Taxation — Agricultural tenancy held by partners — Whether value of one partner’s share is half value of tenancy — Whether reluctance of actual freehold owners to acquire tenancy relevant in valuing tenancy
John Walton
died on August 6 1984. At his death he and his son, John, were equal partners
holding an agricultural tenancy of a 495-acre hill farm in Northumbria; the
freehold was held by the deceased and his two sons, F and John. For the
purposes of section 38 of the Finance Act 1975 the revenue contended that the
value of the deceased’s partnership share was one-half of the value of the
tenancy plus tenant right; the value of the tenancy was £100,000, being
one-half of the vacant possession premium of the farm of £200,000 (the vacant
possession value being £400,000), and the value of tenant right was £40,000.
The revenue’s valuation of the partnership share was therefore £70,000. Before
the Land Tribunal the executor appealed on the grounds that the property to be
valued was the partnership share and not a separate share or interest in the
partnership’s assets. The tribunal ([1994] 2 EGLR 217) determined the value of
the entire tenancy as an asset of the partnership at £12,645, accordingly the
value of the deceased’s share was £6,300. The Inland Revenue appealed.
Held: The appeal was dismissed.
1. In valuing
the deceased partner’s interest in the agricultural tenancy, the open market
hypothesis in section 38 of the Finance Act 1975 does not require, as a
necessary incident of it, that the landlord should be hypothetical; the statute
requires one to assume a sale but it should be assumed to take place in the
real world: see Trocette Property Co Ltd v Greater London Council
(1974) 28 P&CR 408. It is not necessary for the operation of the statutory
hypothesis of a sale in the open market of an interest in a tenancy that the
landlord should be treated as a hypothetical person; it is a question of fact
to be established by the evidence before the tribunal of fact whether the
attributes of the actual landlord would be taken into account in the market.
The same logic requires that in the case of a deceased partner owning an
interest in a tenancy which is a partnership asset, regard should be had to the
actual intention of the actual surviving partner and not to a hypothetical
partner.
had not made a decision which no tribunal could have made in rejecting the
freeholders, or the other owner of the half-share in the tenancy, as special
purchasers are prepared
conclusions were reached without error of law.
The following
cases are referred to in this report.
Agricultural
Mortgage Corporation plc v Woodward (1994)
70 P&CR 53; [1995] 1 EGLR 1; [1995] 04 EG 155
Gray v Commissioners of Inland Revenue, sub nom Lady Fox’s Exors v
Commissioners of Inland Revenue [1994] STC 360; [1994] 2 EGLR 185;
[1994] 38 EG 156; [1994] RVR 129
Inland
Revenue Commissioners v Clay [1914] 3 KB
466; (1914) 83 LJKB 1425; 111 LT 484; 30 TLR 573
Inland
Revenue Commissioners v Crossman [1937] AC
26
Lloyd-Jones
v Church Commissioners for England [1982] 1
EGLR 209; (1981) 261 EG 471, LT
Lynall v Inland Revenue Commissioners [1972] AC 680; [1971] 3 WLR
759; [1971] 3 All ER 914, HL
Raja
Vyricherla Narayana Gajapatiraju v Revenue
Divisional Officer, Vizagapatam [1939] AC 302
Trocette
Property Co Ltd v Greater London Council
(1974) 72 LGR 701; 28 P&CR 408; [1974] EGD 547; 231 EG 1031, CA
This was an
appeal by the Commissioners of Inland Revenue from a decision of the Lands
Tribunal ([1994] 2 EGLR 217), which had allowed an appeal by John Walton,
surviving executor of the will of John Hedley Walton deceased, from a
determination of the appellant commissioners of the value of a partnership
share of the deceased in an agricultural tenancy.
David
Neuberger QC (instructed by the solicitor to the Inland Revenue) appeared for
the appellants; Derek Wood qc and
Robert Ham (instructed by Nicholson Wood & Gregg, of Hexham) represented
the respondents.
Giving the
first judgment at the invitation of Evans LJ, Peter Gibson LJ
said: This appeal raises questions of some general importance on the valuation
for the purposes of capital transfer tax (‘CTT’) of the share of a partner in a
farming partnership the assets of which include an agricultural tenancy of the
farm. It is an appeal by the revenue from a decision of the Lands Tribunal
(Judge Rich QC and Dr T Hoyes frics)
and comes before us by way of case stated.
As long ago as
August 6 1984 John Hedley Walton senior (‘the deceased’) died. The executors
named in his will were his two sons John Hedley Walton junior (‘John’) and
Frederick Walton (‘Frederick’), who died in September 1989. The deceased and
John carried on a partnership, farming Keepwick Farm (‘the farm’), Humshaugh,
Northumberland, which the Lands Tribunal described as a typical Northumbrian
hill farm of 459.119 acres with a farmhouse building and three farm cottages.
At the time of the death of the deceased, John was 36 years old.
The
partnership was governed by a partnership agreement dated December 16 1969.
Each of the parties was by clause 12 required to devote the whole of his time
to the business and was precluded by clause 13(a) from engaging directly or
indirectly in any other business. By clause 13(d) a partner could not assign or
mortgage his share or interest in the partnership business. By clause 14 a
partner could retire on six months’ notice. By clause 15 in the event of the
death, retirement, bankruptcy, unsoundness of mind or misconduct of a partner,
the other partner had the option to purchase the outgoing partner’s share at
its net value over five years.
The freehold
of the farm was owned by the deceased, John and Frederick in equal shares. By
an agricultural tenancy agreement dated 10 March 1971 the freeholders let the
farm to the deceased and John on a tenancy commencing on May 12 1969 and
continuing from year to year until determined by the freeholders or the
partners by 12 months’ notice in writing. That agreement was in standard form.
It required one of the partners to live in the farmhouse (John did) and it was
not assignable without the consent of the freeholders.
In August 1984
the annual rent of the farm was £6,000 and it was liable to increase by
arbitration on May 13 1986. In August 1984 the estimated arbitration value was
£8,250 pa and the tender rental value (the rent that would be obtained if the
freeholders sought tender bids) was £12,000 pa. The vacant possession value of
the farm in August 1984 was agreed to be £400,000 whereas the value of the
freehold subject to the tenancy was £150,000. It was also agreed that the value
of the partnership’s prospective claims against the freeholders for statutory
compensation for improvements and tenant right (I shall refer to this compendiously
as ‘tenant right’) was £40,000. In the light of those figures it is a little
inconsistent that it was also agreed that what is sometimes called the
‘marriage value’ and the revenue called the vacant possession premium (‘VPP’), viz,
the difference between the value of the land with vacant possession and its
value subject to the tenancy, was £200,000, but we are not concerned with that
inconsistency.
It is
convenient at this stage to set out the statutory provisions contained in the
Finance Act 1975, which govern how assets of a deceased are treated for CTT
purposes.
By section
22(1) (so far as material):
On the death
of any person after the passing of this Act tax shall be charged as if,
immediately before his death, he had made a transfer of value and the value
transferred by it had been equal to the value of his estate immediately before
his death …
Section 23
gives, as the meaning of a person’s estate: ‘… the aggregate of all the
property to which he is beneficially entitled …’ subject to an immaterial
exception.
Valuation is
dealt with in section 38(1), which reads (so far as material):
Except as
otherwise provided by this Part of this Act, the value at any time of any
property shall for the purposes of capital transfer tax be the price which the
property might reasonably be expected to fetch if sold in the open market at
that time …
A notice of
determination was issued by the revenue that the value of the deceased’s estate
included: the value of his interests in the partnership business and in the
assets thereof; that the tenancy was such an asset; that the value of the
deceased’s share in the partnership was to be taken as 50% of the value of the
assets of the partnership business less 50% of the liabilities of the business;
further or alternatively that the value of the deceased’s interest was not to
be less than the net value payable to him had the partnership been dissolved
immediately prior to his death and had John exercised his option to purchase
the deceased’s share; that the net value would have included an amount in
respect of the tenancy, derived from the larger of: (i) half of the open market
value of the tenancy; and (ii) half of what a landlord would have paid a tenant
for a surrender of the tenancy, and that amount was £65,000. That figure was
arrived at by valuing the tenancy at half the VPP, viz £100,000 plus
tenant right, viz £40,000, allowing a 10% discount from the £100,000 ‘to
reflect the assembled nature of the partner’s interest in the underlying
property’ and halving the resultant figure of £130,000. That, it appears, has
been the revenue’s normal practice in valuing partnership assets. However, the
revenue no longer think it appropriate to allow a discount in the circumstances
of this case and therefore value the deceased’s interest in respect of the
tenancy at £70,000, though Mr David Neuberger QC, for the revenue, has told us
that if the appeal succeeds, tax will not be claimed at a greater rate than if
the valuation did not exceed £65,000.
John appealed
against that determination. In his notice of appeal it was made clear that
issue was taken with the revenue’s entire approach to that valuation. It was
said that the property comprised in the deceased’s estate which had to be
valued in accordance with section 38 was his share and interest in the
partnership and not any separate share and interest in the individual assets
thereof, and that the tenancy as such did not have to be valued.
The issue
before the Lands Tribunal was by agreement:
Insofar as
the Deceased’s interest in the Partnership included an interest in the tenancy
… what for the purpose of the charge to [CTT] on the Deceased’s death is the
value of the Deceased’s interest in the partnership and its assets so far as
attributable[?]
The revenue
led expert evidence from Mr Malcolm Stanton [frics],
an experienced valuer of agricultural property, in support of their valuation
based on valuing the whole tenancy and then halving the value. John gave
evidence which was accepted by the Lands Tribunal. This was: that in August
1984 the freeholders would not have been interested in securing the surrender
of the tenancy so as to get the farm in hand nor did they jointly or
individually have the available financial resources to make a significant
payment for a surrender; farming was his life and the deceased’s objective had
been for the farm to be farmed by the family members; and that Frederick was
the tenant of a similar-sized farm elsewhere to which his financial resources
were committed and he would not have wished to disturb the joint occupation of
John and the deceased. John said that he wished to retain the farm for his own
family and that he would not have wanted to share the tenancy and partnership
business with an outsider from 1988 onwards.
Their experts
gave evidence for John. Mr Fox, an accountant with wide experience of advising
upon the financial and business aspects of landowning and farming, said that it
was almost unheard of for there to be an open market bargain transferring a
share in a farming partnership where the partners farm as tenants, that there
was no real market for such interests but a working farmer might pay a sum to
enjoy the apparent profit rent until the next arbitration rent in May 1986. Mr
Desmond Hampton [frics], an
experienced valuer of interests in agricultural land, gave evidence primarily
of the value of the deceased’s share in the partnership; but he also gave
evidence on the footing that the entire tenancy had to be valued. Mr Philip
Scrope [frics], an experienced
land agent with a detailed local knowledge of farming and land ownership, said:
that there was no evidence that tenancies of a farm such as the farm would sell
at a premium over and above a market rent; that the landlord had created the
subsisting arrangement and would not wish to pay to upset it; that local
landlords did not often seek surrenders from tenants; and that any value was
one of nuisance only and a nominal figure to avoid any third party involvement
or exposing the business to outsiders.
The Lands
Tribunal found from the evidence that the value of a whole tenancy depended on
the circumstances of the parties at the material date, landlords only seeking
and paying for the surrender of tenancies when they wished to release the VPP
at an early date and tenants only contemplating surrender when their prime
objective was not to continue farming; only if aspirations came together might
the 50/50 division of the VPP be a realistic interpretation of market
behaviour, but they were not the circumstances for valuation in the instant case.
The Lands
Tribunal rejected the revenue’s approach of valuing the tenancy as a whole,
holding that the property that was the subject of the deemed transfer was an
undivided beneficial interest in the tenancy as a partnership asset. They
pointed out that the deemed transferee of the deceased’s interest in the
partnership would not have an opportunity to offer the tenancy on the open
market; it was unassignable save with the consent of the freeholders which
might be arbitrarily withheld. Nor could the transferee assign the interest in
the partnership without the consent of his partner, John. They concluded at
p221:
The sole
value of the tenancy, as an asset of the partnership, rests upon the extent to
which its terms enhance the profits of the partnership because the partners are
able to exploit the assets of the partnership without paying a full market rent
for the farm.
The Lands
Tribunal did not accept an argument by the revenue, based on para 14(2) of
Schedule 4 to the Finance Act 1975, that the net assets of the partnership
business had to be valued and divided by two, and they also rejected a
contention that the freeholder must be taken to be a hypothetical person, who
might be expected to want to obtain a realisation of the VPP. They further
rejected the argument that John, as a special purchaser, would pay a premium to
exclude a stranger from purchasing the deceased’s share or to realise the VPP.
They
considered profit rental valuations for the whole tenancy by Mr Hampton and Mr
Stanton respectively and arrived at an aggregate value of £12,645 which they
halved and rounded down to produce a figure of £6,300 for the deceased’s
interest in the tenancy. Although this approach might be said to be
inconsistent with the earlier rejection by the Lands Tribunal of a valuation of
the entire tenancy, Mr Derek Wood QC, for John, did not suggest that this was
wrong when the valuation was on the basis of a profit rent, half of which was
attributable to each partner.
The revenue
now appeals. By virtue of section 3(4) of the Lands Tribunal Act 1949 the
appeal must be confined to errors of law and Mr Neuberger has rightly
acknowledged that he cannot complain of valuation findings by the Lands
Tribunal. The questions for this court were identified in the case stated:
1. Whether the
Lands Tribunal were correct in rejecting the proposition that the proper method
of valuing all shares in partnerships for all the purposes of the Finance Act
1975 is the ‘net assets’ method of valuation prescribed by para 14(2)?
2. Whether, in
the circumstances of the hypothetical sale of the annual agricultural tenancy
required to be assumed under section 38, the freeholder of the farm should be
deemed to have all the personal inclinations and characteristics of the actual
freeholder or whether he should be assumed to be a hypothetical person?
3. Whether, on
the findings of the Lands Tribunal concerning the actual desires or
inclinations of the owners of the freehold interest in the farm, the Lands
Tribunal were entitled to reject wholly such freeholders or special purchasers
of the tenancy prepared to pay a proportion of the VPP in order to acquire the
same as an entirety, and/or to reject the owner of the other half-share in the
tenancy who was also beneficially entitled to a one-third interest in the
freehold in the farm as a special purchaser of the deceased’s half-share in the
tenancy prepared to pay a portion of the VPP in order to be the sole owner
thereof?
The revenue
gave notice of an application that the case stated be amended to include a
fourth question which the Lands Tribunal refused to include among the questions
for this court. However Mr Neuberger did not pursue that application, nor did
he address us on question 1, and I need say nothing more about either. In
addressing us on questions 2 and 3, he submitted that on a common-sense view of
the matter it could not be right that where the VPP was as much as £200,000 the
tenancy was merely worth the profit rental capitalised at 3 years’ purchase. He
said that something had obviously gone wrong in the approach of the Lands
Tribunal.
There was,
however, a good deal of common ground between the parties on the correct
approach to the valuation. It is not in dispute that section 38 requires first
the identification of the property to be valued. In this case the Lands
Tribunal’s finding that it was an undivided beneficial interest in the tenancy
as a partnership asset has not been challenged, and it has not been suggested
that that interest should be valued together with any other asset, such as the
deceased’s interest in the freehold of the farm. Second, it is agreed that the
valuation required by section 38 is on the basis of a hypothetical sale in the
open market. Although the statute says nothing about a willing seller or a
willing buyer, the concept of the open market automatically implies a willing
seller and a willing buyer, each of whom is a hypothetical abstraction.
However, the willing buyer ‘reflects reality in that he embodies whatever was
actually the demand for that property at that time’: Gray v Commissioners
of Inland Revenue, sub nom Lady Fox’s Exors v Commissioners of Inland
Revenue [1994] STC 360 at p372 per Hoffmann LJ*. While both the
seller and the buyer are assumed to be willing, neither is to be taken to be
over-eager. Each will have prepared himself for the sale, the seller by
bringing the sale to the attention of all likely purchasers, and honestly
giving as much information to them as he was entitled to give (Lynall v Inland
Revenue Commissioners [1972] AC 680 at p694 per Lord Reid) and the
buyer by informing himself as much as he can properly do. The
would ever be a sale of the property in the real world, for example because of
restrictions attached to the property, nevertheless the sale must be treated as
capable of being completed, the purchaser then holding the property subject to
the same restrictions: see Inland Revenue Commissioners v Crossman
[1937] AC 26. It also means that the vendor, if he is offered the best price
reasonably obtainable in the market, cannot be assumed to say that he will not
sell because the price is too low as inadequately reflecting some feature of
the property, nor can the purchaser be assumed to say that he will not buy
because the price is too high. Because the market is the open market, the whole
world is to be assumed to be free to bid. But the valuer will inquire into what
sort of person will be in the market for the property in question and what
price the possible purchaser would be likely to pay. Again to quote Hoffmann LJ
([1994] STC 360 at p372):
*Editor’s
note: Also reported at [1994] 2 EGLR 185.
The valuation
is thus a retrospective exercise in probabilities, wholly derived from the real
world but rarely committed to the proposition that a sale to a particular
purchaser would definitely have happened.
With that
introduction I turn to the live questions raised by the case stated.
Question
2: hypothetical landlord
This question
is, in my judgment, incorrectly worded. On the death of a partner where the
partnership assets include an annual agricultural tenancy, section 38 does not
require the hypothetical sale of the entire tenancy but only of the deceased
partner’s interest therein, as the Lands Tribunal themselves found. I shall
therefore proceed to answer this question as though the reference to the
tenancy were read as a reference to the deceased’s interest in the tenancy.
It was Mr
Neuberger’s primary contention that the Lands Tribunal erred in concluding that
for the purposes of the valuation exercise one should take the actual landlord
with all his attributes rather than assuming a hypothetical landlord who is
neither desperate to purchase nor uninterested in purchasing and who is neither
in straitened circumstances nor extremely rich. He submitted that, as a matter
of practical commonsense, to admit the evidence of the actual landlord as to
his desires and intentions is an unfair and undesirable course.
I readily
accept that such evidence may be selfserving, but it is for the tribunal of
fact to determine, what, if any, credence should be given to that evidence. The
fact that such evidence may be selfinterested is not, in my judgment,
sufficient reason to justify the implication that, where the property to be
valued is a tenancy or an interest in a tenancy, the actual landlord is to be
treated as stripped of his actual intentions and desires but clothed with
hypothetical aspirations. The insuperable difficulty in Mr Neuberger’s path is
that there is nothing in the statute to support his contention. The open market
hypothesis does not require, as a necessary incident of it, that the landlord
should be hypothetical. In my judgment, the statute requires one to assume a
sale, but it should be assumed to take place in the real world. As was said by
Lawton LJ in Trocette Property Co Ltd v Greater London Council
(1974) 28 P&CR 408 at p420:
It is
important that this statutory world of make-believe should be kept as near as
possible to reality. No assumption of any kind should be made unless provided
for by statute or decided cases.
The majority
decision of this court in the Trocette case is, in any event, determinative
of this question. In that case the claimants were the tenants of a property
which they wanted to develop but they needed the concurrence of the respondent
landlord. The landlord took the view that the property might be required for
highway purposes and told the claimants that it was not prepared to grant a new
lease. Nevertheless the claimants applied to the local planning authority for
planning permission and when that was refused, served a purchase notice on that
authority, which accepted that they would purchase the claimants’ interest as
tenants of the property. By r(2) of section 5 of the Land Compensation Act 1961
the compensation to be paid was ‘the amount which the land if sold in the open
market might be expected to realise’. The Lands Tribunal, to whom the question
of compensation was referred, held on this point that it was to be assumed that
the landlord would grant a new long-term lease to enable the development to
proceed. The question that arose was formulated by Megaw LJ (at p415) thus:
Does the
value of the claimants’ interest, as a matter of law, fall to be assessed by
reference to the actual intention of the actual landlord or by reference to the
presumed reasonable intention of a hypothetical normal landlord, that is, a
landlord who does not possess the special characteristics of the landlord in
this case, namely, a local authority with a special planning interest relating
to the use of the land in question?
He said (at
p416):
No buyer in
the open market is going to offer to pay a price which takes into account the
leaseholder’s share of the potential ‘marriage value’ if that buyer knows that
in fact the freehold owner is either unable or unwilling to do that which it is
necessary for him to do in order to create the ‘marriage value’. I see nothing
in the legislation … which compels or permits one to ignore, in assessing
compensation for the leasehold interest, evidence of a fact which would be
known to the buyers in the market and which would eliminate any question of
‘marriage value’.
If the
assessment of the value for the purpose of compensation is to be on the basis
of ignoring a proven or admitted fact which would have affected the price of an
actual sale on the open market, the use of such basis must, I think, be
justified by reference to some specific provision of the legislation.
Cairns LJ took
a different view. But he was in the minority as Lawton LJ was also of the
opinion that the Lands Tribunal erred in law in assuming that the freeholders
would be likely to co-operate in releasing the potential value of the site,
when the evidence showed that they would do nothing of the kind. He pointed out
that any prospective buyer would have made inquiries about the prospect of the
freeholders co-operating, but that if no information was available, the buyer
might have inferred that the freeholders would be co-operative; but if the
buyer knew that they would not be co-operative, the price offered would be on
the basis of the value of the site for use for a limited period.
Mr Neuberger suggested
that Lawton LJ adopted a somewhat middle course between Megaw LJ and Cairns LJ.
I do not agree. At p422 Lawton LJ said:
In most cases
it may well be that the personal characteristics of the parties are irrelevant,
but if the evidence in a particular case establishes that buyers would be
likely to be put off bidding beyond a certain figure because of the existence
of an unusual factor such as the likely refusal to cooperate of a freeholder
whose cooperation is essential if the full potential of the premises or site is
to be released then the existence of that factor should be taken into
consideration in assessing compensation, and this would be so whatever the
reason for the existence of that factor might be. The assessment of
compensation under rule (2) of section 5 of the Act of 1961 is not concerned
with the search for an economic abstraction — a valuer’s Holy Grail — but with
‘… the amount which the land if sold in the open market by a willing seller
might be expected to realise: …’ Who are likely to be buyers in such a market
will depend on the facts of each case, and what they would be likely to bid,
and their reasons for doing so, will also depend on the facts.
In my
judgment, the reasoning of Lawton LJ is fully in accord with that of Megaw LJ.
Mr Neuberger
submitted in the alternative that section 38 requires the assumption of a
hypothetical landlord unless the actual landlord was a person with a policy
known to the market. The freeholders in the Trocette case, he said, were
such a person as also would be bodies like the National Trust. But to adopt a
question posed by Henry LJ in the course of argument, does this mean that the
well advised family freeholders should put an advertisement in a newspaper as
to the family’s policy? This argument, to my mind, founders on the same rock as
Mr Neuberger’s primary argument, that is to say, it is not justified by the
language of section 38 nor by anything said by the majority in Trocette.
It is not necessary for the operation of the statutory hypothesis of a sale in
the open market of an interest in a tenancy that the landlord should be treated
as a hypothetical person,
tribunal of fact whether the attributes of the actual landlord would be taken
into account in the market.
I would add
that the same logic requires that in the case of a deceased partner owning an
interest in a tenancy which is a partnership asset, regard should be had to the
actual intention of the actual surviving partner and not to a hypothetical
partner.
Question 3
special purchasers
Mr Neuberger
submitted that even if the freeholders cannot be treated as hypothetical, it
did not follow that the VPP would not be unlocked by reason of John and
Frederick, as freeholders, being special purchasers with an interest in paying
more than what a person interested in the profit rent would pay, or by reason
of the interest of John, as the partner with the interest in the tenancy other
than that of the deceased, John’s evidence being that he would have wanted to
exclude a stranger as a partner. Mr Neuberger pointed to the fact that when
Frederick died, John bought Frederick’s interest in the freehold as he did not
want an outsider buying that interest.
The difficulty
that I have with this submission is that it is a challenge to the findings of
fact by the Lands Tribunal. They were well aware of John’s purchase on
Frederick’s death, but that took place more than five years after the
deceased’s death and they were entitled to find that that did not affect the
position in 1984. They had in mind John’s evidence that he would not have
wanted to share the tenancy and partnership business in August 1984, but they
came to the view that if the stranger was not uncongenial John would have had no
incentive to bid up to exclude an uncongenial potential partner, and if the
stranger and John were not satisfied they could work with each other, the
stranger would not bid. They therefore held that they would not add anything to
the valuation based on the profit rent to reflect the likelihood that, in the
real world, John would have been the purchaser of the deceased’s interest in
the tenancy. They also considered whether the freeholders would have paid a
premium because of the possibility that at some time in the future the
freeholders might seek a surrender of the tenancy so as to realise the VPP. But
they said that in terms of the price to be paid for the property of the
deceased they regarded that as entirely speculative and exceedingly remote because:
(a) John and Frederick would have had to change their position; (b) John wanted
to continue working the farm and had no interest in making an additional
payment; and (c) no surrender could be obtained without the co-operation of
John as the owner of the other share in the partnership.
Mr Neuberger
accepted that his submission came down to saying of the Lands Tribunal’s
decision that it could not be right and that no reasonable tribunal could have
reached that conclusion. I cannot see how that can properly be said of the
fully reasoned conclusions of the Lands Tribunal. It was for them to consider
who were the special purchasers (if any) in the market and what premium (if
any) any special purchaser would be prepared to pay. Their conclusions on these
points are factual, and in my opinion were certainly not perverse.
Mr Neuberger
drew attention to four authorities.
In Inland
Revenue Commissioners v Clay [1914] 3 KB 466 a house fell to be
valued on an open market valuation. It had a special value to a special
purchaser and the valuer took that fact into account in arriving at an open
market value well above what the ordinary purchaser would pay. Sir Herbert
Cozens-Hardy MR said at p472:
It is for the
referee, whose competence is not challenged, to arrive at a figure. The Court
ought not, as a rule, to review his decision on what is in truth a question of
fact.
Similarly,
Pickford LJ at p480 said of a special purchaser:
The effect on
the market of such a purchaser is a matter to be estimated by the referee.
Raja
Vyricherla Narayana Gajapatiraju v Revenue
Divisional Officer, Vizagapatam [1939] AC 302 was again a case where the
presence of a special purchaser was held to be a factor which should be taken
into account in an open market valuation. But that case turned on its
particular facts and, in my judgment, does not show that the Lands Tribunal
erred.
Mr Neuberger
next referred to a decision of the Lands Tribunal under the Leasehold Reform
Act 1967, Lloyd-Jones v Church Commissioners (1981) 261 EG 471*,
as an example of a case where the ‘marriage value’ is divided between the
lessor and the lessee. But, as Mr Wood pointed out, that was a decision turning
on the particular legislation and on the particular facts one of which was that
the tenant, a special purchaser, had declared himself to be a bidder. I can
derive no assistance from that for the present case.
*Editor’s
note: Also reported at [1982] 1 EGLR 209.
Finally Mr
Neuberger relied on the decision of this court in Agricultural Mortgage
Corporation plc v Woodward (1994) 70 P&CR 53*. In that case a
mortgagor of agricultural property fell into arrears. Shortly before a deadline
for clearing his arrears expired and in breach of a contractual obligation the
mortgagor granted a tenancy of the mortgaged property to his wife at a market
rent, thereby halving the value of the freehold. This court held that the tenancy
agreement was a transaction at an undervalue for the purposes of section 423
Insolvency Act 1986, by reason of the substantial benefits conferred on the
wife, including the surrender value which it gave her and the ransom position
in which it placed her. Mr Neuberger said that the conclusion of the Lands
Tribunal lay uneasily with that decision. Again that case, to my mind, turned
on its own very special facts and offers no guidance on how the valuation
should have been calculated in the present case.
*Editor’s
note: Also reported at [1995] 1 EGLR 1.
I would also
point out again that the Lands Tribunal had well in mind that the property
which fell to be valued in the present case was not the entire tenancy but only
the interest in the tenancy as a partnership asset, so that a purchaser of the
deceased’s interest could not unlock the value of the VPP without the consent
not only of the other partner but also of the freeholders. In my judgment, the factual
conclusions of the Lands Tribunal were reached without error of law and are
unassailable.
For these
reasons, which owe much to the Lands Tribunal’s careful decision and to Mr
Wood’s arguments lucidly presented to us on paper and orally, I would dismiss
this appeal.
Henry LJ
agreed with both judgments and did not add anything.
Also agreeing,
Evans LJ said: Mr
Neuberger, for the revenue, submits that ‘something must have gone seriously
wrong’ when the interest of the deceased in the tenancy of a Northumbrian hill
farm of 459 acres is valued at no more than £6,500, being two years’ purchase
of the apparent profit rents until the next arbitration review. He says that
account should be taken of the sum of £200,000 which might be realised for the
benefit of the landlords and the tenants if the ‘marriage value’ of the two
interests was unlocked, meaning the sum which the landlords might be expected
to share with the tenant in order to obtain a surrender of the tenancy so that
they could then sell the freehold of the farm with vacant possession to a third
party for its full market value.
A feature of
the present case is that the deceased himself was part-owner of the freehold,
jointly with his two sons Frank and John, he and John as partners being the
tenants also.
In these
circumstances, a valuation of his interest in the tenancy as an asset of the
partnership is established by envisaging a notional sale of that interest in
the open market, under the statutory provisions referred to by Peter Gibson LJ.
I agree with him that the sale has to take place ‘in the real world’ and that
account must be taken of the actual persons as well as of the actual property
involved. The Lands Tribunal’s figure is not artificial or unreal, but rather
the reverse. It reflects the realities of the situation. If the question is the
correct one to ask, then it is the correct answer to give.
It is worth
noting that the deceased’s interest in the freehold was valued before these
proceedings began. The figure, as I understand it,
tenancy in question. That figure was established, therefore, on the basis that
the tenancy was not surrendered or likely to be surrendered, and without any
payment to the tenant in respect of the marriage value. It would be
inconsistent, in my judgment, for the revenue to claim that the tenancy should
then be valued on the opposite assumption, that the tenancy was surrendered or
might be surrendered, and the farm sold. I would give this as a short
additional reason why their appeal should be dismissed.
Appeal
dismissed.
