Scottish Court of Session Decisions

For the appellant: Clarke; Simpson & Marwick

For the respondent: No appearance

11 November 2008

Introduction

[1] This is an appeal by the assessor against a decision of the Valuation Appeal Committee at Edinburgh dated 13 March 2008 relating to the respondent's public house, the World's End, at 2-8 High Street, Edinburgh. The subjects were entered in the Valuation Roll at the 2005 Revaluation at a net annual value and rateable value of £51,000. The respondent appealed against the entry. The Committee allowed the appeal to the extent of substituting an NAV/RV of £47,000.

[2] The World's End is a small public house situated in a prime tourist location on the Royal Mile. The Committee found that it has a welcoming and attractive appearance. The present manageress has created an attractive Scottish menu aimed at the tourist trade, with a high standard of service. She has cultivated the staff at local tourist sites and achieved a significant number of recommendations for her bar.

[3] The assessor valued the subjects in accordance with the Scottish Assessors Association (SAA) scheme for the valuation of licensed premises in the 2005 Revaluation (cf Suburban Taverns (Glasgow) Ltd v Ass for Glasgow, 2008 SC 299). That brought out the figure entered in the Roll.

[4] The respondent's valuer, Mr Peter Henry FRICS, accepted the assessor's adjusted turnover figure and the percentage factor that she applied; but he relied on the SAA Practice Note 17 which recommended inter alia that if there was clear evidence from similar surrounding properties that the actual turnover differed considerably from the hypothetically achievable turnover by comparison with similar surrounding premises, an adjustment to the turnover might be appropriate. Mr Henry suggested that the remarkable turnover of the World's End indicated that there was over-performance resulting from the popularity of the manageress and her ability to cultivate business. He made an end allowance of 20% to reflect over-performance. That brought out an NAV/RV of £40,700.

[5] The Committee considered that the closest comparable bars were the Albanach, which was also the subject of an appeal, and the Mitre. It made no finding in fact about the turnover of the Albanach, It found that the turnover of the Mitre, which was much larger, was £3971 psm. The turnovers of the Tass, the Whiski and the Royal Mile Bar, all located nearby, were £2,817, £4,342 and £3,771 psm respectively. The World's End had a turnover of £8,458.21 psm. The only bar that out-performed it was Deacon Brodie's, which was some distance away. The Committee rejected it as a comparison. It also rejected the respondent's comparisons.

[6] The Committee found that the World's End was well maintained and effectively managed, and had achieved a significant food turnover despite its relatively small size. It held that the turnover was beyond what a hypothetical tenant would expect to achieve. It considered that it was likely that the hypothetical tenant would allow for the fact that the turnover of the World's End was well established. It accepted that there was "some truth" in the view that a hypothetical tenant of the World's End would not easily persuade the landlord to discount the rent in light of its performance; but it considered that a hypothetical tenant would be concerned about the competition. It concluded that the performance of the World's End was "at least partly attributable" to the manageress, whom they described as "particularly good." A hypothetical tenant was "likely to doubt whether that success could be matched."

[7] The assessor's valuation produced a rate of £773 psm. The Committee acknowledged that, in the main, rates per square metre were variable and that there was no direct correlation between floor area and turnover. It thought that a hypothetical tenant would look for and probably obtain an agreement on a rate in the region of £700 psm. There was a minor dispute over the floor area. The Committee took a figure of 67 sm. That brought out a figure of £46,900, which it rounded up to £47,000 NAV/RV. That represented an end allowance of 71/2%.

[8] For over a century, turnover has been found to be the most reliable basis on which to assess the annual value of licensed premises (cf Haggart v Ass for Leith, 1912 SC 784). In modern times, turnover, adjusted in certain respects, has been the basis of successive revaluation schemes produced by the SAA. Since licensed premises differ in their locational advantages, attractiveness and character and in the trading policies of the licensees, it is generally recognised by valuers, and was recognised by the Committee in this case, that turnover per square metre is not a reliable guide to annual value. The essence of the SAA scheme is that it is based on actual turnover in the survey year. Like all such schemes it is merely a means to an end, namely that of ascertaining "the rent at which the lands and heritages might reasonably be expected to be let from year to year" on the statutory terms, which I need not repeat (Valuation and Rating (Scotland) Act 1956 (the 1956 Act), s 6(8); UKAEA v Ass for Highland, 2006 SC 252).

[9] In exceptional cases a valuation produced by a turnover-based scheme may not be a reliable indicator of annual value where the actual turnover is influenced by some factor that would not apply in the hypothetical transaction. That is the essence of the concept of over- or under-performance that we discussed in Belhaven Brewery Group v Glasgow Ass (2003 SC 395), JD Wetherspoon plc v Lothian Regional Ass (2003 SC 400) and Sinclair v Lothian Ass ([2003] RA 202).

[10] If a turnover is to be held to reflect over-performance, it has to be abnormally high. For that conclusion to be drawn there has to be some special feature of it that would not influence the parties to the hypothetical letting (Haggart v Ass for Leith, supra); for example, if part of the turnover is attracted for reasons personal to the licensee (cf Sinclair v Ass for Lothian, supra), or if an abnormally high turnover is generated by abnormally low prices and margins (eg JD Wetherspoon plc v Lothian Regional Ass, supra). Conversely, there may be under-performance where, for example, the occupier operates on restricted hours of opening or runs the premises on an uncommercial basis (cf Belhaven Brewery Group v Glasgow Ass, supra).

[11] Such cases are uncommon. The essential point in each is that the actual turnover is not a valid indicator of the rent that would be struck on the statutory hypothesis.

[12] In the course of normal competition some public houses will be significantly more attractive and better managed than any of their local competitors. The success that follows in such cases cannot be characterised as over-performance. If it were, every appeal on the point would become an assessment of the quality of the appeal subjects and the standard of their management. From that it would be a short step to the principle that the rateable value of any outstandingly successful bar should be reduced on account of its success.

[13] I make these general remarks to emphasise that the mere fact that the turnover performance of a public house is better or worse than that of any of its competitors, no matter how much better or worse it may be, does not of itself demonstrate over- or under-performance.

[14] As in the case of Ass for Lothian v BBW Leisure Ltd ([2008] CSIH 61), which we heard along with this, the Committee carefully considered the evidence; but in my opinion its conclusion was unjustified. There is nothing in its findings to suggest that the turnover of the World's End is "abnormal" in the sense in which I have used that expression. Turnover per square metre, on which the Committee seems to have relied, is not of itself a decisive criterion on the point. The Committee's own findings explain the success of the World's End. It is in a prime location. It is more attractive than its competitors. It is run skillfully and with a good understanding of the market.

[15] The Committee conceded that there was some truth in the idea that the hypothetical tenant of the World's End would not easily persuade the landlord to discount the rent in the light of its performance. That points against any reduction in the valuation. But the Committee thought that the hypothetical tenant would be "likely to doubt" whether he could match the success of the World's End and concluded that the turnover was "at least partly attributable" to the skills of the manageress. In doing so, in my opinion, it overlooked an essential feature of the valuation hypothesis, namely that the hypothetical letting is concluded in an open market. The open market includes prospective tenants who would know of the turnover performance of the World's End and who could run it as successfully as the respondent. The Committee in effect excluded such prospective tenants from the hypothetical market. In doing so, it failed to apply section 6(8) of the 1956 Act correctly.

[16] I propose to your Lordships that we should allow the appeal.

[17] For the reasons given by your Lordship in the chair I agree that this appeal should be allowed.

[18] For the reasons set out fully by your Lordship in the chair, to which there is nothing I can usefully add, I agree that this appeal should be allowed.