England and Wales Lands Tribunal

[2001] EWLands ACQ_105_1999 (02 March 2001)


 


ACQ/105/1999

LANDS TRIBUNAL ACT 1949

COMPENSATION – compulsory acquisition of leasehold shop and premises – total extinguishment of business – disturbance - analysis of accounts – treatment of wife's earnings – depreciation of capital assets – multiplier - Land Compensation Act 1961 s1 – Award: £73,176

IN THE MATTER of A NOTICE OF REFERENCE

BETWEEN ALI KAMURAN HALIL Claimant

and

LONDON BOROUGH OF LAMBETH Acquiring

Authority

Re: 136 Lambeth Walk, London, SE11

Tribunal Member: P R Francis FRICS

Sitting at: 48/49 Chancery Lane, London, WC2A 1JR

on

5 February 2001

The following cases are referred to in this decision:

Afzal v Rochdale MBC [1980] RVR 165

Zarraga v Newcastle upon Tyne Corporation [1968] 19 P&CR 609

Reynolds v Manchester City Council [1981] RVR 200

Appleby v Ireland [1978] RVR 156

Klein v London Underground [1996] RVR 94

Sceneout Ltd v Central Manchester DC [1995] RVR 200

Longbottom and Longbottom v BingleyUrban District Council [1974] 14 RVR 139

Perezic v Bristol Corporation [1955] 5 P & CR 237

Christopher Lewsley of counsel, instructed by Fletcher Dervish & Co, solicitors of London N8 for the claimant

Nicholas Burton of counsel, instructed by Steele & Co, solicitors of London SW8 for the acquiring authority

DECISION

1. This is a reference to determine the compensation payable to Mr. A K Halil ("the claimant") in respect of the compulsory acquisition by The London Borough of Lambeth ("the acquiring authority") of the shop and premises at 136 Lambeth Walk, London, SE11 ("the subject premises") under The London Borough of Lambeth (136 Lambeth Walk) Compulsory Purchase Order 1998 ("the CPO").
2. Mr. Christopher Lewsley of counsel appeared for the claimant and called Graham John Coulter BSc FRICS, a chartered surveyor with Pinders Professional Consultancy Services of Milton Keynes, who gave valuation and accounting evidence. Mr. Halil gave evidence of fact in respect of a point raised by the Tribunal.
3. Mr. Nicholas Burton of counsel appeared for the acquiring authority and called David Epstein FCCA, a chartered accountant with Levy Gee of London W1 who gave accountancy evidence.

Backgound

4. The parties had failed to produce a statement of agreed facts and issues prior to the hearing, although at the commencement of the proceedings it was agreed that in respect of the assessment of compensation, the provisions of s46 of the Land Compensation Act 1973 (total extinguishment of business) and s47 (tenant's right to apply for a new tenancy under the provisions of Part II of the Landlord and Tenant Act 1954) were applicable in this case. The net internal floor area of the subject premises was also agreed at 100 sq.m.
5. From this, the expert reports, the evidence at the hearing and my inspection of the area in which the subject property had been situated on Wednesday 7 February 2001, I find the following facts:

5.1 The subject premises comprised a pair of narrow fronted but deep shop units with interlinked accommodation towards the rear and forming part of the ground floor of Sugden House, a 1972 local authority built development of 22 commercial units (mainly lock up shops) and 71 residential flats, on the north western side of Lambeth Walk. The premises traded as "His and Hers Hair and Sauna", and during the three trading years considered for valuation purposes, the claimants wife worked full time in the business. Sugden House, together with Pory House, a similar development of shops and flats directly opposite (and connected at upper levels by pedestrian walkways) formed the Lambeth Walk precinct, which is located on the northern side of the Ethelred Estate. In addition to the standard lock up shops (amounting to 44 units in the two buildings), there were two supermarkets and a public house. At the time of my inspection, Sugden House had been demolished.

5.2 The frontage units at the subject premises were separately arranged as a ladies hairdressers and a gentlemens' barbers with the shared accommodation to the rear comprising a reception area, communal sauna and massage facilities (two massage rooms, a sauna and shower) together with kitchen areas and wcs. The gross external site area was 138 sq.m. with a net internal area of 100 sq.m.

5.3 The claimant occupied the premises under a 20 year internal repairing lease from the then Greater London Council that commenced on 10 October 1972. Following an application for a new lease in 1992 and subsequent negotiations with the council the legal documentation was not completed, and the parties have agreed for the purposes of assessing compensation (as stated in para 4 above) that Mr. Halil was, at the relevant date, holding over within the terms of the original lease at a rent of £4,500 per annum.

5.4 In connection with its ongoing concerns regarding urban decay and social deprivation within the area, the council has entered into a development agreement with the Peabody Trust to undertake the Lambeth Walk Single Regeneration Budget Scheme (SRB). Sugden House was required as an integral part of that scheme, its demolition facilitating the construction of new social housing. Despite having agreed terms with all the other commercial and residential occupiers of Sugden House, acquisition of the subject premises by agreement was not possible. The council therefore resolved to make the CPO in July 1998, and it was confirmed by the Secretary of state on 6 May 1999.

5.5 Notice to Treat and Notice of Entry were served on the claimant on 25 June 1999 and possession was taken on 31 August 1999 (the Valuation Date).

5.6 A claim in answer to the Notice to Treat was served by the claimant on 15 July 1999, and the Notice of Reference to this Tribunal was dated 17 August 1999.

5.7 The claimant was aged over 60 at the relevant date.

Issue

6. It is agreed that the sole issue for my determination is the appropriate level of compensation payable to the claimant for disturbance on the total extinguishment of his business, on the basis that, despite there being no claim for the value of the tenancy, he was a protected tenant within the meaning of Part II of the Landlord and Tenant Act 1954.

Claimant's Case

7. Mr. Lewsley said that section 20 of the Compulsory Purchase Act 1965provides that for a yearly tenant (which includes a tenant holding over with 1954 Act protection), compensation is payable for the value of his unexpired term or interest in the land, and for any just allowance which ought to be made to him by an incoming tenant, and for any loss or injury he may sustain. The claimant sees this therefore, as a s20 claim with the protection of the 1954 Act. Also, he said, section 47 of the 1973 Act provides that where an acquiring authority acquire the interest of a tenant, the right of the tenant to apply for a new tenancy under Part II of the Landlord and Tenant Act 1954 shall be taken into account and it shall be assumed that the acquiring authority, in this case the landlord council, have not acquired or do not propose to acquire any interest in the land.
8. In assessing the compensation to be paid, Mr. Lewsley said that the established rule is that any effect on value by the scheme underlying the acquisition must be disregarded (the Pointe Gourde principle). This means that the claimant may be assumed to have the 1954 Act protection and that the council must be assumed to have no grounds for opposing a new tenancy under that Act. There is no claim for the value of the tenancy, but compensation for disturbance on a total extinguishment basis must be assessed on the footing that, in the no scheme world, the claimant could have continued to trade for as long as he wished.
9. Mr. Lewsley also referred to section 46 of the 1973 Act which provides that where a person is carrying on a business on any land and, in consequence of the compulsory acquisition of the land, he is required to give up possession, then if he has attained the age of 60 at the date of possession (which the claimant had), and other conditions being met (which they were) it is to be assumed in assessing compensation that it is not reasonably practicable for that person to carry on business elsewhere. He reiterated that it appeared to be common ground that these conditions were satisfied.
10. The claimant was the first tenant in the development when it was built in 1972, and was the last out prior to the demolition of Sugden house. He ran a traditional family business which relied principally on trade from the local residential occupiers, shoppers and shop workers. It was not the type of concern that needed to advertise, or that would be exposed to major variations in turnover which more modern establishments might suffer; for instance, the whims of fashion. As his trading accounts showed, he had a steady turnover even in the final years when the area had become even more run down, with approximately 50 per cent of the shops empty, and thus it could be expected that, were it not for the proposed development, he could anticipate continuing his business for many years to come.
11. There were, Mr. Lewsley said, three areas where the experts disagreed in respect of the interpretation of the claimant's accounts for the 3 years ended 31 January 1997, 1998 and 1999. These were a) the treatment of the claimant's wife's earnings from the business, b) depreciation to capital assets and c) the question of the multiplier to be applied to the adjusted net profit.
12. Firstly, as to the treatment of Mrs. Halil's earnings, and her contribution to the business Mr. Lewsley said that, with the object being to assess the value to the claimant, rather than open market value, it is correct to add back the whole of the wife's earnings, as Mr. Coulter had done. Apart from the possible tax advantages in dealing with this aspect in this way, the value of the business to the claimant must include the value of the wife's contribution and what it produces for the family unit. Mr. Coulter's experience is that his method is the usual way of dealing with wife's earnings in this type of small, privately run family business. This view was taken by the Lands Tribunal in Zarraga v Newcastle upon Tyne Corporation [1968] 19 P&CR 609 where it was held that 'in assessing the business profits, no deduction should be made in respect of "wages" of the claimant's wife, notwithstanding a figure in respect thereof had been allowed for income tax purposes, since the wife could not fairly be classed as a "paid employee"'.
13. Secondly, regarding depreciation on capital assets, it was submitted that Mr. Coulter's approach – to ignore this aspect, was correct. It would be unreliable to base a deduction on capital allowances in accordance with Inland Revenue rules (as Mr. Epstein had done) which may not accurately reflect the capital employed in the business. In this instance there was very little capital equipment employed, and what there was was old but sufficient for its purposes. If depreciation were allowed, Mr. Lewsley said there would need to be a corresponding adjustment to the multiplier.
14. Finally, as to the appropriate multiplier, and referring to a number of cases which showed that the underlying objective of compensation legislation was to compensate the claimant for the whole of the loss attributable to the acquisition, Mr. Lewsley said that bearing in mind the difference between the experts in their approach to the valuation of the business, the Lands Tribunal decision in Afzal v Rochdale MBC [1980] RVR 165 was important to consider. In it the Member, Mr. R C Walmsley FRICS, said at p 168:

"I inquired of the [council's valuer] what figure he was seeking to arrive at, and his reply was: 'what a purchaser would pay for the business'. But with respect, that is not right. The market value of the claimant's goodwill is not the measure of what the council is required to pay. In respect of a business extinguished on a compulsory acquisition the measure is always that of 'value to the claimant', not that of 'value in the market'. The loss suffered by an expropriated trader is the ability to derive a future profit out of the premises from which he has been dispossessed".

In that decision a net profit was capitalised to £9,000, a multiplier of about 4.

15. Similarly, in Reynolds v Manchester City Council [1981] RVR 200 the multiplier adopted was 3.5. In that case Mr. Walmsley said:

"The claimant's compensatable loss is more accurately described as 'loss of ability to derive a future profit out of the particular premises from which he has been dispossessed'. The council's scheme does nothing to impair the claimant's skills and abilities, which are released to be deployed elsewhere".

The ability of the claimant to deploy his skills elsewhere appeared, Mr. Lewsley said, to be a factor in the standard method used by the Lands Tribunal in assessing compensation on a total extinguishment basis, and bore particularly on the multiplier. However, where s46 applies, this effect should be ignored. With the claimant being over 60, there was no opportunity for him to start up and deploy his skills elsewhere – in effect he was taking 'early retirement'. This should be reflected by using a higher multiplier.

16. In Appleby v Ireland [1978] RVR 156 it was said at p 165:

"the multiplier that has come to be regarded as fair and reasonable as between a dispossessed trader and an acquiring authority is 3YP of ascertained net profit, assuming the business to have been trading at a steady level of profitability and from its own freehold premises".

In the instant case whilst the premises were leasehold, the fact that the claimant had been trading there for 27 years (and in the vicinity for some 36 years) and he had the protection afforded by the Landlord and Tenant Act 1954 meant, Mr. Lewsley said, that the assessment of compensation should not be materially different.

17. In Klein v London Underground [1996] RVR 94 which related to a hairdresser's business, the member, Mr. Musto, had adopted 3.25 YP. Finally in connection with the multiplier, Mr. Lewsley referred to Sceneout Ltd v Central Manchester DC [1995] RVR 200 where it was held that compensation in a total extinguishment case was to be assessed by reference to the value to the owner, and in that case a multiplier of just under two was used.
18. Mr. Coulter had applied a multiplier of 3, which Mr. Lewsley said was a fair figure, pitched in the middle of the range that was apparent from consideration of earlier Lands Tribunal decisions.
19. Mr. Coulter is a chartered surveyor specialising in business valuations and appraisals, and has recent experience with hairdressers businesses. He had inspected the subject property in August 1999, and produced an initial report that was superseded by a second report immediately prior to the hearing. His revised document that had shown a multiplier of 3 against one of 1.25 in his initial report was, he said, produced following further deliberation, and consideration of the type of business being valued.
20. Mr. Coulter said that at the time of his inspection there were only a handful of shops occupied within the precinct, and the whole area was substantially run down and in obvious decline. He understood that in the early years of the claimant's occupation, the area comprised a busy and thriving shopping and residential community, including two mainstream supermarkets and a public house, and his business had employed four full, and one part time member of staff in addition to his own and his wife's full time involvement. Following the planned redevelopment in 1992 the area had become increasingly run-down, and Mr. Coulter said that he believed the claimant's trading followed the general declining pattern.
21. However, his analysis of the three last full years' trading accounts had revealed a steady trading performance, with only a very slight reduction in turnover in each of those years. This indicated that the claimant had a well established and loyal customer base and his business was of a type that would be less exposed to market fluctuations than other concerns.
22. Mr. Coulter set out his analysis of the 3 years accounts as:

	Year ended 31.1.97	Year ended 31.1.98	Year ended 31.1.99
Net turnover (£)	38,674	36,848	36,110
Weekly Average (£)	743	708	694
Gross Profit (£)	37,295	35,671	34,958
Gross Profit Margin (%)	96.43	96.80	96.80
Reconstituted Net Profit (£)	25,141	24,353	23,683
Net Profit Margin %	65.00	66.09	65.58

23. The expenses, which included an average of £2,000 per annum for staff salaries (relating to one part time staff member), very low cost of materials (indicating few retail sales of shampoo and similar items), nil advertising costs and no allowances for repairs or redecoration together with the exclusion of any payments paid to the claimant's wife, resulted in a high net profit as a proportion of turnover. All other expenses being in line with expectations, this was, Mr. Coulter said, typical of a business of this type that was being run virtually solely as a family concern. The average net profit over the 3 year period amounted to £24,392 per annum.
24. He said it was his firm's, and the conventional, approach to exclude the wife's wages for businesses of this type. Most of his valuations were for mortgage purposes and banks would be looking at the global income, and forming a judgment as to whether there would, after normal expenses, be enough left over for the family. The approach was the same for the assessment of compensation. If the wife's earnings were included, Mr Coulter said he would have adjusted the multiplier accordingly.
25. As to Mr. Epstein's methodology, Mr. Coulter said that it could be used, but, as he had indicated, the multiplier would have to drastically adjusted to arrive at the true value of the business.
26. Regarding depreciation of capital assets, Mr. Coulter said that for this type of business with little capital equipment, it was convention to ignore it. To include it would be artificial, solely necessitated by tax considerations. Also, any amount included for depreciation would not reflect the true value of the equipment. If, as with the treatment of wife's earnings, he had had to include depreciation, the result would be reflected in an adjustment to the multiplier.
27. In assessing the multiplier at 3 times the average adjusted net profit in his revised valuation, Mr. Coulter said from evidence available there appeared to be a range of 2 to 5, and a mid-level was appropriate in this instance. Having considered the fact that bearing in mind his age, Mr. Halil would not easily be able to replicate the business elsewhere, but by staying where he was, he would have a future in trading terms of at least 5 years, he said 3 was not inappropriate.
28. In cross-examination, Mr. Coulter accepted that the Lambeth Walk precinct had been in serious decline since about 1992 but did not agree that it was necessarily the case that that decline would have occurred to the same extent in the no-scheme world, without the redevelopment proposals. In any event, the claimant's trading accounts showed a fairly steady income stream in the last three years to January 1999 which, as he had said, indicated this particular business was less seriously affected than others. He did accept that the slight decline in annual turnover over the 3 years, if inflation were taken into account, would appear more significant.
29. Regarding depreciation, he said that the fact it was not in his view appropriate to show it in the accounts had been taken into account in his choice of multiplier. There was, in this instance, very little capital employed in the business.
30. In comparing a statutory valuation for compensation purposes with an open market valuation, Mr. Coulter said that exclusion of payments to the wife from the business (whether specifically earned or taken, as happened in many such businesses up to a point just below the National Insurance minimum level) was the correct approach. Most prospective buyers would be married couples who would wish to run the business jointly, and, through the analysis of the accounts, would want to see the total income that could be available to the family unit.
31. In response to a query as to why, if that were the case, Mr. Halil was the sole claimant, Mr. Halil stated in evidence, that under Moslem law "the wife works under the husband", and although she is not formally one of the claimants, the claim is also being made on her behalf.
32. Asked why, in his first report, Mr. Coulter had used a multiplier of 1.25 whereas he had used 3 in his latest valuation, he said that the first had been based on a straight disposal, i.e., "lock up and walk away". There had been no consideration of the s46 implications. In adopting a multiplier of 3, he had taken account of the statutory assumptions, the fact that the claimant had some 36 years track record in the area and a loyal and reliable customer base, and there was therefore a considerable value to the claimant. Whilst having no specific market comparables, Mr. Coulter said he had based his multiplier on his experience, and the figures used in the cases referred to by Mr. Lewsley in opening.

Acquiring Authority's Case

33. Mr. Epstein is a chartered accountant, a partner in Levy Gee, and since 1990 has been head of its Litigation Support Department. He said that as an experienced practising accountant, he is aware that wages paid to the wife of a sole proprietor can sometimes be limited to a figure below the National Insurance threshold, as long as limiting such salary does not cause the proprietor, in this case the husband, to pay a higher rate of tax on excess profits. This avoids employers National Insurance currently at 12.2 per cent, and employees National Insurance at 9 per cent, which would otherwise be borne by the wife's wages. Therefore, he said, this enables a tax-free amount to be paid to the family unit without any further cost to the proprietor.
34. In Mr. Epstein's view, the correct approach in calculating the adjusted net profits was to include a figure that would reflect the salary of a full time hairdresser, as it was confirmed that during the accounting period Mrs Halil was fully employed in the business. This he had calculated at £9,543 per annum from the New Earnings survey, Part D. This had the effect of significantly reducing the adjusted net profits.
35. In respect of the assumed depreciation adjustment, Mr. Epstein said that as the claimant has claimed capital allowances (evident from the tax returns supplied) in each of the financial years being analysed, and did not have a depreciation policy, it was appropriate to deduct the capital allowances claimed to reflect the use by the business of its assets. The allowances claimed were £1,552, £1,164 and £874 and these figures he considered to be appropriate on a "rough and ready" basis to be taken for the depreciation in each year.
36. Having therefore deducted the assumed salary of a full time hairdresser, and sums for depreciation, the adjusted net profits became £14,046 for 1997, £13,646 for 1998 and £13,266 for 1999. Taking the view that, even though Mr. Coulter recognises that turnover has declined for each of the three trading years, reflecting the deteriorating economic situation within the precinct, an average of these results is appropriate when calculating the claimant's compensation, the resultant average adjusted net profit is £13,653.
37. In calculating which multiplier to use, and noting that Mr. Coulter had moved from his original 1.25 to 3, Mr. Epstein said that Mr. Halil's age was not a benefit – indeed it was a hindrance. This is because, the closer to retirement age the claimant is, the less likely it is that the business will be able to grow, and may not have been maintained in a modern way due to its shorter future. Accordingly, he saw no reason to adjust the factor from the original 1.25, giving a compensation figure of £17,066 (£13,653 x 1.25).
38. In cross-examination, Mr. Epstein accepted the principle that compensation should be based upon the value to the owner, and that that figure could be more than the open market value. He said that in this case any additional value to the owner was negligible. Assuming that the claimant's wife had worked full time (this being necessary as the business to all intents and purposes was run as two separate salons), he agreed that a husband and wife team could well be the type of purchaser the market would attract.
39. However, in such circumstances Mr. Epstein did not believe that buyers would analyse the accounts in the way that Mr. Coulter had. The open market value does not vary according to the type of purchaser, and similarly does not vary according to the current owner. As an accountant he said he would have difficulty in adjusting value on that basis. For instance, in respect of his treatment of wife's wages, he said that if the wife became ill, a replacement would need to be paid on a proper basis and a purchaser would therefore expect to see an allowance built in to the accounts.
40. Mr. Epstein did accept that a purchaser would look at the total money generated by the business and in a husband and wife situation would intend to maximise income for the family unit. The wife's 'unpaid' work would bring a benefit to that unit. In response to a question from me, Mr. Epstein acknowledged that prospective purchasers had a choice as to which way they look at the results, and a husband and wife team might analyse the figure in the same way that Mr. Coulter had. However, he said Mr. Halil was the sole proprietor, and he should have considered the costs of employing his wife. A purchaser also needs to be aware of what that cost would be if a non-related person were employed, because it would then be evident that if the wife can earn more than say £9,500 elsewhere, then it would make sense for the business to employ someone at £9,500 and for the wife to take the better paid post.
41. Mr. Epstein went on to say that it depends on who the owner of the business is. If it's a family unit, Mr. Coulter's methodology might be appropriate but, as in this case where there is a sole owner, then deducting an appropriate figure for the wife's wages is correct.
42. As to depreciation, Mr. Epstein said that it should be taken into account. If it is not, then the stated profits are shown to be higher than they actually are, and this would need to be reflected in the multiplier.
43. Mr. Epstein accepted that the factor to be applied to the adjusted net profit in assessing the value of the business is judgmental, and that the guidance given in previous Lands Tribunal cases needed to be taken into account. The true basis of valuation, he said, is to judge what will flow from the business and analyse it accordingly. The age of the proprietor, he acknowledged, was an important factor in assessing value.
44. In closing, Mr. Burton said there were three tightly defined areas in dispute and, in respect of the treatment of wife's earnings, referred to 3 authorities in support of Mr. Epstein's approach. Firstly Zarraga, that had been referred to by Mr. Lewsley, actually indicated that the acquiring authority's approach was correct. That case related to a shop with a flat over, and Mrs Zarraga was being paid a wage regardless of the amount of her contribution to the business, which was extremely limited and, according to her husband's evidence, not essentially necessary. The wage that was being paid was what was allowable by HM Inspector of Taxes. In the instant case, Mrs Halil's input was most certainly essential and, as had been established, virtually full time. She was not in a position to go off and work elsewhere, particularly due to the configuration of the shop as His and Hers salons. A salary for her should be taken into account especially as the claim was from Mr. Halil alone.
45. Secondly in Longbottom and Longbottom v Bingley Urban District Council [1974] 14 RVR 139 it was held that an allowance should be made for managerial or supervisory wages by adding back the wages or drawings of both partners to the average net profits for three years. This was because the council were required to take the premises and the business as they found them and the business was a partnership of the two claimants and it was irrelevant that it might have been bought by a limited company if sold as a going concern. This case differed in that the business was a partnership, whereas in the instant case, Mr. Halil was a sole trader.
46. Thirdly in Perezic v Bristol Corporation [1955] 5 P & CR 237 it was held that, in the business of a sole trader, the personal remuneration of the owner should not be deducted in calculating the gross value of the goodwill.
47. Mr. Burton accepted that the depreciation element was not significant in value terms, but contended that Mr. Epstein's approach, using the capital allowances figures, was right in the circumstances.
48. Finally, as to the multiplier, he said it was surprising that Mr. Coulter had attributed a multiplier in his second report that gave a value over 2.5 times that which he had initially concluded to be appropriate, based upon Mr. Halil's age.
49. Mr. Lewsley said that Mr. Halil is to be seen as a protected tenant within the terms of Part II of the 1954 Act. Even though it was acknowledged there was no value in the lease, this factor had a bearing on the value of the business for compensation purposes. Mr. Coulter's figure was fair, and in coming to his conclusions, he had not sought to suggest an uplift to take account of the fact that, whilst the accounts showed the claimant to have a stable and loyal business, it must have been affected to some degree by the surroundings.
50. Referring to Zarraga, Mr. Lewsley said it clearly set out that what the market normally does is look at the husband and wife's earnings together. The wife's earnings are added back to reach the appropriate adjusted net profit – as Mr. Coulter had done in this case. He said that it was strange that Mr. Epstein did not accept the adding back, as he was effectively excluding the contribution she would make and what she could get out of the business.
51. As to the multiplier, Mr. Lewsley said that the increase to 3 used in Mr. Coulter's second report was not solely based upon the claimant's age, that being only one of the factors. Mr Epstein was looking at value through the eyes of a prospective purchaser, rather than value to the owner to which legislation adds value. Mr. Halil cannot replace his business which must, Mr. Lewsley said, mean the existing business is worth that much more to him. Finally he re-iterated that Mr. Coulter's multiplier was in the middle of the range that had been adopted in previous Lands Tribunal decisions, and was not, therefore, over- stating the value of the claim.

DECISION

52. I deal first with the fact that the claim is in Mr. Halil's name only, and the intimation by the acquiring authority that were it a joint claim by him and his wife, Mr. Coulter's approach to the matter of the wife's wages might be more acceptable. I find as a fact that the reason the claim was made by by Mr. Halil, and not Mr. and Mrs Halil jointly is that they treated their business relationship on the Moslem basis, that is to say that Mrs Halil worked with the claimant as his wife rather than as a partner. She was not an employee, and nothing therefore falls to be deducted from the profits in respect of the value of her services. It appears to me that formally, under English law, Mr. and Mrs Halil did work as business partners but, in the light of the reason for the claim being made by Mr. Halil alone, I can see no justification for reducing the compensation below that which would have been payable if the claim had been made in Mrs Halil's name also.
53. Secondly, I note there is no dispute that the claimant was protected under the provisions of Part II of the Landlord and Tenant Act 1954. Sections 46 and 47 of the Land Compensation Act 1973 apply, and there is therefore no dispute that compensation should be based upon total extinguishment of a business that in terms of its occupation of the subject premises, was secure.
54. As indicated by counsel for both parties, there are a number of authorities to assist me in determining the three disputed issues. Firstly, in connection with the treatment of wife's earnings, both parties sought to rely upon the decision in Zarraga. Mr. Lewsley pointed out that in that case it was held that no deduction should be made for the wife's earnings. Mr. Burton submitted that the circumstances there were entirely different, in that the husband and wife lived over the shop, and the wife's payments did not specifically relate to her input (which was minimal), but were allowable payments within the Inland Revenue rules. There was also a question as to whether, had the CPO not frustrated Mr. Zarraga's plans for modernisation, there would have been any need for his wife's services. I agree with Mr. Burton that the circumstances in that case were different, but nevertheless it was held that when estimating Mr. Zarraga's loss, to deduct the figure that the Inspector of Taxes was prepared to allow for wife's wages would be wrong. The member, Mr. J R Laird FRICS also said: "Furthermore, the evidence is that the market does not in practice operate in the manner adopted by Mr. Case". Mr. Case had regarded the wife's "wages" as an outgoing that should be deducted.

55. Whilst in my judgment Zarraga does provide some assistance in establishing the correct approach to the treatment of the wife's income, and the Member's comment regarding the way the market operates in practice is particularly apposite, the decision in Longbottom, also referred to by Mr. Burton, bears more similarities to the instant case. In that case, which related to a business that was run by two brothers in partnership, Mr. V C Wellings FRICS held that no deduction should be made for the wages or drawings of either partner, and determined that they should be added back to the three years adjusted net profits for the purposes of assessing compensation for disturbance. As I have already said, the claimant and his wife were in my judgment, for the purposes of assessing compensation, working as a partnership.

55. Perezic decided a matter of principle, viz., should the personal remuneration of the owner occupier of a one man business be a deduction from the gross value of the goodwill? Whereas it was held that it should not, that is not a matter for consideration here as the question of Mr. Halil's own drawings is not in dispute.
56. Mr. Coulter said that the conventional approach, in valuing a business of this type, was to exclude the wife's wages because likely purchasers would also be husband and wife teams, and they would seek to establish, through the accounts, the total income that would be available to the family unit. Whilst initially disagreeing with Mr. Coulter's approach, Mr. Epstein did accept in cross-examination that a prospective purchaser would look at the total money generated by the business, and would be seeking to maximise the income available to the family. He also acknowledged that purchasers had the option to look at the accounts either way, and might analyse the figures in the way Mr. Coulter had, but as Mr. Halil was a sole trader the costs of employing his wife should be dealt with in the same way as if a non- related person were employed.
57. In my judgment, and bearing in mind my conclusions as to how Mrs Halil's input should be treated, the decisions in Zarraga and Longbottom support Mr. Coulter's approach. I also prefer Mr. Coulter's evidence as to the way the accounts would be analysed by the type of prospective purchasers who would be in the market, and see no reason, in terms of open market value versus value to owner, why there should be any difference as to the basis for analysis in respect of this element. In the circumstances Mr. Epstein's argument as to why Mr. Coulter's approach should not be used does not carry any weight. I therefore determine that no deduction should be made from the adjusted net profits to reflect Mrs Halil's earnings from the business.
58. The matter of depreciation is a straightforward difference of opinion between the two experts, and no authorities were produced to guide me as to the correct approach. Mr. Coulter's reason for not including an amount for depreciation of capital assets is compelling. In a business with very little in the way of capital equipment (and that which there was, I suspect, was very old and probably written off years ago), it would, Mr. Coulter said, be artificial to include a figure necessitated solely by tax considerations. Mr. Epstein had used the figures that Mr. Halil had claimed as capital allowances on his income tax returns, which were in accordance with the Inland Revenue guidelines. Mr. Burton accepted in closing that this method was only a rough and ready guide.
59. It occurs to me that, under normal market circumstances, a valuer when analysing accounts would not have access to the owner's tax returns. Also, as to the Inland Revenue guidelines on the subject of capital allowances, no evidence was produced to prove that using that as a basis for calculating depreciation was the conventional approach. I therefore accept Mr Coulter's evidence that in this instance it is appropriate to exclude an allowance for depreciation. In my judgment, whether or not to include such an allowance will depend upon particular circumstances, such as type and size of the business, and the amount of capital and equipment employed. Mr. Epstein said that ignoring depreciation resulted in profitability being overstated, but Mr. Coulter did comment that the proportion of profits to turnover was high, and he had reflected his exclusion of depreciation in arriving at the appropriate multiplier.
60. The subject of what multiplier to use once the adjusted net profit has been established has been covered in many Lands Tribunal decisions, and as with the argument as to whether or not to include depreciation, the appropriate figure will depend upon a number of factors.
61. Mr. Lewsley referred to the principal of equivalence, and the fact that the objective is to compensate the claimant fully for his loss. The circumstances that he had outlined in opening regarding sections 46 and 47 of the 1973 Act, and the fact that compensation should therefore be assessed on the basis that the claimant could have continued to trade in the premises as long as he wished meant, he said, that the value to the owner could be significantly more than the open market value. I think that his point here was that Mr. Coulter's multiplier of 3 (which he had based upon his own market experience, and the cases to which Mr. Lewsley had referred) was appropriate in all the circumstances, whereas on the face of it, looking solely at the business and its trading location, a lower multiplier, in open market terms, might have been used.
62. Mr. Epstein thought a YP of 1.25, which was the figure used in Mr. Coulter's first report, was correct but accepted in cross-examination that the appropriate figure was a matter of judgment, and that the levels applied in earlier decisions did need to be considered. He could not, however, reconcile the increase that he thought Mr. Coulter had applied relating solely to the claimant's age. Mr. Lewsley said in closing that the claimant's age was not the only reason for Mr. Coulter's increased figure.
63. There was no argument suggesting that the value to the owner and open market value are the same, the basis for compensation having been clearly established in Afzal and Reynolds, but the question for me to consider is how much more the business was worth to Mr. Halil. Reference to the cases referred to is helpful, in the absence of direct comparable evidence, in order to assist in establishing an appropriate multiplier. However it must be remembered that each case will have been judged upon its own merits and, in the final analysis, the particular circumstances of this case must prevail.
64. In Afzal Mr. Walmsley said in his decision which related to the total extinguishment of a business, immediately after the passage referred to by Mr. Lewsley:

"I dare say that the value in the market of the claimant's goodwill would be not more than 2 YP of net profit, if indeed it would be as much. Here, however, is a young man of Asian origin who in 1971 took over a retail business in a predominantly Asian community; the business did well and in 1974 the sales area was extended; then in 1977, when the business had become well established, the scheme intervened. In order to re-establish his business elsewhere the claimant will require to find premises that are not only suitable in themselves but are also situated in a locality where there is a community of similar specialist customers. In terms of years purchase of net profit the loss he has sustained is, in my opinion, more than double what a purchaser would pay for the business. I propose to allow £9,000". [4 YP]

That case referred to a corner shop, and bore similarities to this reference in that it was in a locality described in the decision as "…..semi-deserted…..the property is in a housing action area where the council are pursuing a policy of housing improvement linked with selective clearance of unfit property, and there are many houses empty". Where it differed, as Mr. Burton said, is that it had adjoining living accommodation. It was also freehold.

65. In Reynolds Mr. Walmsley said that the council's valuer recognised that each case falls to be dealt with on its own merits because he had proposed a multiplier of 3.5, despite his knowledge that there had been various settlements in respect of 'goodwill' or 'loss of profits' in the range of 1.5 to 2.5 YP. That was a somewhat different type of business, but it supports the contention that value to owner can be significantly more than the open market value.
66. The decision in Klein also related to a hairdressers business where the tenant was holding over under the terms of his original lease, but the premises were located in a prominent and busy location at the entrance of Waterloo station. The Member, A P Musto FRICS, determined a YP of 3.25 (the claimant having sought 5 YP and the acquiring authority 2 YP), saying that whilst there was no justification for the claimant's figure, the "pessimistic" figure adopted by the acquiring authority should be increased to reflect, amongst other things, comparable settlements and the growth potential of the business.
67. In Longbottom the Member applied a multiplier of 3. He had taken into account submissions that 2 YP was the appropriate figure (based on two further cases) but concluded that "on the assumption of a total extinction of a fully operated business it is difficult to justify a multiplier of less than 3".
68. The above decisions, taken in the round, do tend to support a multiplier of a least 3, but as I have already said, each case would have been considered on its own merits. In terms of market value, considering the evidence in the instant case, and particularly the premises' location, which in the no-scheme world and absent any scheme for improvement was deteriorating, I think some downward adjustment would be applicable and I have no quarrel with Mr. Epstein's figure of 1.25 YP (which indeed was used by Mr. Coulter in his original valuation). The fact that upwards of 50 per cent of the shops in the area were vacant from the early 1990s and the area was in overall decline would have a serious effect on the marketability of the premises. Although the accounts show a steady performance over the last three years, and I accept the evidence relating to the 'captive audience' of loyal customers, there can be no doubt that the business has declined from its heyday when there were a number of staff employed.
69. However, and this point is not in dispute, it is the value of the business to the claimant that has to be determined. In Afzal the Member found that the loss the claimant had sustained was more than double what a purchaser would pay for the business, and determined a multiplier of just over 4 YP. There, the claimant was a younger person and account was taken of the fact that in order to re-establish his business elsewhere, he would require to find premises that were not only suitable in themselves, but also situated in a locality where there was a community of similar specialist customers. There are distinct parallels in this case, but here it is accepted that, due to Mr. Halil's age, it would be unlikely that he would wish to start all over again.
70. As Mr. Lewsley said, the approach in Reynolds was similar, and there the multiplier was determined at 3.5. He said that reference in that decision to the fact that the Council's scheme did nothing to impair the claimant's skills and abilities, which are released to be deployed elsewhere (the claimant had already set up a new business), appeared to be a factor in the standard method which the Lands Tribunal had developed to assess compensation in total extinguishment cases, particularly the multiplier. However, he felt that in a case where s46 of the 1973 Act applies, this effect should be disregarded as, assuming the claimant does not deploy his skills elsewhere there should be a higher multiplier.
71. There is no doubt in my mind that this particular business, to this particular claimant (with over 30 years background in the same trade in the same vicinity) is significantly more valuable to him than it would be on the open market. It is agreed that as the claimant is over 60 it would not be practicable for him to re-establish his business elsewhere. The question is, absent the scheme, and undisturbed in his current premises, how long would he have continued to work? Mr. Coulter said at least 5 years, but I do not know on what precise premise that estimate was based. Mr. Lewsley said in opening that Mr. Halil had reached the age of 60 (in connection with s46 of the 1973 Act), but his precise age was not divulged.
72. I expect that Mr. Halil would have continued in business for a few more years. The uncertainty about precisely when he would have chosen to retire coupled with the uncertainties about the level of future trade lead me to conclude that, on the particular merits of this case, an appropriate multiplier would be 3 YP. The average annual net profit on Mr. Coulter's analysis amounts to £24,392 and taking into account my decisions in respect of wife's earnings and depreciation, I accept this.
73. The other authorities referred to by Mr. Lewsley offer no additional assistance in this case, and in accepting the claimant's evidence on all three issues, I determine that the acquiring authority shall pay to the claimant compensation for disturbance in the sum of £73,176. This is calculated as 3 x the adjusted net profit of £24,392.
74. What I have said so far determines the substantive issue in this case and my award is final. It will take effect as a decision when the question of costs is decided and at that point, but not before, the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 and Order 61 rule 1 (1) of the Civil Procedure Rules will come into operation. Representations on costs are invited from the parties, and a letter accompanying this decision sets out the procedure for submissions in writing.

Dated: 2 March 2001

(Signed) P R Francis FRICS

ADDENDUM ON COSTS

75. I have received submissions on costs from the parties. The claimant submitted that as the award substantially exceeded the compensation offered by the acquiring authority, and the figures proposed in evidence, the authority should pay the claimants costs of the reference.
76. The acquiring authority submitted that whilst generally the principle of costs following the event would apply, it had been necessary for it to make a number of interim applications to force the claimant to comply with requests for information and documents. These have added significantly to its costs and in any event costs orders were made against the claimant in respect of those applications.
77. Further, it was submitted that a change of multiplier in the claimant's expert's final report had confused the issues and the claimant's late briefing of counsel had meant his written opening remarks could only be considered on the morning of the hearing.
78. As a result of the increased costs incurred, and the difficulty the acquiring authority had had in assessing the basis of claim, it was proposed that only 50 per cent of the claimant's costs should be paid.
79. I have considered the submissions and, apart from the costs associated with the interim applications, which are to be borne by the claimant, I am not satisfied that the acquiring authority have been put to any material extra costs due to the claimant's alleged conduct of the reference.
80. I therefore determine that the acquiring authority shall pay the claimant's costs in the reference from which shall be deducted its costs in respect of the Order dated 18 October 1999, 12 November 1999, 12 January 2000 and 17 March 2000. Such costs are to be agreed or in default of agreement assessed on the standard basis by the Registrar of the Lands Tribunal in accordance with the Civil Procedure Rules.

Dated: 10 April 2001

(Signed): P R Francis FRICS