Butcher’s shop in Glasgow–Owners a private limited company of retail butchers with several branches, head office and cooked meat factory–Continued occupancy for eight years after vesting date–Value of property–Tribunal’s general comments on settlements–Disturbance–Total extinguishment of business–Forced sale of equipment–Loss of profit–Deduction of director’s remuneration–Claim for loss of central profit because of increased overheads at factory not allowed
Mr J M S
Horsburgh (instructed by Alexander Jubb & Taylor, of Glasgow) appeared for
the claimants; Mr W D Cullen QC (instructed by the Town Clerk, Glasgow) for the
acquiring authority.
Giving their
decision, the tribunal said: The claimants were owners and occupiers of 257
Buchanan Street, Glasgow, which was compulsorily acquired by Glasgow
Corporation under the Coweaddens Compulsory Purchase Order No 2 1963 with
vesting in the corporation on November 11 1965. This is agreed by parties to be
the valuation date: Trustees of Mrs Renfrew v Glasgow Corporation
[1971] RVR 478. The claimants, however, were allowed to continue trading at 257
Buchanan Street until they were displaced in 1973. Although no terms appear to
have been agreed between the acquiring authority and the claimants about the
basis of the continued occupancy, it appears to be the corporation’s practice
in these cases to offset statutory interest against what might have been
charged as rent.
The claimants
are a private limited company still carrying on the business of retail
butchers. No 257 Buchanan Street was only one among many of their branches. Mr
Thomas McKellar, a director of the company since 1948, gave evidence that there
were four full-time working directors operating seven branch shops as at the
valuation date in November 1965. Since that date, however, two of the branches
have been compulsorily acquired, one closed, and another opened up, so that
there were five branches operating at the date of the actual closure of the
premises in 1973.
The directors’
duties involved going to the market to make purchases, deciding on prices,
supervising branches and generally running the business. When occasion
demanded, however, they did actual butchering as well. The office
administration was carried out at 70 Royston Road, Glasgow. There was also a
factory at Drumchapel, where cooked meats were prepared for the various shops.
In 1965 this factory employed two men, four youths and one woman and contained
substantial equipment. According to Mr McKellar the cooked meats comprised
about one-tenth of the total turnover from the shops.
It is not in
dispute that the claim is correctly based on a total extinguishment of the
branch of the business at 257 Buchanan Street. It is convenient to deal with
the claim under separate headings.
Value of
Property
A description
of the shop, which is now demolished, was produced and agreed by parties. The
shop had a ground-floor area of 320 sq ft and a basement of 277 sq ft. It had
been extensively fitted out in 1957 and at the date of valuation was adapted as
a butcher’s shop with tiled walls, terrazzo floor, modern shop-front, hanging
rails and cold store. The toilet used by the shop was at the rear of the
building and did not appear from the titles to lie within the shop’s curtilage;
but there was no evidence that this in practice caused difficulties. The shop
was in a location which appeared suitable for a butcher’s business, being
centrally situated and adjacent to a busy bus station. The nearest butcher’s
shop was at 44 Dundas Street adjacent to Queen Street Station.
Evidence was
given by Mr Harry J Crone FRICS [of the firm of Henry J Crone & Partners,
of Glasgow] in support of a claim for £16,900. He had taken the alleged price
paid by Messrs McKellar in 1957 of £6,500 and applied a growth factor of 3 per
cent for the period of eight years to 1965. This figure of £6,500 was arrived
at by taking the total purchase price of £8,200 in 1957 and deducting therefrom
a figure of £1,700 apportioned to the fittings. This implied that there had
been no payment for goodwill. In addition he took the alleged cost of £8,100
spent on the property in 1957 and, allowing for monetary changes and the rise
in building costs, applied again a 3 per cent per annum increase over the
period. After adjustments the figures at 1965 proposed by Mr Crone were £8,200
for the basic property and £8,700 for improvements, giving a total value of
£16,900. He conceded that not all the expenditure necessarily increased the
value. This total figure represents, relative to a reduced area of 377 sq ft, a
capital rate of £44 per sq ft of ground floor, ie £21 per sq ft for the basic
shop and £23 per sq ft for improvements.
Mr Crone was
of the opinion that in valuing a small shop a relatively higher rate per sq ft
was appropriate. He did not, however, attempt to justify his opinion by
comparable transactions. Those he did produce analysed at a maximum rate of £15
per sq ft. He considered, however, that the location of these comparables was
such that they were of little assistance in arriving at the value of this
particular butcher’s shop.
The basic
information on costs was given to Mr Crone by the company’s accountant, Mr
David S Edgar. The latter gave evidence that in 1957 the shop and business had
been purchased for £8,200 and apportioned (apparently at the request of the
sellers) as follows:
|
Property |
£5,000 |
|
Goodwill |
£1,500 |
|
Fittings |
£1,700 |
There were no accounts available showing the business being done by
the previous owners. £5,000 was agreed to be the consideration for the
disposition of the heritage mentioned in the recorded disposition. The fittings
had been scrapped and substantial alterations carried out to the shop at an
alleged cost of just over £8,000. No receipts were available to show how this
sum was made up, but Mr Edgar said that these costs were included in the
accounts–some against capital but the remainder against revenue. The cost of
the new floor, amounting to £666.14, was a capital item and is shown in the balance
sheet.
In the revenue
account the repairs and replacements over a number of years were as follows:
|
1955 |
£1,892 |
1958 |
£1,745 |
|
1956 |
£2,983 |
1959 |
£2,650 |
|
1957 |
£1,880 |
1960 |
£2,229 |
These figures, however, applied to all branches of the business and
no details as to how they were made up are at this date available. The building
is now demolished. The tribunal are unable to hold that the above figures
substantiate in any way the indirect evidence of Mr Edgar and Mr Crone that
improvements at the costs stated were carried out.
Mr Robert
Drennan ARICS, district valuer of Glasgow 2, stated that in his opinion the
value of the shop as at November 1965 was £8,000. This valuation was
represented by the following capital rates per sq ft:
|
Ground-floor 320 sq ft @ £20 |
£6,400 |
|
Basement 227 sq ft @ £7 |
£1,589 |
|
£7,989 |
|
|
say |
£8,000 |
Mr Drennan also showed that the analysis of £8,000 as the value of
the shop could be illustrated thus:
|
Ground floor 320 sq ft @ £12 |
£3,850 |
|
Basement 227 sq ft @ £3.50 |
£800 |
|
£4,650 |
|
|
With addition for heritable |
£2,550 |
|
Chill room |
£800 |
|
£8,000 |
Counsel for the acquiring authority was anxious, however, that we
should not take this as a valuation but only as a way of showing how it could
be built up in a similar way to what Mr Crone had done. His figure for
heritable improvements was broken down in evidence into the following items:
|
£ |
|
|
Floor |
670 |
|
Wall tilling |
208 |
|
Shop front |
750 |
|
Work in basement |
250 |
|
Rear window |
100 |
|
Removing pillar |
250 |
|
Hanging rails |
250 |
|
£2,478 |
This, however, was the estimated cost in 1957 and no figures were
included for plumbing and electrical work.
Settlements
In arriving at
the alternative figures of £12 and £20 per sq ft Mr Drennan had regard to 19
compensation settlements in the area, mostly with chartered surveyors,
including Mr Crone’s firm. These settlements analysed to show in the same part
of Buchanan Street rates from £10 per sq ft for unimproved premises to £24 per
sq ft for a snack bar which had been modernised. In adjacent streets rates
varied from £7 per sq ft to £21 per sq ft.
These
settlements were all involved in the Cowcaddens Compulsory Purchase No 2 Order,
and the figures for the actual properties–as opposed to disturbance–were
apportionments made by his office of the total compensation settlements and not
necessarily those apportionments agreed in all cases with the claimant’s
surveyors. Mr Crone nevertheless accepted that the apportionments involved in
cases with which his firm was concerned were correct.
Mr Drennan
explained, however, that in dealing with the initial settlements formed
following the 1963 CPO regard was had by him to sales in some cases as far back
as 1957 to assist in determining values as at 1965. Evidence of such sales,
however, was not given in evidence. Mr Drennan accepted that the values of
shops in this area would have increased by about 25 per cent from 1957 if there
had been no scheme.
The recorded
purchase price of £5,000 for the subjects had been taken into account by Mr
Drennan–although he regarded it as on the high side compared with other sales.
But we are unimpressed with this argument, as no evidence of such other sales
was placed before the tribunal.
In terms of
rule (2) of section 12 of the Land Compensation (Scotland) Act 1963 we have to
determine the amount which the shop if sold in the open market by a willing
seller might be expected to realise–disregarding any depreciation in value due
to the corporation’s redevelopment proposals. The tribunal are reluctant to
accept settlement figures for compensation for properties acquired under a
comprehensive redevelopment scheme where there exists evidence of comparable
sales in the vicinity which are not affected by the scheme. The latter are the
best evidence of open market value. We adopt, however, as a guide what was said
by the Lands Tribunal (Sir Michael Rowe QC) in Xerri and Shanks v Enfield
London Borough Council [1966] RVR 848, 850:
‘The
claimant’s valuer distrusted the district valuer’s settlements. In his view an
owner anxious to sell had agreed to the first purchase, and once the district
valuer had that precedent in his bag the pass had been sold and even surveyors,
acting for owners or leaseholders not in a financial position to litigate,
could not hope to do much better for their clients. This tribunal has said on
more than one occasion that the danger to which the claimant’s valuer drew
attention is a real one, though it seldom carries with it any stigma of unfair
conduct by a district valuer or his officers; but the tribunal has also said
that if settlements of this kind are to be disregarded, there must be evidence
clear and positive to prove that they were on too low a basis. If there have
been sales of truly comparable properties in very close proximity to the
subject land effected in the open market and not, so far as can be ascertained,
affected by any special factors, those sales should be regarded as better
evidence of market value than settlements effected by the district valuer even
if surveyors were acting for the claimant.’
In that case
the learned President, however, declined to prefer two open-market transactions
relating to property some distance away. In the more recent case of Shaw
v Hackney London Borough Council (1974) 231 EG 1300 the tribunal did
prefer evidence of two adjacent sales in preference to the acquiring
authority’s schedule of settlements.
We have been
given no evidence of sales of modernised butcher’s shops, and therefore in
determining the value we have to do our best with the evidence and information
which was put before us. This may be summarised as follows:
(a) A price of £8,200 was paid in 1957 for the
going concern carried on at 257 Buchanan Street.
(b) The consideration for the property in the
1957 disposition was £5,000;
(c) Although the exact costs were not proved,
considerable alterations were carried out to the shop after its purchase at a
cost which was estimated by the district valuer at not less than £2,500 plus
£800 for a chill room (ie £3,300) and by the claimants at £8,100;
(d) The district valuer has settled compensation
for modernised shops within the same compulsory purchase order area at figures
which analysed for the ground floor up to approximately £24 per sq ft.
We consider
that a purchaser wanting to buy a butcher’s shop in this trading position would
have some regard to the costs involved in buying a shop and reconstructing it
to provide a modern shop, fitted and equipped for a butcher’s business. If the
purchaser had been considering these costs at 1965 they would be considerably
higher than those of 1957.
In view of the
lack of positive evidence before the tribunal we have experienced difficulty in
this matter, but we eventually determine the value of the shop at £9,700
computed as follows:
|
Ground floor 320 sq ft @ £24 |
£7,680 |
|
Basement 227 sq ft @ £9 |
£2,043 |
|
£9,723 |
|
|
say |
£9,700 |
The £9 per sq ft includes for the new chill room installed in the
basement. As an overall check we also consider that the above figures are not
unreasonable having regard to the figure of £5,000 paid for the heritage in
1957.
Disturbance
The claim
under this heading is separated into three parts and we shall deal with it in
the same way.
(a) Claim for loss on forced sale of equipment
|
Equipment |
|
Cost |
|
|
£ |
|
|
Scales |
|
850 |
|
Cash |
|
395 |
|
Refrigerated |
|
1,200 |
|
Deep-freeze |
|
600 |
|
Slicer |
|
150 |
|
Mincers |
|
550 |
|
|
£3,745 |
|
|
Less 20% depreciation |
|
758 |
|
say |
|
£3,000 |
These figures were supplied by Mr Edgar, who had taken firstly the
cost of replacing with new equipment at dispossession. The depreciation figure
of 20 per cent, as we understand it, is to reflect the wear and tear of the
equipment since it was purchased in 1957 or 1958. Mr McKellar stated that no
sum had been received for the equipment, most of it being left on the premises.
Two new scales had been taken away–the other two scales which had been
converted for decimalisation were left. Mr McKellar explained that there was no
market for second-hand butcher’s equipment. It appears that as a corollary
there is no supply at any particular time. In consequence new equipment is
usually purchased when fitting out a butcher’s shop.
Mr Drennan
proposed a sum of £756 for the loss on forced sale of equipment. This figure
was based on a value of £840 for movable equipment which appears to have been
agreed for estate duty purposes in 1968 as the value of the movable assets in
the going concern at that time. Mr Drennan then made a deduction of 10 per cent
in respect of further depreciation of the equipment for the five years up to
1973, when the claimants moved from the premises. But he explained that this
deduction was really to take into account the benefit the owner had in using
the equipment during the period from the valuation date until the premises were
vacated. His proposal accepts that there is no salvage value.
No Realisable
Value
We have to
determine the owners’ loss. Both parties computed the value of the equipment to
the owners at the date of dispossession. At the date of dispossession in 1973
the owners had equipment which was of value to them in the continuing business
if it had not been compulsorily acquired. They contended, however, that the
equipment had no realisable value if sold on the open market. This was accepted
by the acquiring authority. The factual loss would be incurred at the date when
the equipment ceased to be used, ie in 1973. If there had been a realisable
value, then one would have taken that as the figure actually received when it
was sold. In view of the fact that it is agreed in this case that there is no
realisable market value, the dispute between the parties is the value to the
owner of the equipment at the date of the realisation or, in this case, of
non-realisation when the equipment required to be scrapped. The claimants
valued this scrapped equipment at £3,000 and the acquiring authority at
£756–both at 1973.
We do not
accept that the basis of value for estate duty purposes at 1968 was necessarily
on the basis we have now to take for the disturbance claim following a
compulsory acquisition and which reflects value to the owner. The market value
at 1968, when the relevant death occurred, would have regard to the fact that
the business was being carried on in the premises at the whim of the acquiring
authority and could be terminated at any time.
The costs to
replace the equipment with new, as submitted by the claimants, were not
challenged by the acquiring authority. The deduction of 20 per cent, however,
is not convincing and the basis for that deduction is obscure. As we have
stated previously we consider that the acquiring authority’s basis of value is
suspect. The additional deduction for depreciation from 1968 to 1973 does not
appear to take into account the presumably rising cost of new equipment during
that period. Photographs of most of the relevant equipment in situ were taken
just before dispossession and produced at the hearing. From these photographs
the equipment appeared to be modern and attractive.
We consider
that the value proposed by the claimants is too high and that the acquiring
authority’s value is too low. In these circumstances, we have to make a
judgment on the information before us. We do so at the sum of £1,500, which is
50 per cent less than the cost of new equipment. It may be noted that the
apportionment of the price of £8,200 paid for the business in 1957 included
£1,700 in respect of fittings. As there was no salvage value the loss under
this item is determined at £1,500.
We have not
made any discount back to the valuation date to allow for statutory interest as
from that date, as the acquiring authority did not ask us to do so.
(b) Claim for loss of profit due to cessation of
branch
Mr Crone
supported the claim under this heading at £11,694 calculated as follows:
|
Net profit 1965 |
£1,688 |
|
Add director’s salary |
2,210 |
|
£3,898 |
|
|
Year’s purchase |
3 |
|
£11,694 |
Mr Drennan, after hearing the claimant’s evidence, proposed a sum
for this item of £2,156, which represents two years’ purchase of an adjusted
net profit of £1,078. Both parties were agreed that we should have regard to
1965 profit levels for calculating loss of profits.
Both valuers
derived their profit from a statement prepared by Mr Edgar on behalf of the
claimants showing the apportionment of profit and outgoings to the branch at
257 Buchanan Street. The gross profit of £11,242 and the outgoings of wages,
rates, insurance, heating and lighting for the branch of £4,444 for the year ended
October 31 1965 were agreed. The actual net profit from the branch as a
contribution to the main company was therefore £6,796. Deductions were also
made in respect of costs and expenses incurred by the company in respect of all
their branches and these are the subject of a different approach by the two
parties.
In Mr Edgar’s
statement a deduction was made of one-fifth of the company’s expenses for the
year ended October 31 1965 and a sum of £2,210 for the salary of one full-time
working director. The deduction of one-fifth appears to arise from the fact
that there were five branches in 1973–just before Buchanan Street was closed.
The net profit shown in the statement is £1,688, which is the figure adopted by
Mr Crone as the base for his computation.
Mr Drennan’s
deduction for company expenses was done on the basis of the proportion of
turnover of the branch to the whole business in the appropriate year. This
produces a factor of 0.176 which means a lower deduction than the 0.20 proposed
by Mr Edgar. Mr Drennan has also applied the 0.176 to the total directors’
remuneration. This gives a figure of £1,556, which again is a lower figure than
Mr Edgar’s.
Further
adjustments, however, were made by Mr Drennan as follows:
(i) Evidence was given that in 1973 the costs of
the head office and the running of the factory at Drumchapel were £10,500. This
was apportioned as to £2,000 for head office expenses; £5,000 for the factory
and £3,500 for transport and carriage costs. Mr Drennan said that the £3,500
for transport had already been taken into account in Mr Edgar’s deduction, so
that only the £7,000 had still to be set against the branch profits. As the
£7,000 was a 1973 figure Mr Drennan reduced that to £4,900 after a study of the
costs between 1965 and 1972. He then applied his ratio of 0.176 to that, giving
a deduction of £860.
(ii) Mr Drennan also deducted £640 from the
profits, being the notional rent of the shop and representing 8 per cent of his
value of £8,000.
(iii) He also made a deduction for interest on capital
of £200, which represented 8 per cent of £2,500–his allocation to the branch of
the capital involved in the branch and the business so far as the branch was
concerned. Although not specifically stated, this would appear to include the
value of the equipment at £756.
After making
these deductions Mr Drennan’s calculation of the net profit was thus £1,078.
Both parties are agreed that at least some of the company’s general expenses
should be deducted to arrive at the loss of profit. So far as the proportion of
these expenses is concerned, Mr Drennan’s ratio is more beneficial to the
claimant, so we accept his ratio of 0.176.
Head Office
and Factory Expenses
The expenses
of the head office and the factory are a part of the company’s outgoings, and
on the evidence these were necessary to maintain the profitability of the
branches. The question of whether head office expenses should be deducted from
the profits of a branch depends on the ability of the company either to absorb
this expenditure or reduce it or to replace the turnover by opening another
branch.
No evidence
was led to show that the claimants in this case were not able to contain their
costs following the closure of the branch. Over the years branches had been
closed and opened by the company. It also appears difficult for the claimants
in this case to concede that a substantial part of the company’s outgoings
should be deducted as a proportion–but that other expenses should not. In the
circumstances of this case we therefore accept that the deduction of £860
proposed by Mr Drennan should be made.
So far as the
rent deduction is concerned, this was not seriously opposed by the claimants
and therefore we consider that a deduction is also appropriate. The deduction
proposed by Mr Drennan was 8 per cent applied to his opinion of value. We have
determined the value at £9,700; so applying 8 per cent we arrive at a notional
rent of £776.
The deduction
for interest on capital was not challenged by the claimants and we accept that
this should also be made. As we have increased the value of the equipment we
have made an adjustment in this item. Mr Crone in his computation added back
the allocation made by Mr Edgar for director’s salary. His reason appeared to
be that the loss of the branch would cause a loss of remuneration to a
director. But in the tribunal’s view the proper question is whether director’s
salary should fairly be deducted in arriving at the claimant’s net profits.
Director’s
Remuneration
The argument
in connection with director’s remuneration is linked to the argument about the
deduction for company expenses. The question of whether such a deduction should
be made to arrive at net profits has been dealt with in a number of Lands
Tribunal cases in England. It has been held that in the case of a limited
company with branches a deduction is appropriate: see Cliffords (Dover) Ltd
v Dover Corporation (1965) 195 EG 821 and Freeman Hardy & Willis
v Bradford Corporation (1967) 203 EG 1099. In the case of Widden
& Co v Kensington (1970) 213 EG 1442, however, it was agreed by
both the claimants and the acquiring authority witnesses that no deduction
should be made for director’s fees; but in that case the business was run by
the director himself and his wife. The matter was also considered in the recent
case of Longbottom v Bingley (1974) 230 EG 371, where no
deduction was made for the director’s remuneration in the case of a
partnership.
This is a
larger business involving a limited company with several branches where we
consider that a deduction is appropriate. In the case of Shulman (Tailors)
Ltd v Greater London Council (1965) 196 EG 453 at 458 the tribunal
said:
‘I accept
evidence that in the great majority of small family businesses profitability is
more reliably measured by ignoring the directors’ fees actually charged and
substituting instead a reasonable figure being the value of the directors’
services had they been employees.’
Mr McKellar
gave evidence that the directors spent considerable time in running the
business and that they were also actively and physically involved as butchers.
The branch profits therefore were dependent on the directors’ work. In this
case the figure of £1,556 proposed by Mr Drennan appears to us to be reasonable
and is less than the figure proposed by the claimants themselves. The adjusted
net profit, allowing for the increased rental, is therefore £882.
Mr Crone had
proposed a multiplier of three years’ purchase to the net profit whereas Mr
Drennan had applied two years’ purchase. There was no direct evidence to
establish what the correct multiplier should be. Mr Drennan indicated some
transactions in connection with butchers’ businesses; but no details were given
of these and we were unaware whether these were one-man businesses or branches
with head office expenses set against them. We consider in the circumstances of
this case–where we have a shop well modernised and making a substantial
contribution to the company organisation–that a multiplier of three years’
purchase is more appropriate and we so determine. This gives a value of £2,646.
(c) Claim for loss of central profit because of
increased overheads at Drumchapel
The claimants
propose a sum of £6,300 under this heading, which is computed as follows:
|
Distribution charges at |
£10,500 |
|
There are five branches, therefore the loss in |
£2,100 |
|
At three years’ purchase |
£6,300 |
The acquiring
authority rejected this claim on the basis that no loss had been proved.
We consider that the question of the overheads at Drumchapel and
head office expenses has been dealt with under the previous heading. If the
costs at Drumchapel had
another branch in which to absorb these costs, then this claim might have been
valid. We consider, however, that this part of the claim is not established and
we reject it.
We therefore
determine the compensation at £14,019, calculated as follows:
|
Value of property |
£9,700 |
|
Loss on forced sale of |
1,500 |
|
Loss of profit |
2,646 |
|
Surveyors’ fees under Scale |
173 |
|
£14,019 |
We consider that there was some justification in the acquiring
authority’s complaints that they had been supplied with insufficient
information to enable the disturbance claim to be properly assessed.
In the whole
circumstances we make no finding as to expenses.