Scottish Court of Session Decisions

This case is concerned with an appeal by the Assessor and a cross-appeal by the ratepayers against a decision of the Valuation Appeal Committee for Argyll & Bute, Dunbartonshire and Glasgow following a hearing on 26 February 1997 fixing rateable values for four properties in Union Street, Glasgow. The four properties are all shops. 84 Union Street is occupied by a firm named Semi-Chem and was entered in the Roll by the Assessor at a net annual value and rateable value of £71,000. 88 Union Street is occupied by Tiptop Stores trading as Superdrug and the rateable value entered was £67,700. 96 Union Street is occupied by Ron Wood Greetings Cards trading as Birthdays and was entered at £67,600. 100 Union Street is occupied by Oliver Group trading as Timpson and was entered at £89,000. The appeal in regard to 84 Union Street was a new occupier appeal with effect from 18 March 1996, while the other three appeals were 1995 revaluation appeals. The Committee allowed the appeals and entered rateable values for 84 Union Street of £25,000; 88 Union Street at £25,300; 96 Union Street £25,200; and 100 Union Street £24,500. In his grounds of appeal, the Assessor originally sought restoration of the values which had been inserted in the Roll but that contention was not advanced before the court and the Assessor's appeal was restricted to a more limited attack on the manner in which the Committee had dealt with the evidence of value available to them. Before the Committee, the ratepayers had sought a reduction of the values to nil. That contention was repeated before the court and it is convenient to deal with that matter first.

The appeal subjects are four shops located on the ground floor of the Egyptian Halls in Union Street. The Egyptian Halls is an important grade A listed building. There are in total eleven separate entries in the Valuation Roll in respect of properties located at Egyptian Halls. The four appeal subjects are located on the basement and ground floor of the property and there are other properties unoccupied on the upper floors. Each of the appeal subjects is occupied and used as a shop and the parties were able to agree a total reduced area for each of the units and also a zone A rate to be applied but under the exclusion of any effect on the value of the units of certain structural defects in the building and consequent liabilities for expenses of repair. The zone A rate agreed on that basis was £500 per square metre. The Egyptian Halls have considerable structural problems. The problems are set out in detail in the findings of the Committee but we do not need to repeat them. It is sufficient to say that there are very substantial defects in relation to the load-carrying capacity of floors within the building, the stability of the structure arising from a lack of lateral restraint, cracking and weathering of stonework, water penetration and other similar matters. It is more important to consider the history of investigations and steps which have been taken in regard to these defects up to the present time. In 1991, Glasgow District Council served a listed building repair notice under the Town and Country Planning (Scotland) Act 1972. The notice was served on the various landlords holding property in the Halls and listed the repair works required by the authority. The repair notices were in due course passed to the various tenants. Some time thereafter, the tenants of 88, 96 and 100 Union Street and the proprietors of 84 Union Street, along with an upper floor proprietor, Mr. Woo, instructed Rennick Partnership, a firm of structural engineers, to carry out investigations and report. The Rennick Partnership reported in May 1995. As the Committee find, the report, in addition to setting out a comprehensive description of the defects which had been discovered, set out various options for the building ranging from demolition, while retaining the existing façade, to retaining the existing steel and cast iron frame and strengthening it. The report also considered the cost of the various possibilities and pointed out that a considerable share of the liability would be attributable to the proprietor of the upper floor, Mr. Woo. By that time, however, Mr. Woo had vacated the property and could not be traced. There was also an indication that Historic Scotland might provide assistance by way of grant but that assistance would apply only to the upper floors and would not reduce the liabilities faced by the occupiers of the ground floors.

A further full report was submitted by Messrs M.P.M. Adams in October 1996. This report contained a full description of recommended works which included the retention of the front and rear elevations but the demolition of the internal elements and the roof structure, the construction of a new framework and the laying of new floors. It was also proposed that cleaning and certain other remedial work should be carried out on the stone façade. Again the findings of the Committee set out fully the recommendations of the report, which the Committee accepted. The Committee found:

The Committee then set out details of the leases under which the appeal subjects are let. In the case of three of the properties, the leases were entered into for substantial periods without knowledge of the defects in the building and also contain provisions, the effect of which is that the state of the building cannot be taken into account on a rent review. These leases therefore throw no light on the effect of the defective state of the building on its value. In respect of 84 Union Street, the fourth property, the position was more complicated. As at 1 April 1995, the tenants were the Bothwell Bridge Book Company. The property was then let for the period from 18 March 1996 to 31 December 1996 at an initial rent of £40,000 (equivalent to £50,500 per annum) in the knowledge of the report by the Rennick Partnership on the basis of the tenants being liable for internal repairs and insurance. When the Adams report became available, the rent payable was reduced, with effect from 1 January 1997, to £30,000 per annum, again on an internal repairing and insuring basis only and, further, on the condition that the tenants would have monthly break options. The Committee find that the rent of £30,000 per annum was less than half of the level of rent which might have applied had the building been in sound condition. They point out that in certain respects the rent was not a guide to the annual value of the property on the statutory basis without adjustment: for example, the date of the lease was two years after the revaluation date and four years after the Assessor's tone date and the lease was not on the statutory terms. Nevertheless, the Committee find:

The Committee also find that certain other suggested comparisons were not reliable, for reasons which they give.

In giving their decision, the Committee refer to section 6(8) of the Valuation and Rating (Scotland) Act 1956 and point out that the statutory definition involves a let from year to year, on the basis that the tenant will pay the cost of repairs, insurance and other expenses necessary to maintain the lands and heritages "in a state to command that rent". They say:

They point out that there is, and must be, some interdependence between the rent and the repair costs and go on to reject the ratepayers' contention that the premises should enter the Roll at a nominal value on the ground that it was contrary to the statutory definition to proceed on the footing that a tenant would pay a nominal rent but undertake very high repair costs. They went on to consider a detailed calculation put forward on behalf of the ratepayers which took its starting point from the Semi-Chem rent of £30,000 per annum and held that that rent was as good a single piece of evidence as the Committee could have and was a reliable figure. They discussed some further aspects of the ratepayers' calculation and made some adjustments to it, the result of which was to produce the figures for annual values which have been set out above.

Counsel for the ratepayers submitted that the Committee had failed to have regard to the extensive repair cost liability which would have been a burden on each hypothetical tenant but had, indeed, ignored that burden in assessing the rateable value. The extent of the liability was shown by the findings that the repair cost would amount to £360,000 for each of the appeal subjects. There was no doubt that that liability existed at the material date and on an annualised basis it could exceed the net annual value of the premises. The findings showed that the repairs were necessary and that the building could not remain in the state in which it was. The Committee's reasoning was that the tenant would not be required to meet all the repair costs but only those necessary to keep the building in a poor state of repair, but there was no finding in regard to such lesser liability. The question for the Committee was what rent the hypothetical tenant would pay on the statutory assumptions. The Committee had the agreement between the ratepayers and the Assessor that, but for the state of the premises, the rent, based on a zone A rate of £500, would be in the region from £62,000 to £75,000 but that agreement went on the false hypothesis that the tenant would only meet normal repairs. So the question became whether there was a liability on the tenant over and above that of a normal level of repairs and, if so, what the extent of that liability was. The Committee had gone for a possible answer to the question of value and worked back from that, asking what repair expenditure the tenant would have if he was paying for a subject of lesser quality and had said that the expenditure would be more than would be the case in a building in a good state of repair, but in so doing they had ignored the finding they had already made that the actual and the hypothetical tenant would have a liability in relation to the whole building. Section 6(8) was the only provision which made reference to repairs. In Scots law the difference between ordinary and extraordinary repairs had always been recognised and if the tenant started with a property in tenantable condition he bore the liability for ordinary repairs and the landlord that for extraordinary repairs. That was the approach shown in House of Fraser v. Prudential Assurance Co. 1994 S.L.T. 416 and also in the earlier case of MacMurchie v. Assessor for Dundee 1962 S.L.T. 195. Here the Committee had found that there were defects which, though expensive, were remediable at great cost. The fact that subjects such as shops were now dealt with under section 6(8) rather than, as formerly, under section 6(2), meant that the landlord's obligation, to carry out extraordinary repairs, was put on the tenant so that the tenant was liable for all repairs. The appropriate starting point was the rent which would be payable if the subjects did not need extraordinary repairs and that would provide some measure, the figures being decapitalised as proposed. The argument advanced for the ratepayers had been given effect in England in Benjamin v. Anston Properties Ltd. [1998] R.A. 53, although the effect of that decision had been altered by the Rating Valuation Act 1999. Reference was also made to Assessor for Central Region v. United Glass 1984 S.C. 389.

For the Assessor, counsel submitted that it was wrong in principle to apply the actual costs likely to be incurred in repairs to the hypothetical rent directly. Firstly because the argument based on the case of MacMurchie was misplaced, that case being the only exception to the rule that premises should be valued in their actual state, as was made clear in the United Glass case, and secondly because the argument assumed a wrong view of the liability of a hypothetical tenant under the statutory hypothesis. It was sufficient for the purposes of the present case to say that the works and expenses referred to in the findings were so far removed from the repairs contemplated in a hypothetical tenancy that they could not provide a basis for estimation of rent on the statutory hypothesis. That view mirrored the repair obligations of a tenant at common law who undertook an obligation to repair and maintain. There were indications that even on the basis that there was a straight transfer of obligations from landlord to tenant involved in the change from the application of section 6(2) to that of section 6(8) not everything came into the category of repairs, as Lord Kilbrandon had indicated in MacMurchie and also in Dundee Assessor v. Myles 1963 R.A. 209. Reference was also made to Camden London Borough Council v. Civil Aviation Authority [1980] R.A. 369. The case of Benjamin supra strangely did not consider the question in the context of the repair obligation. The United Glass case did not involve any issue about extraordinary repairs even though there were substantial repairs done only at seven year intervals. The fact that the three ratepayers who took on a repair obligation had accepted that they were bound to do this work was a reflection of the terms which they had agreed and which went beyond the hypothetical tenancy.

In our view, the Committee's approach to this question was correct. The hypothetical tenancy proceeds on the basis of a lease from year to year. The four properties which are the subjects of appeal are all, as has been found, fully occupied and used as shops. It is true that there is a massive liability for repair or renewal of the premises which will require to be faced at some time but, on the other hand, it is not certain when the repair works will be carried out nor, indeed, what form they will ultimately take. Common sense is not always a reliable guide in valuation matters, but it seems to us to be reasonably obvious that it is contrary to common sense and common experience that the existence of a future liability, even though very substantial, should deprive the premises of any current annual value. On the other hand, it seems to us that it is equally contrary to common sense and common experience to suggest that the imminence of a massive repair scheme, with all the disturbance associated with such a scheme, would not have an effect on the rent which the hypothetical tenant was prepared to pay. Accordingly, it seems to us to be clear that, in the particular circumstances, the Committee were entitled to take the view that the subjects could properly be regarded as having a current annual value and that the problem for them was to find the rent at which, given all these circumstances, the premises might reasonably be expected to be let from year to year.

The ratepayers relied on the case of MacMurchie v. Assessor for Dundee in which, as Lord Patrick pointed out, the rent payable by the tenant was assessed on the assumption that the landlord could be compelled to carry out his obligation to put the premises into tenantable repair, and on Benjamin v. Anston Properties Ltd. Both of these cases concern the question of the assumptions which may have to be made about the performance of obligations of repair, and the impact which such assumptions may have on value. Benjamin, in particular, was a case concerning the valuation of an unoccupied subject in a state which might compendiously be described as derelict. MacMurchie was concerned with the valuation of a dwellinghouse which was inhabited but in a poor state of repair. Neither case seems to us to have direct relevance to the valuation of commercial subjects currently let and fully occupied for business use. The proper approach in this case seems to us to be to apply the principle that the subjects are to be valued in their actual state in all the circumstances.

The second question arises on the Assessor's cross-appeal. The ratepayers were prepared to accept the values which had been put on the subjects by the Committee, if their primary argument for a nil valuation was rejected. Counsel for the Assessor accepted that he could not advance the Assessor's original argument which was that there should be no reduction to the figures inserted in the Roll on the basis of a zone A rate arrived at by comparison with neighbouring properties. He submitted, however, that the Committee had not given adequate reasons for the figures at which they arrived. Even if it were accepted that actual rental evidence, which was what the Committee had relied on, might provide reliable foundation for valuation, the Committee had erred in their treatment of the evidence. They had failed adequately to consider the circumstances of the 1997 rent for the Semi-Chem premises which really represented a month to month rent, whereas there had been three different rents for that property arrived at at different times as the problem emerged. The Committee had also failed to consider that the earlier two rents for those premises were entered into with some knowledge of the difficulties. It was accepted that the Committee were entitled to reject the rent of other properties in Union Street and those other rentals which involved full repairing obligations and also that the Committee were entitled to reject comparisons with properties in Hope Street and Bothwell Street. Nevertheless, if the reasons were considered, they were virtually entirely confined to reference to the one Semi-Chem rent. What was to be seen was the Committee going straight to that rent and not looking at it critically.

In our view, these criticisms are not well-founded. The Committee were faced with a very unusual situation in which it was for them to consider how far comparisons could be made with other subjects and how much of the available evidence might provide them with a basis for valuation. They concluded that the only reliable evidence available to them was the one Semi-Chem rent entered into in full knowledge of the extent of the repairs which might be required. They did not accept the ratepayers' valuation based on reference to that rent uncritically but made a number of adjustments to it. It is not necessary for us to consider the details of those adjustments, which were not the subject of particular criticism. The assessment of evidence, including the assessment of the usefulness of an actual rent passing for particular subjects, is a matter for the Committee with which we could only interfere if we thought that they had erred in principle in some way. In our view, no such error has been demonstrated.

For these reasons both the Assessor's appeal and the ratepayers' appeal fall to be refused.