Generally, capital value valuation relies on rents/yields and prices per square foot derived from market transactions that are analysed to provide evidence to apply across huge numbers of property assets. It is mostly non-contentious unless alleged negligence is being tested.
In contrast, it is common that for statutory purposes (compulsory purchase and taxation) capital valuations involve disputes that sometimes result in litigation.
When that happens, valuation evidence is set out in expert reports and tested in cross examination. It is very rare for the dispute to be about differences reliant on comparables, rents and yields and capital values per square foot or per acre. Such difficulties are regularly resolved between valuers.
Instead, statutory valuations for compulsory purchase and compensation are reliant on “no scheme world” subjective judgment and frequently involve the vagaries of hope value, marriage and ransom value, planning assumptions as well as disputes on facts and legal interpretation.
Such valuations do not rely on easily applied analysis of comparables and the scope for polarisation is ever present, sometimes leading to excessive claimant ambition and frugal acquiring authority assessments.
That is where the valuers are tested and where some are found to be lacking.
What governs valuer expertise and conduct?
There is no lack of professional standards and guidance applicable to the circa 120,000 chartered surveyors worldwide.
In 2014, the RICS introduced a “registered valuer” scheme – a monitoring programme for all members undertaking valuations in accordance with the RICS valuation standards, contained in the Red Book.
The current edition of the Red Book (RICS, 2014) is a 250-page document officially titled RICS Valuation – Professional Standards, which provides the trusted “gold standard” of valuation. The simple requirement for a Red Book valuation is generally considered as providing the best and most reliable outcome.
While the definition of “open-market value” in the Red Book does not apply to statutory valuations, the general requirements it contains do apply
(Professional Standards 1 and 2 cover, among other things, such matters as the need for terms of engagement, exceptions, departures and ethics.)
Additionally, chartered surveyors engaged as expert witnesses are subject to comprehensive mandatory guidance. The Surveyors Acting as Expert Witness professional statement, currently in its fourth edition (RICS, 2014), states:
You must only act as an expert witness and give expert evidence where you have the
(a) ability to act impartially in the assignment;
(b) experience, knowledge and expertise appropriate for the assignment; and
(c) resources to complete the assignment within the required timescales and to the required standard.
Finally, there is the recently introduced mandatory requirements set out in the Surveyors advising in respect of compulsory purchase and statutory compensation, professional statement (RICS, 1st ed, April 2017.)
The need for this is because of the issues that arise from compulsory purchase with obvious and inevitable adverse impact on homes, businesses and the lives of those affected. This statement is to ensure that chartered surveyors undertaking this work have appropriate expertise.
The explicit requirement for understanding of the law and guidance in respect of the Compulsory Purchase Code seems basic but is regrettably a necessity given the number of instances where those who are not sufficiently well versed, and with appropriate capabilities, take on the work. This applies to both sides of the process. Those representing acquiring authorities can sometimes fall short; it is not just valuers who represent claimants. There have been numerous instances of valuer inadequacy with criticism of valuers appearing in Lands Tribunal decisions.
In summary, when “weighing the valuers” there is no lack of defined standards and guidance against which to judge the work undertaken and lawyers should perhaps be more demanding earlier in the process so that standards will be raised and confidence in the CPO process enhanced.
The deceptive simplicity of “open-market value”
For less usual property interests which are often subject to CPO, open-market value – a single price with completion on the day – is seldom the way the market works and as a result direct comparable sales evidence does not exist. This often applies in regeneration CPOs where “hope value” – an element of value which reflects the prospect of some more valuable future use or development in excess of the current existing use – arises.
Customarily the market deals with hope value by way of either overage where the consideration to be paid includes a sum which the vendor may be entitled to receive after completion if a specified condition is satisfied or by use of conditional/contingent agreements. In both there is no single on-the-day price.
Typically, CPO valuations deal with this need to reflect hope value by either adding an uplift to existing use value (+10-50%) (the “bottom up” approach) or if development is considered to be more certain and reasonably imminent discounting from full value (a “top down” approach). The tribunal has sometimes adopted a percentage chance of securing planning permission and then applied this as a percentage to full market value with such permission. The logic is understandable but it is something the market would never contemplate.
Valuation methodologies
A residual appraisal is the sum of money available for the purchase of land calculated from the value of the completed development minus the costs of development including profit. The tribunal’s dislike of and scepticism regarding this method of valuation is well known.
The temptation to make consistently biased assumptions on inputs and resulting wide variation in conclusions has led to some spectacular differences of opinion on value, examples of which follow.
That said, there are instances where there is no alternative and the decisions in a number of these cases support use of residuals.
It is this approach which sets the greatest test for “weighing the valuer”. The temptation to reach a predetermined conclusion (high or low) is so easily achieved by manipulation of the inputs, which is why the next test is so critical.
“Stand back and look” – a recurrent call from the tribunal
Is the valuation credible and does it fit with market transactions however far removed from the actual circumstances? In some cases, the best “comparable” may be a historic transaction or a valuation of the property itself. This is so even when a relatively long period of time has elapsed – such a transaction or valuation provides a touchstone of reality to which the respective valuers will need to relate, whatever conclusion has been reached.
There are some noteworthy examples of shortcomings in this regard.
In Waters v Welsh Development Agency [2004] UKHL 19; [2004] 2 EGLR 32, Lord Nicholls said:
“A result is not fair and reasonable where it requires a valuation exercise which is unreal or virtually impossible…”
and
“A valuation result should be viewed with caution when it would lead to a gross disparity between the amount of compensation payable and the market values of adjoining properties not being acquired.”
Cases in which major valuation concerns were highlighted
Richards & Richards v Somerset County Council [2002] RVR 328
This was a purchase notice case concerning a small parcel of vacant land next to the eastern distributor road in Burnham-on-Sea. The claimants sought a £4.8m ransom value, acquiring authority at £100,000 being hope value.
The claimants’ valuer relied on “a consortium purchase arrangement” involving the several landowners he contended would benefit from the access improvement claimed to be reliant on the reference land, which involved an aggregation of ransom values.
At para 222, the tribunal said: “I have doubts whether his evidence represented his honest and objective opinion. In short, I think he was putting forward a case for the highest possible figure rather than putting forward an objective opinion.”
The acquiring authority’s valuer’s £100,000 – on a “40 years man and boy” basis of approach was strongly criticised by the claimant’s counsel.
The conclusion reached was that there were no comparables to support the claimant’s valuer. His approach was analytical and failed because the underlying assumptions were unsupported, the result being not remotely credible.
The acquiring authority’s valuer’s spot figure was accepted, with the tribunal saying: “I found him to be an objective, reliable and competent witness, whose opinion I can accept.”
The £100,000 spot figure was accepted as “being not too low”.
Welford v EDF Energy Networks (LPN) Ltd [2007] EWCA Civ 293; [2007] 2 EGLR 1
This case concerned a 0.6-acre site in Canning Town, east London, which was purchased at auction in 1995 for £41,000. It was to be used as a skip hire yard and it became part of waste transfer site. An adjoining site of a similar area was acquired in 1997 for £230,000.
Beneath the site lay 15 high voltage electricity cables. The compensation claim followed the grant of necessary wayleaves. The valuation date was August 1998.
The claimant’s valuer relied on a combination of profits and residual valuations to arrive at a value in the sum of £3,436,439 (for the sites purchased in 1995 and 1997 for a total of £271,000), which was amended during the hearing to £2,252,896.
The claim to reflect the wayleaves was £774,645, amended during the hearing to £472,970.
Relying on comparable transactions, the compensating authority’s valuation allowing for the term of the wayleaves was £78,151.
The tribunal’s award included:
■ agreement with the acquiring authority’s counsel’s statement: “absence of evidence… conclusion that the profits valuation is a figure which does not reflect the market, is completely unsupportable, unsupported and counter intuitive’’;
■ criticism of the selective approach to providing information, eg absence of rental or capital valuation;
■ combination of profits and residual methods rejected with reference to the latter being inappropriate when solely prepared for litigation.
Decision on diminution in land value at £81,932.
Read the second Blundell lecture series article by John Gaunt QC on open market value.
Colin Smith FRICS is senior director in the compulsory purchase team at CBRE
