 1005 Mr Howard, who had given evidence in the
earlier appeal, corrected his earlier evidence. The tribunal said at p 398:
He told us
that when in the earlier case he had said that 5 per cent was the figure to
apply to the effective capital value he had not appreciated that he was
replying to questions relating to gross value, for whilst a number of
hereditaments were valued by the contractor’s method, only very few had a gross
value and the 5 per cent produced the rateable value. For gross value he should
have said 6 per cent and now it was 7 per cent which latter figure was not
challenged by the other parties.
In this later
appeal the tribunal applied 3 1/2 per cent following the reasoning explained in
the Cambridge Colleges case which was heard immediately
beforehand, Downing, Newnham, Churchill and King’s College, Cambridge v
City of Cambridge and Allsop (VO) (1968) 208 EG 805, 915. In that case 3
1/2 per cent was adopted by the tribunal on the understanding that it
represented half the commercial rent. I observe in passing that no one in the
instant case suggests that half the commercial rent is the appropriate figure.
I detect a
similar lack of precision as to the nature of the rate per cent adopted. In the
earlier Oxford Colleges case reference was made to the appropriate
‘interest rate,’ but it is not clear whether this was a reference to the rate
at which money could be borrowed or the rate of return required on investment.
In the Cambridge Colleges case there was a reference to the raising of a
loan for building purposes in the form of 7 per cent debenture stock. In the
meantime an appeal relating to local authority schools (the Leamington case)
had been decided where, as I have already indicated, the tribunal had before
them two alternative concepts. Firstly, the rate at which money can be borrowed
and secondly, the rate of interest the occupier would have to forgo if he used
his own capital; and as I have indicated, I do not consider that these two
alternatives necessarily produce the same answer.
Further
uncertainty arises from a consideration of the meaning attached to the words
‘effective capital value.’ The Oxford
and Cambridge colleges were valued on the basis of an estimated substituted
building and the figures of costs which emerged have been frequently recognised
as being artificial and unreal. In many of the cases of schools and colleges it
has been necessary to make final adjustments in the valuation which represented
reductions in both annual and capital value. For example, in Shrewsbury
Schools v Shrewsbury Borough Council and Plumpton (VO) (1960) 176 EG
143 the final adjustment made by the tribunal in their decision was derived
from a check of gross value per capita at other schools.
From a study
of all the cases, it seems to be clear that on rare occasions only is the
effective capital value to be described properly as a value rather than as an
adjusted figure of cost, actual or imaginary.
Doubts about
agreed assessments
One of the
arguments put forward in the present case was that by departing from 3 1/2 per
cent the tribunal would be casting doubt on the correctness of a large number
of assessments of independent schools settled on the 1973 list. There is of
course no direct evidence before me of these other assessments. I would merely
say that a finding of some higher rate per cent in this case does not of itself
call into question the correctness of any other assessment. I was told that
some measure of agreement had been reached among those concerned as to the
valuation approach to be adopted for public and other independent schools for
the purposes of the 1973 revaluation and I was shown a document which purported
to set out details of an agreed approach.
While it is
true that 3 1/2 per cent to gross value was adopted as part of this valuation
approach, effective capital value was to be arrived at on the basis of a
formula containing a number of arbitrary adjustments, designed, for example, to
reflect nature of construction, and type of accommodation related to effective
floor areas; and at the end of the valuation it was apparently found necessary
to consider whether any other adjusting calculation was required in order to
make it supportable as the rent at which the hereditament might reasonably be
expected to let. The application of this formula has led to the agreement of
many assessments for the 1973 list and these agreed assessments are all
evidence of deemed rental values for the hereditaments concerned. A similar
formula method of arriving at a notional effective capital value, based on the
number of scholar places, has also been used, it appears, in the valuation of
local authority schools, where the rate per cent is taken at 5 per cent in the
1973 valuation list.
Owing to the
extreme artificiality of these formulae and the many variable factors included,
I do not consider that any weight can be attached to any individual step in the
valuation taken in isolation. I am therefore not persuaded that there is any
sufficiently clear guidance from these earlier cases establishing 3 1/2 per
cent as the appropriate rate to apply in order to arrive at gross value in the
instant case.
What then is
the appropriate rate? Mr Bewlay says 5
per cent, the local valuation court said 4 per cent and Mr Grieves and Mr
Goodwin say 3 1/2 per cent. One thing is clear, the rate at which the actual
occupiers are able to borrow money is by no means conclusive. In Metropolitan
Water Board v Chertsey Assessment Committee [1916] 1 AC 337 Earl
Loreburn said (at p 347):
I come now to
the claim of the Water Board, that the hypothetical rent should be fixed at a
lower figure because they were the only possible tenants and could borrow at
less than the current rate of interest. This singular argument had been properly
refuted in the assessment committee’s case, but Mr Page on their behalf threw
that over, and, if I understood him aright, accepted the proposition that the
financial standing of the Water Board was a proper element for consideration. I
suppose there must be some practice for taking that into account. If so, it is
quite wrong. If you may regard the wealth of the possible tenant you must also
regard the wealth of the possible imaginary landlord, for the one is as
relevant as the other in any conjecture as to the rent that would result from
bargaining between the two.
This passage,
however, is to be read, I think, in conjunction with the judgment in the Court
of Appeal in Tomlinson (VO) v Plymouth Argyle Football Co Ltd (1960)
6 RRC 173 where it was held that the football club was the only possible tenant
of the football ground, since any successor formed to take its place on a
dissolution would not be simultaneously in existence and would similarly be the
only possible tenant. It may well be, therefore, that if it could be shown that
all possible tenants were able to borrow at lower rates of interest, that is a
factor which might be taken into account. In the instant case it was urged on
me by Mr Tucker that there were other possible tenants who would be competing
for the appeal hereditament. He referred, for example, to schools in central
London run by other foreign communities.
No competing
tenant
Having heard
the evidence, I do not consider that there is any other competitor in that
field who could reasonably be taken to be in the market for the American School
premises. The local education authority occupy a large comprehensive school a
few hundred yards away from the American School. Mr Tucker suggested that they
were also competing tenants. But the two schools are physically quite different
in character; and neither school, it seems to me, could be considered as a
possible tenant of the other’s premises. In my judgment, therefore, the
trustees of the American School are to be considered as the most likely tenants
of the appeal hereditament.
Nevertheless,
there exists a strong need for the educational facilities which this school
provides. As Bowen LJ said in the
at p 741:
It does not
matter whether the school board want the premises for the purpose of profit, or
will make profit out of them; the question is whether the school board wants
and would take them.
The Court of
Appeal held that it was right to consider the school board as possible tenants
of the schools.
Similarly in
this case, there is clear evidence that the trustees of the American School
want the premises. They have in fact built them. In these circumstances, I do
not think that any allowance is called for merely by virtue of the fact that
the occupation may be described as ‘non-commercial.’ As to the rate at which they could borrow
money, it is true that some of the capital was made available free of interest.
Nevertheless, the overall picture which emerges from the evidence is that the
resources would be there to pay a rent commensurate with the gross commercial
rent.
In a number of
cases where the rating assessments of educational establishments have been
under consideration, adjustments downwards have been made from the commercial
rent which has been applied to the so-called effective capital values in each
case. In the main it has been found that the actual occupiers were in effect
the only possible tenants, but there is also a thread running through the
decisions which indicates the importance of the factor described as the
consideration to make ends meet.
I think the
underlying principle is that where there is no competition among tenants
interested in taking a tenancy of a hereditament the one tenant is in a
stronger bargaining position in his negotiations with the hypothetical
landlord. At the same time, the landlord is not without bargaining power,
because if the tenant fails to come to terms with him, he, the tenant, must
consider the alternative of providing the hereditament for himself in those
cases where he has a real need to occupy them. This is, of course, the
underlying idea of the contractor’s basis.
In other
cases, as for example in R v The South Staffordshire Waterworks
Company (1885) 16 QBD 359 (see the words of Lord Esher MR at p 370) and East
Midlands Airport Joint Committee v Coppin (VO) (1971) 17 RRC 31 (see
the passage in the judgment of Lord Denning MR at p 36), a lower rate per cent
was taken to reflect the unused potential which was reflected in capital value
but which did not enhance annual value at the relevant date.
This second
factor is not present in the case of the American School, where the premises
are fully used and occupied. As to the relative bargaining strength of the
hypothetical landlord and tenant, I do not consider that the landlord in this
case would find himself at much of a disadvantage. The appellant rating
authority, however, concedes a reduction from 6 per cent to 5 per cent and in
the light of the evidence as a whole, I am not able to say that that reduction
is insufficient. I, therefore, adopt 5 per cent at this stage of the valuation.
Disabilities
There remains
the question of the end-allowance to reflect certain physical disadvantages
from which the hereditament suffers. Mr Grieves lists these disabilities as
follows: the cramped site and the high density with limited parking; shortage
of playing fields, swimming pools and other recreational facilities; limited
fenestration; seven different floor levels on the ground floor; stairs and ramps
necessary because of the railway tunnel and main sewer running below the site;
the inadequate entrances and the many unusual features of the design leading,
for example, to severe shortage of staff rooms and storage accommodation.
Finally, what he described as defects in the air-conditioning system, which
provides heating and forced ventilation but no cooling or refrigeration. For
these disabilities Mr Grieves made a deduction of 10 per cent.
The respondent
valuation officer, Mr Goodwin, accepted most of these factors as disabilities
but took a less serious view of their effect and allowed 7 1/2 per cent. For
the appellants, Mr Bewlay accepted lack of recreational facilities and certain
features of the design, for example the unusual access, and he adopted an
allowance of 5 per cent.
I consider
that some of Mr Grieves’ disabilities are already taken into account in
arriving at the effective capital value. For example, if a cooling plant had
been installed, the effective capital value would have been higher and its
absence is therefore already taken into account. The existence of the railway
tunnel and the sewer beneath the site were clearly factors reflected in the
purchase price, since they would have affected any likely development which a
purchaser might have in mind. I think this is a case where I should not disturb
the finding of the local valuation court who made an allowance of 6 per cent as
suggested at that stage by the valuation officer and I therefore adopt that
figure.
The valuation
at which I arrive, therefore, is as follows:
|
Effective capital value (as agreed) |
|
|
£2,350,000 |
||||
|
Converted to annual terms at 5% |
£117,500 |
|
|||||
|
less for |
|
7,050 |
|
||||
|
|
£110,450 |
|
|||||
|
Say gross value |
£110,000 |
|
|
||||
|
rateable value |
£91,638 |
|
|
||||
Ability to pay
There is one
other matter to which I should refer. In a note to the audited accounts of the
trust at June 30 1978 it is stated:
Contingency:
The company is
a party to appeal proceedings relating to the rateable value of its property.
At this stage of the proceedings it is not possible to estimate the amount of
additional rates payable or recoverable. However, the directors do not consider
the amount to be significant to the financial position of the company as at
30th June 1978.
It was urged
on me by counsel for the respondents that this statement, being made some years
after the relevant date, was inadmissible. I do not agree. This statement is
not to be compared with valuation evidence which was unknown or could not be
anticipated at the relevant date of valuation. It is an expression of opinion,
and to be admitted in the same way as any other expression of opinion put
forward by the witnesses at the hearing and relating to the company’s ability
to pay. It refers specifically to the effect in 1978, so it may be that no
great weight should be attached to it. It does not provide any support,
however, to the respondents in their contention that the rate per cent should
be reduced because of difficulties experienced by the ratepayers in making ends
meet.
My finding
means that the decision of the local valuation court on the first proposal
dated February 19 1974 at gross value £84,500, rateable value £70,388 will
stand, there being no proposal outstanding at that date to increase the
assessment. The appeal of the rating authority against the decision of the
local valuation court on the appeal arising from the second proposal of March 7
1975, is allowed, and the appropriate order will be issued directing that the
valuation list be altered in pursuance of that second proposal to gross value
£110,000, rateable value £91,638. The first respondent and the second
respondent will each pay one half of the costs of the appellants, such costs
failing agreement to be taxed by the Registrar of the Lands Tribunal on the
High Court scale.
