Landlord and Tenant Act 1954 New tenancy Public house User clause in lease restricting food service to snacks and light refreshments Valuation Whether claimant’s own operation typical of hypothetical lessee Whether limited user clause significantly affecting valuation
The claimant brewery ran a chain of public houses that sold only its own brand of beer at discounted prices plus a limited food menu. One of its pubs was a mews property in London W1, which was let to it by the defendant landlord for a 10year term from 1994 at a rent of £65,000 pa. The property comprised a groundfloor bar and servery plus a small courtyard, with a kitchen and accommodation above. A user clause confined the use of the premises to use as a public house but permitted “snacks and light refreshments only” to be served ancillary to that use. When the term expired in 2004, the claimant applied for a new lease under Part II of the Landlord and Tenant Act 1954. A preliminary point was tried as to the user clause to be included in the new lease. The defendant wished to remove the reference to snacks and light refreshments on the ground that normal public house use now included a full food service. HH Judge Hazel Marshall QC determined that the reference should be retained so as not to extend the user clause beyond what was already permitted.
In determining the rent for a new lease on those terms, both parties’ experts applied a “profits method” of valuation by assessing the fair maintainable trade for the premises, estimating the net profits on that trade, making a deduction for the tenant’s capital expenditure on stock and fixtures and dividing the balance between the landlord’s rent and the tenant’s profit. The claimant’s expert reached a figure of £35,000, based upon the claimant’s own average trading figures of £245,000 as being typical of the reasonably competent operator. The defendant’s expert, who had originally compiled his report on the basis of an unlimited food use, emphasised the rise in the market owing to the increase in “gastro pubs” and cited as his best comparable a property in a corner location that had followed the gastropub route. He justified his continued reliance upon that comparable, despite the limited user clause determined by the judge, on the basis that its greater food offer was countered by an inferior position to the claimant’s premises. He contended that the approach of the claimant’s expert overlooked the fact that the claimant’s discounted “pie and pint” style of operation was not typical and would not be followed by an incoming tenant, which would improve the decor and offer a wider range of beverages and food. He asserted that the claimant could make a 4050% improvement in wet sales and make a more uptodate food offer. He assumed a fair maintainable trade figure of £456,000, of which 25% was attributable to food, with a net profit of 32% before deductions for tenant’s capital and a division of the remainder that gave 52% to the landlord to take account of the prevailing strong market. From that, he derived a rent of £75,000.
Held: The rent was fixed at £58,000 pa.
The claimant’s expert lacked experience and his uncritical reliance upon the claimant’s operation as being that of a reasonably efficient operator for that site was superficial. The discounting style of operation would not be followed by competitors. Although the evidence of the defendant’s expert was generally to be preferred, he had not altered his opinion of value in the light of the preliminary decision regarding the user clause and his report was plainly aimed at the chefled, “gastropub” type of operation, with a greater emphasis upon eating food rather than having a drink. It was unrealistic to claim that the location of the claimant’s premises, which were tucked away and inconspicuous, was such as to outweigh the advantage enjoyed by his best comparable, which, far from having an inferior location, enjoyed greater prominence, a larger size and a broader food use. Taking those matters into account, the discounting element should be removed and 40 50% should be added to the claimant’s own figures to produce a basic wet trade of around £300,000. Given the limited user clause, 20%, rather than the defendant’s suggested 25%, was a more realistic proportion for food turnover. Taking the defendant’s figure of 32% as a guide to net profit produced £120,000, from which a deduction of £5,000 should be made for tenant’s capital expenditure in the light of the need for improvements in decor. That reduced the divisible capital to £115,000, which was to be divided in two to give £57,500. Making a comparison with the defendant’s best comparable, which had let at £65,000, a reduction of 10% to take into account the differences from the claimant’s premises produced a figure of £58,500. The appropriate rental level for the claimant’s premises was £58,000 pa. Although that was less than the current rent, that fact alone did not indicate that it was inappropriate, since the current rent had been fixed in 1994 in a very different market.
The following case is referred to in this report.
Land Securities plc v Westminster City Council [1993] 1 WLR 286; [1993] 4 All ER 124; [1992] 2 EGLR 15; [1992] 44 EG 153, Ch
This was a hearing to determine the rent to be paid by the claimant tenant, Samuel Smith (Southern) Ltd, to the defendant landlord, Howard de Walden Estates Ltd, on the grant of a new tenancy of business premises, pursuant to Part II of the Landlord and Tenant Act 1954.
Siri Cope (instructed by Bude Nathan Iwanier) appeared for the claimant; Andrew Walker (instructed by the legal department of Howard de Walden Estates Ltd) represented the defendant.
Giving judgment, HH Judge Hazel Marshall QC said:
[1] This is an application by the tenant of premises at a mews public house in Weymouth Street, London W1, for a new lease of those premises, pursuant to Part II of the Landlord and Tenant Act 1954. The premises themselves are situated in Weymouth Mews, which links Devonshire Street and Weymouth Street. They are a Grade II listed building, comprising a basement cellar, a groundfloor bar with three areas including a servery, a small rear courtyard and first and secondfloor accommodation without a separate access. The kitchen is |page:108| on the first floor and, as I understand it, doubles as a domestic and a catering kitchen and is equipped with suitable equipment.
Background
[2] Originally, the lease was granted in 1994 for 10 years at a rent of £65,000. The rent review in 1999 was not, however, implemented. The lease terminated in 2004. The current tenant under the lease is Samuel Smith (Southern) Ltd. Samuel Smith is a brewery operation with its own chain of public houses throughout the country, although no doubt run by different associated companies in the group. The landlord is the Howard de Walden Estate. The application for a new lease has been resolved largely by agreement, except for issues relating to the user clause and to rent and interim rent. All these are before the court.
[3] The user clause was dealt with earlier by me as a preliminary point because, logically, that is needed before a rent can be determined. I will summarise it, since it is part of the background.
[4] The disagreement there arose because the previous user clause in the lease had read, in effect, that the premises should be used as a public house “save that snacks and light refreshments only may be served and consumed on the demised premises as ancillary to the use as a fully licensed public house”, thus implying that the sale of snacks and light refreshments was an extension of and outside what would otherwise be regarded as public house use. By 2004 (the landlord argued), trade had moved on, and what would now be regarded as a normal public house use would, on any basis, involve the provision of food. The landlord wished, therefore, to remove the words “save that snacks and light refreshments” entirely or, alternatively, to substitute the word “meals” for “snacks and light refreshments”. It argued that this, in fact, corresponded more naturally with what the tenant was actually doing.
[5] The tenant was concerned that either of those changes would, by alleged necessary implication or by express words, extend the user clause to cover the provision of a full food service that (it said) went beyond what it was doing or wished to do. It provided only pub food of the singlecourse, plateddish variety of plain and traditional pub refreshments, that is, sandwiches or a simple hot dish.
[6] Each party agreed that the tenant was not in breach of the user clause, but for different reasons. The landlord, plainly, was interested in establishing the wider scope of the clause for the purpose of a rent increase, as I will turn to below. The tenant, however, was interested in not being in breach of its lease but being able to continue its current trading pattern, which is a pattern that it adopts throughout its public house portfolio. Both sides agreed, therefore, that the food use being made by the tenant would be permissible under “the snacks and light refreshments” rubric, although the landlord plainly raised an eyebrow at this. I record, therefore, that this interpretation was agreed between the parties, rather than being a matter of decision by the court.
[7] Against this background, in a separate earlier judgment, I held that the tenant was entitled to insist that the user clause in the lease did not extend further than the business that it was entitled to run under the old lease (in other words, a public house serving snacks and light refreshments, interpreted as agreed, but not fullscale meals), that the wording of the old lease was, in the modern market, likely to cause uncertainty, and that this was a good reason why it should, and could, fairly be changed. Since precise wording could not be agreed, I ruled that the clause should be amended to provide that the user clause should be for the “trade only of a fully licensed public house which may serve snacks and light refreshments” (in the agreed meaning), the words “which may serve” being agreed to be preferable to “serving”, so as to make it clear that the tenant was permitted, but not obliged, to offer such a service. Having thus decided upon the meaning and extent of the user clause, the next issue is, therefore, the rental valuation, and it is that with which I am concerned in this judgment.
Issue of rental value
[8] The terms of the new lease, as I have said, have been generally agreed as more or less corresponding with the old lease and to be for a term of 10 years, with a fiveyear rent review within the security of the Landlord and Tenant Act 1954 (the 1954 Act). As to the issue of rent, I have received the evidence of two valuers, Mr Nicholas Duck and Mr Andrew Crease. Mr Nicholas Duck is a member of the RICS and from the firm of Brecker Grossmith, which is a local firm in Wigmore Street. He has been in practice for eight years with fiveandahalfyears’ postqualification experience as I read his CV, concentrating (he said) upon retail, leisure and office accommodation but more specifically involved in “numerous”, as he put it, public house rent reviews, valuations and disputes.
[9] Mr Crease, now in independent practice, is a FRICS and a member of the IRRV. Since 1989, he has spent six years in a valuation office and then gone into private practice, joining Christie & Co, a specialist licensing and restaurant firm. Thereafter, he left in, I believe, 2002, in order to found his own firm specialising in the valuation of leisure and licensed premises.
[10] The basis of the required valuation is the open market letting description given at sections 34 and 35 of the 1954 Act. This is familiar and I need not repeat it, as nothing turns on any particular point of interpretation of the 1954 Act.
[11] Interestingly, each valuer had written his report prior to my ruling on the user clause, but neither changed his opinion of value on the basis of it. Their opinions were widely differing, with the landlord contending for a rent more than double that contended for by the tenant.
Tenant’s case
[12] Mr Duck, on behalf of the tenant, contended for a rent of £35,000 pa. He observed that the date he was valuing at was 1 August 2004, but said, in a supplementary report, that there was no change when taking the date as June 2006, which is when this hearing took place.
[13] The actual tenant, Samuel Smith, was (Mr Duck said) typical of the reasonably competent operator and, therefore, of the hypothetical tenant that one would expect. Historic trading figures for the actual tenant showed a range of £207,000£271,000 turnover net of VAT over the past 11 years, reaching a height in the year to April 2001 and then falling back again. The average over the past three years had been £245,000. The lease, he said, suffered from the restrictions regarding food use. The premises, being in a mews, were in a particularly poor location: quiet and invisible.
[14] His comparables were all in the immediate locality and all bar one inside a square bounded roughly by Marylebone High Street, Devonshire Street, Great Portland Street and Wigmore Street. The best comparable, he said, was the Golden Eagle at 59 Marylebone Lane. It had a lease containing a similar use covenant and had a single trading floor. It was smaller than the Dover Castle, our premises, but it made up for this in terms of a better location and site. A lease renewal agreed in 2004 at £35,000 pa was agreed on turnover figures of £197,000 and £212,000 in the years to April 2002 and 2003.
[15] Another key comparable of his was The Ship, in New Cavendish Street, although this was actually a “nontransaction”. What had happened was that the average turnover in 200204 was around £144,000, but on a fiveday trading week. Mr Duck said that the owner had said that this would increase by around 15% (he thought) on sevenday trading, which would bring it up to around £165,000 pa. There was little food on offer and it was therefore parallel to the Dover Castle. It failed to find a bidder at £65,000 pa “several years ago”. This figure would suggest a fair maintainable trade assumption for the premises of around £400,000 pa, and this thus showed that such an assumption was not supportable. The Ship had a similarly sized ground floor plus a first floor, but was in a better location than the Dover Castle. Since it was a family business, Mr Duck believed that it had a reasonably competent operator. The entire history showed, therefore, that a rent of £65,000 for that premises must be too high, and it would similarly be too high for the Dover Castle.
[16] Mr Duck’s further comparables were the Bok Bar in Blandford Street, a £65,000 rental figure fixed on a rent review in 1999. The 2004 rent review was still outstanding, although he understood that the tenant had offered to settle at £67,500 on condition that the rent was not backdated. Reportedly, this was based upon a fair maintainable trade for |page:109| that particular outlet of £312,000 pa. Broader food use was available. It was in a better location. It had greater prominence on the corner, with a similar size ground floor but having a firstfloor trading area.
[17] Mr Duck also referred to the O’Connor Don in Marylebone Lane, an Irishstyle pub with a full food menu and a designated restaurant on the first floor; indeed, I think that it has an A3 use (that is, use class A3 restaurant) in its lease. The rent was fixed at £47,750 in 1999 on a regearing transaction. The 2004 rent review was outstanding, with the landlord apparently asking £75,000 on a turnover reputedly of £700,000, which Mr Duck said benefited from the goodwill of Guinness and of the personal characteristics of the landlord. This property was much larger; although with a similar ground floor, it had two additional floors. It had much greater prominence, a much better location and an unrestricted food use, as I have said.
[18] Last, he came to the Masons Arms in Devonshire Street, the only open market transaction. This was agreed in December 2005 at £65,000 for a 10year lease outside the 1954 Act. However, Mr Duck said that this was a bigger property, with a similar ground floor plus, however, a first floor for food and restaurant use. It offered a full food menu. It was much more prominent, on a corner location, and it would trade well above the Dover Castle figures.
[19] Mr Duck relied upon rating valuations to show the pattern that the Dover Castle was more akin to The Ship and the Golden Eagle, his better comparables, than to the O’Connor Don, the Bok Bar and the Masons Arms.
[20] Relying upon the factors above, namely historic trading figures and the comparables, Mr Duck was of the view that the hypothetical tenant, which would of course be looking to see how much money it would expect to make out of the operation of the property and, consequently, the amount of rent that it could afford to pay, would assess the fair maintainable trade of the Dover Castle at, he thought, £250,000 pa, somewhat higher than is currently being done by Mr Smith, the tenant. As a rule of thumb, which he put at 14% of turnover, this would equate to £35,000 pa rent. However, he also adopted a slightly more elaborate “net profits” approach. This is something rather more approximating to a profit and loss account exercise that might be done by the tenant. His £250,000 net turnover after VAT he then adjusted to 30% to get a net profit, giving a figure of £75,000. From this, he would deduct a tenant’s return of 10% on a presumed £40,000worth of capital expenditure, taking off £4,000 to reach £71,000 as a “divisible balance”, available to divide between the landlord’s rent and the tenant’s profit. Divided at 50%, this would be £35,500, but Mr Duck went on to deduct a further sum of £2,000 for onerous lease terms and maintenance costs, giving a figure of £33,500. Following from these two approaches, he took the figure of £35,000 as his view of the rental value of the Dover Castle itself.
[21] In a supplemental report, Mr Duck brought in a late comparable, namely an arbitrator’s award (although it was in fact an independent expert determination), on a rent review on the Duke of York, in New Cavendish Street, for 1999. In fact, this was a rent review conducted between the same parties as in this case, upon a lease of similar terms. The 1994 rent had been £47,000 but, for 1999, this was reduced to £36,500. This was said to be support for Mr Duck’s figure of £35,000 for the rental value of the Dover Castle. Of course, as both counsel accepted, such an award or determination is not admissible in itself as evidence of value: see Land Securities plc v Westminster City Council [1993] 1 WLR 286*. In the end, it came to be relied upon by Mr Duck as an example of his assessment of rental value being nearer to the eventual result than that which had been put forward by his opponent, Mr Crease. He said that this supported the conclusion that his opinion was likely to be more reliable than Mr Crease’s.
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* Editor’s note: Also reported at [1992] 2 EGLR 15; [1992] 44 EG 153
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[22] Mr Duck dismissed other comparables referred to by Mr Crease, where they were outside the Marylebone area, as being irrelevant for that reason, namely their dissimilarity in location.
Landlord’s case
[23] Mr Crease contended for a rent of £75,000. He emphasised the good catchment area of the location, with local residential and offices all around. In his report, he said that he regarded the user permitted by the lease as being, as a matter of common sense, that of a “full public house”, capable, therefore, of serving full meals of any description. At the time he wrote his report, he seems, though, to have concentrated on the point that the tenant could, in his view, serve any form of food, both hot and cold, and was, I infer, arguing against any suggestion that “snacks and lights refreshments” would permit only cold food. Consequently, in his report, he valued for an unlimited food use, and found that there were no onerous terms in the lease.
[24] As a matter of background, he noted the great changes in the pub market since this lease had been granted, with the rise in the “gastropub” phenomenon over the past five or six years as breweries lost control of outlets and public houses turned more and more to a foodbased offer in order to increase their turnover. In consequence, he told me, the standard of pub food had improved enormously, although the range would still be from light snacks through to highquality restauranttype meals. The market has risen throughout the period, and he referred, in particular, to a rise of 250% in average pub rents over the period from 1985 to 2002, noted by a survey of one particular specialist firm. He also observed that there was a discounting battle in the high street locations, but commented that discounting was viable only on very high volumes, which he would regard as being turnover in excess of £750,000 pa. He indicated that units on Marylebone High Street, for example, would have a rental value exceeding £100,000 pa; he had not therefore referred to any of these because they were not comparable, but, he would, none the less, market the Dover Castle (he said) by requesting offers in excess of £80,000 pa.
[25] He said that the actual tenant is just not typical. It is a brewery, offering a limited range through selling only its own products. There are none of what he would describe as the “feminine” type of drinks and limited availability of soft drinks. The tenant discounts its own beers, to the extent that the prices of basic beers and lagers are approximately fiveeighths of comparable premium brand prices on offer at other public houses. The figures seem to be approximately £1.73 gross including VAT, compared to around £2.90 elsewhere. The food offer, he said, was similarly lower priced and of a more traditional kind, which he would have described as being from the 1980s. In other words, he would class the Dover Castle as being styled as a local man’s drinking pub for those who like Sam Smith’s beer and a meat pie, and he pointed out that it had the decor to match this kind of ambience. Discounting is the Samuel Smith’s style of operation; none of the competitors does it. The incoming tenant, he said, would therefore not necessarily and, indeed, not in fact follow the Samuel Smith style but would change the decor to brighten it and freshen it up, although he said nothing structural would need to be done. It would also offer a wider range of beverages and a far more modern and interesting food range. His view was that if you were discounting in a location that is not pricesensitive, you could do better.
[26] He also emphasised that mews properties are more suitable to a more extensive food operation. He classified pubs as being “high street”, “community”, “back street” and “roadside” type. This pub is in a subset of “back street”, which he would describe as being “corner”, “terrace” and “mews”, depending upon the exact kind of site.
[27] He emphasised the large number of chefs moving into the pub trade and paying large rents, transforming former rather dull public houses into gastro pubs, offering a quasirestaurant experience. The Masons Arms, he said, was a good example and his best comparable. He classed it as being inferior to the subject premises but pointed out that, as it let at £65,000 on a turnover at the time reputed to be £300,000 pa, this was a good indication of what could be achieved. As to comparables in general, he looked at a wider range. He referred to the Golden Eagle (Mr Duck’s best comparable), but pointed out that it was much smaller, that the rent was for a period of five years outside the 1954 Act and that, in his view, it was trading at maximum potential, at £210,000, because in fact it had no catering kitchen and could at best |page:110| offer only a very limited range of, perhaps, hot pies, but nothing really in the way of food of a class that he would expect to see normally.
[28] The Bok Bar in Blandford Street he described as a backstreet pub. He agreed with Mr Duck’s figures, but suggested that this was a similar location, yet showing a fair maintainable trade of £400,000 pa, although he agreed that it had fallen off lately. The location was certainly no worse. It had a better product and pricing strategy and, at £65,000, it was likely to go to rent review in 2004 at a higher figure. He agreed that this was a “sports bar” concept which had not caught on and commented that the chain involved had peak level food takings among their various bars at around 10% of turnover, although he agreed that he did not know the exact figures and breakdown. He referred also to the O’Connor Don, accepting that it was a larger pub but saying that it demonstrated what could be achieved with a better product and pricing strategy providing a more glamorous offer.
[29] He then rather moved out of the area to look at the Running Horse, in Davies Street, across Oxford Street, which he produced as an illustration of the transformation of a pub by improved food offer, but admittedly this was a historic figure; the lease itself was 35 years from 1976, and the latest rent review was at £70,000, although no figures for turnover were available.
[30] He referred also to The Blenheim in Cale Street, although accepting that this was not locationally similar. He included it to show a high demand from a chefled market for public houses. Here, a local chef had apparently paid £135,000 rent where, previously, the rent had been £40,000 for a 25year lease. There was twostorey trading. The transaction was in February 2006, and a colleague of his had acted. Similarly, he looked at the Paxton’s Head, in Knightsbridge Green, for the same sort of reason. There, a rental of £125,000 had been raised to £150,000 in a foodled operation in which he had acted. The lease was for 25 years as at September 2004. The turnover was approximately £982,000. He then referred to the Star Tavern in Belgravia as an example of an increase on a mewslocated property. He pointed out that there was no commercial community around this particular comparable but, in September 2003, there had been a lease renewal on a lease for 15 years with fiveyear rent reviews, where the rent had been fixed at £65,000 pa on an agreed fair maintainable trade figure assessed at £420,00.
[31] As I have indicated, he lastly referred to the Masons Arms as his best comparable. He described it as being similarly located and said that it supported a rent of £75,000 for Dover Castle because it was a letting outside the 1954 Act and, in fact, an inferior public house. Fair maintainable trade had, he said, increased from £300,000 to £520,000 for this very nearby location, so he believed that this illustrated what the Dover Castle could do.
[32] He, too, introduced a late comparable following his report, which was the Inn 1888 on Devonshire Street, at the western end, the Masons Arms being at the eastern end. This was a corner site, but on a mews corner. A rent review as at April 2002 had produced a rent of £70,000 pa, although with no backdating applied when it was agreed in April 2004 at the same time as the tenant assigned. There had been a fair maintainable trade of £650,000. The rental, therefore, he put at £65,000 average, and he noted that the passing rent previously had been based upon £32,000 basic plus 5% of the turnover (then approximately, I think, £300,000), consequently making that rent around £47,750.
[33] His comment on the other comparables produced by Mr Duck was that he found the Duke of York disappointing because of the fact that the independent expert valuer he regarded as being from outside the area and unfamiliar with the local market. The Ship, he said, had failed to let, not because of the fact that the rent being demanded was too high but because of its poor state of repair; its turnover was low because of a generally rather halfhearted operation by the owneroperators.
[34] In general, he scorned Mr Duck’s reference to rateable values because he said that these were derived from actual turnover, so that, in effect, Mr Duck’s comment that they reflected turnover was selffulfilling; since Mr Crease had worked in the valuation office, he stressed that he knew what went on in rating valuations.
[35] He asserted that the location of a mews property is no better or worse than any other one on what he would describe as a “back street”, but was, as he put it, “different”. In oral evidence, he was adamant that the precise location did not matter, but he argued that mews sites were good and, indeed, were sought after. A mews property, he said, was more attractive and would achieve a much higher rental than a small corner site.
[36] As to Samuel Smith’s own figures, in his view they should be doing 4050% better in wet trade and make a more uptodate food offer that would increase alcohol sales. He thought that the Dover Castle could, indeed, offer Thai food, although he accepted not takeaway food and not a full threecourse restaurant meal. He told me that a public house offering food, in the way that he would see it, would expect to have probably 2530% of its turnover attributed to food. A restaurant operation would, however, have a 60:40 split as between food and drink.
[37] His valuation was also conducted by the profits method. It approximated to Mr Duck’s second method, but, for the reasons above, he had adopted considerably higher figures. In essence, he took a basic figure after VAT of around £341,000 for beverages and 33% (£115,000) of that for food (equating to 25% of the total, net of VAT), thus providing a fair maintainable trade figure of £456,000. He then assumed that a net profit would be taken to be 32% of that, that is, around £146,000, from which he would then deduct 10% return on an assumed £20,000 of tenant’s capital (representing stock and fixtures) bringing the figure down to £144,000. He would divide the balance by giving 52% to the landlord because, he said, of the strong market, thus producing a £75,000 figure.
My findings
[38] I therefore have to choose between these two competing approaches and my assessment of them.
[39] As regards values, Mr Andrew Walker, appearing for the landlord, criticised Mr Duck’s approach for what he called a hole and a flaw. The hole, as he described it, was Mr Duck’s lack of experience. Indeed, Mr Walker went so far as to say that Mr Duck was not really even entitled to regard himself as an expert in this matter. The flaw, as he put it, was Mr Duck’s blind acceptance of actual figures achieved by the client/tenant rather than a detached vision of the hypothetical tenant itself.
[40] He pointed to Mr Duck’s lack of experience. His “numerous” transactions in relation to public houses had, on investigation, been merely five rent reviews (of which three were in Putney and two in the West End) two lease renewals (including this one) and three sales.
[41] He said that Mr Duck’s reliance upon rating as a support for his approach to value was naive. He had no actual knowledge as to how rating was carried out and this was, therefore, superficial. He also had no actual knowledge of figures. Those that he used were really rule of thumb discounts and displayed no insight. He had shown that he had no knowledge of the way in which the market actually worked, but simply said that he relied upon his experience of discussions with those in the trade in support of his figures. This was really meaningless. He suggested that Mr Duck’s comment that an obligation to maintain a justices’ licence could be regarded as an onerous lease term also showed his lack of experience because this kind of term was absolutely standard, of course, in cases of public houses. He added that Mr Duck had failed to understand the concept of goodwill, indeed at one point equating this with the offering of a wider range of food and drinks and more interesting food.
[42] He invited me to contrast Mr Crease’s curriculum vitae and the obviously far greater experience that he had displayed in relation to dealing with persons in the market and his understanding of what they were doing and what their requirements were. Mr Duck, he said, relied upon trading figures to the exclusion of all other figures and never really sought to identify the kind of clientele, or the kind of operator, that would take over this pub. He had simply assumed that the operation would be like the actual client, Mr Smith. Mr Duck, he said, had dismissed the Star Tavern in Belgravia as being in a different |page:111| kind of area, but had not asked himself whether its success meant that his own approach might be wrong. He had referred to things such as his own clients’ other results, but had not disclosed the material upon which these results were based so as to enable it to be examined. Mr Walker invited me to reject Mr Duck’s evidence, therefore, on both the grounds of his lack of expertise and of his acceptance and starting point being simply his own clients’ figures, and to prefer the evidence of Mr Crease. He pointed out that, even on Mr Crease’s figures, merely taking Mr Crease’s wet sales alone would produce a rent for the Dover Castle of approximately £56,000, which one could compare with Mr Duck’s figure of £35,000.
[43] I have to say that I largely accept Mr Walker’s criticism of Mr Duck and, indeed, I have some doubt as to whether he ought to have accepted this instruction. It seems to me that he did not have the experience to enable him to fulfil the criteria set out in the RICS guidance notes, which he actually refers to and quotes.
[44] Those require and suggest that:
A valuer will need to understand the requirements and the achievable profits of all other potential bidders and the dynamics of the open market.
They emphasise that:
The task of a valuer is to assess the fair maintainable level of trade and future profitability that could be achieved by an operator of the business upon which a potential purchaser would be likely to base an offer, and that when assessing future trading potential the valuer should exclude any turnover and profit attributable solely to the personal skill, expertise, reputation and/or brand name of the existing general management. However, in contrast, the valuer should include any additional trading potential which might be realized under the management of an average, competent operator taking over the existing business at the date of evaluation.
[45] Further, it is stated in the guidance notes (and I am quoting here from para 4.4 of the then applicable guidance notes from the RICS):
It is essential for the valuer to have detailed knowledge of purchasers’ requirements in the relevant markets and to have an indepth appreciation of the market. A proper understanding of the profit potential of those property types and how they compare to one another is essential.
[46] Mr Walker’s criticism of Mr Duck was that he plainly did not have, and could hardly fairly describe himself as having, the experience of “numerous” public house transactions or relevant transactions, and I have to say that this showed itself in ways that I accept. I do find that his reliance upon rating was naive on almost any basis and doubly so since he had no knowledge of how the rating of public houses was actually carried out in practice. His reliance upon the soundness of his own figures also showed, in my judgment, a failure of objectivity, or to grasp the point that this is a hypothetical letting and what a notional operator in the market would pay. Uncritical reliance upon the Samuel Smith operation as being that of a reasonably efficient operator for this site, just because many of its pubs were busy, was, to my mind, superficial.
[47] His assertion that a discounting policy was justified because of the poorness of the location appeared to me to be a process of rationalisation rather than stemming from any expert perception. His figures were mechanistic rather than logically based and his dual method of valuing was flimsy; since both methods involved taking percentages of the sales figures net of VAT (in one case, directly to rent and, in the other, by a percentage equating to net profit and then a further percentage equating to rent), obviously they were all too likely to come to much the same conclusion.
[48] He had not asked himself questions about comparables, nor compared matters such as the state of repair of The Ship, or ascertained whether the restriction of the Duke of York lease was a lease restriction or a planning restriction, and these omissions were, to my mind, superficial and rather unfortunate.
[49] I therefore find it impossible to place any great deal of reliance upon his reasoning or most of his conclusions, except where they accord with obvious common sense at a very broad level.
[50] I am therefore left largely with the evidence of Mr Crease. I accept his greater expertise and knowledge and give respect to his views accordingly. However, he was criticised by Ms Siri Cope, who appeared for the tenant, on three main grounds.
[51] First, it was said that he takes no account of and makes no allowance for the poverty of the location and, in fact, it might be said that he was in denial of it. Second, he places too much emphasis upon the food element, bearing in mind the user clause. Third, he consequently overstates the extent to which turnover can be increased. She pointed out that all the other pubs with which we are concerned are on corner locations, highly visible and benefiting to some degree from passing trade. Only one obvious one is not, and that is the Star Tavern in Belgravia and yet no details of this have been given. Therefore, we know nothing about the nature of the mews, the style of its operation or its visibility. We know only that it is in Belgravia, behind Belgrave Square, with consequent general knowledge of the kind of catchment area. There are no photos and no sizes are given.
[52] Mr Crease said that you can increase turnover by altering brands and increasing prices, but she pointed out that he does not break down any of his comparables into wet trade and food trade, which is crucial in this case because (she said) of the limit on use. The food use here is not “as broad a use as you like”. She stresses, therefore, that Mr Crease’s evidence is all foodled the Bok Bar, the O’Connor Don and, his best comparable, the Masons Arms to a degree that the Dover Castle cannot achieve, having already, as she candidly admitted, pushed back the boundaries of the user clause as far as they can possibly go.
[53] This, she argued, invalidates Mr Crease’s approach and yet all his comparables emphasise the broad restaurant type of use of a public house. In summary, she submitted that there is really no evidence that selling premium brands and improving food and putting a spin on the menus within the scope of this user clause could be expected to increase turnover for food from £33,000 to £134,000, nor to increase the wet trade along with it. Therefore, she said, I should regard the level of wet sales as being likely to be that represented by the Golden Eagle and the Ship Tavern as a better guide to the anticipated achievable results for the Dover Castle, with the modest amount of food that it could sell.
[54] Just because I feel unable to place reliance upon much of what Mr Duck said, it does not mean that I have to accept Mr Crease’s views uncritically. Indeed, it seems to me that this is all the more reason to examine his expressed opinions carefully, and I do so. Obviously, I accept that he does have expertise, and he was indeed very fluent and very capable in giving evidence. I entirely accept the point that he made about discounting, and this not being the kind of operation where discounting would be seen by the hypothetical tenant as being an appropriate, let alone the only appropriate, trading strategy for the particular location. I accept his point that this is, in fact, simply an attribute of the Samuel Smithstyle operation. It may suit it, but that does not mean that the hypothetical tenant in the market is going to take exactly the same view or is indeed likely to take exactly the same view.
[55] I am, however, struck by the remarkable fact that Mr Crease never altered his opinion of value in the light of my decision regarding the user clause, despite the clear statement of his original views being given on the basis that the user clause would in fact permit the catering offer of a full menu, restaurant style of meal, rather than a more limited fare of snacks and light refreshments, albeit cooked ones.
[56] I have read his submission carefully, and it is apparent from what I see there that he had in mind at the time a “chefled” kind of operation. He emphasised this throughout his treatment of the comparables. This led to two matters in his oral evidence.
[57] First, there was the question of the “gastro pub”. In oral evidence, he told me that this phrase had no clear meaning and, apart from the nonfood operation, could cover anything up to what he would describe as the “superchef pub”. Thus, it conveniently included quasirestaurant operations, as well as operations offering simpler, more traditional pub food menus, perhaps just made more modern; he |page:112| therefore drew no distinction between the two. Yet, when his report was read, it was, to my mind, quite plainly aimed at the chefled kind of operation, with the greater emphasis upon the food rather than upon having a drink. He was using the term “gastro pub” in this context and to describe that kind of operation, and assuming that the Dover Castle could operate in such a manner.
[58] Second, there was the emphasis upon the mews location, and his statement in oral evidence that “mews” was a subset of “back street”, and was even more desirable than an ordinary backstreet location. This again, it appeared to me, arose as a result of fresh thinking in oral evidence rather than having been part of the reasoning of his original report. It may be that the term “back street” is more pejorative to my ear than “side street”, but I would say that I would not naturally have thought of locations such as Devonshire Street or Blandford Street as being described as “back street”. More importantly though, I ask myself this. If Mr Crease regarded the more desirable location as being the mews type of location, of which the Dover Castle is an example, why was it that he produced no direct mews comparables to illustrate the effects of this desirable feature, except the Star Tavern, with only very meagre details given, and being put forward apparently as an example of an increase in mews pub rents on conversion to a foodled operation, rather than as direct evidence of mews pubs commanding higher rents than secondary street locations?
[59] I have to say that I gained the very distinct impression that Mr Crease’s focusing upon this feature of the Dover Castle being a mews property had come about only to fill the advantage gap left by the removal of the full “gastro pub” potentiality from his original report, based as it was upon the view that now a full food offer could be made by the tenant; it had not, before, been any, let alone a significant, feature of his valuation. I therefore view that assertion with caution, and the way in which it emerged also causes me to view the rest of Mr Crease’s evidence with a little caution as well.
[60] My reading of many of his comparables, apart from the Golden Eagle, which was brought in for the purpose of dismissal and which, no doubt, Mr Crease would have known would arise because of his previous encounter with Mr Duck in relation to the Duke of York rent review, is that they were introduced to show, and to accustom the interlocutor to the idea, that high levels of rent were achievable and, indeed, were very normal, in seriously foodled enterprises. The outofarea comparables were introduced, therefore, as much to get high numbers into the frame, rather than being, really, evidence of directly comparable operations. I cannot see what other relevance Knightsbridge Green, Belgravia, Chelsea and south of Oxford Street could really be thought to have had.
[61] I do though accept Mr Crease’s criticisms of The Ship and the Golden Eagle for being far too narrow in their food offer (each for different reasons) than would be the case with the Dover Castle and, therefore, I accept that they would not in themselves be a reliable guide to an assumed fair maintainable trade for the Dover Castle.
[62] Mr Crease’s best comparable, he accepted, was the Masons Arms, supported after the event by the Inn 1888 transaction. However, his statement that the Dover Castle is a better property than the Masons Arms is one that I find impossible to accept. It is plain from the photographs, the maps and the plans that the Masons Arms is in a far more prominent position and better placed, as well as benefiting from seating on a footway (an attractive feature) and having a firstfloor restaurant use. Mr Crease has offered no reason, except for the alleged desirability of a mews location, for finding that the Dover Castle is better and, as to that, I can see no supporting evidence, except for Mr Crease’s own personally expressed view, arising in the circumstances that I have already examined. Therefore, on this aspect, I am unpersuaded by Mr Crease that the location of the Dover Castle is such as to outweigh the countervailing benefits of the Masons Arms (which otherwise I think he accepts), namely prominence, bigger size and broader food use. To my mind, it defies common sense that this should be the case.
[63] Similarly, the O’Connor Don and the Bok Bar and, to a degree, the Inn 1888 seem to be patently foodled, as well as benefiting from a more prominent location, a more active location and a corner site.
[64] It follows that I do not simply accept Mr Crease’s valuation at face value, and I do prefer the tenant’s broad point that the Mason Arms and the Inn 1888 both have advantages as against the Dover Castle, it being tucked away and inconspicuous and requiring, therefore, to be a totally destination operation. As I have said, I accept Mr Crease’s point about discounting. No one in this area does it except for Samuel Smith, a national chain selling only its own products in a uniform style. It suits it to do so, and it may well be worthwhile for it to keep on with this style, even if it is dated and unsophisticated, as Mr Crease suggests; it is too much trouble to change. However, competitors would not do so.
[65] Taking out the discounting element and adding, therefore, the sort of 4050% of the tenant’s own figures that Mr Crease regarded as being appropriate, it seems to me to convert the basic wettrade figure to around £300,000. This is accepting that perhaps one would lose some clientele, who like the cheap pint and pie type of ambience, but it would obviously be appealing to another type of clientele.
[66] As to food, the percentage involved appears on the evidence to increase with the sophistication of the operation. Although I note that the Bok Bar chain figures, apparently at 10%, do not seem to bear this out, this may, of course, be accounted for by the possibly differing nature of the sportsbarthemed operation. With the limited user clause, I think that 20% of total rather than 25% would be more realistic, giving £375,000. Taking Mr Crease’s 32% figure as a guide to net profit gives £120,000.
[67] I would accept a deduction for cost of tenant’s capital. I think that it would be greater than Mr Crease’s, since it seems to me that, given his views about the style of the decor and the ambience, the tenant would actually be expecting to spend a bit more on the fixtures. If one takes £5,000 for this, the divisible capital then comes down to £115,000. Taking £115,000 and dividing it in two gives £57,500. I divide this only 50:50 because I am not convinced about a greatly increased demand for this particular pub in this location.
[68] The comparison is, then, with the Masons Arms as at December 2005. This was let at £65,000 for a tenancy outside the 1954 Act, but it does not appear to me to be suggested that this would make much of a difference on a 10year term. There was (I observe) ambiguity in the AG&G letter regarding the achievement of the rent that had been obtained on this operation. It was originally offered at £55,000 outside the 1954 Act, with the agent saying that it was pleasantly surprised at the £65,000 that was eventually achieved. Although the lack of security might marginally reduce the rent in comparison with the Dover Castle lease, I have found that the Masons Arms has countervailing benefits of location, and so forth. It seems to me that a reduction of 10% would take into account all those factors, including, in particular, the difference in location (accepting, as I said I do, this broad point made by Mr Duck) and this would give £58,500. That sits, again, reasonably well with the Inn 1888 transaction, which is slightly more complicated because it was made at the time of an assignment.
[69] In the end, therefore, my conclusion is that the appropriate rental level for the Dover Castle, on the evidence that I have heard when critically assessed, is £58,000 pa. In my judgment, that represents the right level and I so find.
[70] I am aware that this rental is lower than the current rate, but this was fixed in 1994 in a very different market. There is, then, the notable feature that there was no increase in 1999, but this seems to have been a feature of many of the other rent reviews that have taken place in the area around these premises, as far as I can see. It has not been suggested that the mere fact that this rental is lower than that fixed in 1994 is any reason why such lower figure should not be appropriate today. My conclusion, therefore, is that the rental level for this lease renewal will be fixed at £58,000 pa.
Rent fixed at £58,000 pa.
