LANDS VALUATION APPEAL COURT, COURT OF SESSION
Lord Justice Clerk Lord Clarke Lord Doherty	[2011] CSIH 78 XA77/11 OPINION OF THE LORD JUSTICE CLERK In the Appeal by Stated Case by W A P FYFE Appellant; against ASSESSOR FOR FIFE Respondent: _______

Act: Haddow QC; Gillespie MacAndrew

Alt: Stuart QC; Simpson & Marwick

22 November 2011

Introduction

[1] This is an appeal against a decision of Fife Valuation Appeal Committee (the Committee) relating to the entry in the 2005 Valuation Roll for subjects known as Fife Off-Road Centre, Kinkell Farm, St Andrews.

[2] At the 2005 Revaluation the assessor entered the subjects in the Roll as "Land and Buildings" at an NAV/RV of £2,400. With effect from 1 June 2006 the assessor amended the entry by substituting a NAV/RV of £4,300. This reflected the occurrence of a material change of circumstances.

[3] With effect from 1 April 2009 the assessor amended the entry by substituting an NAV/RV of £25,400 to reflect a further material change of circumstances. The assessor calculated this valuation on the contractor's principle.

[4] The appellant appealed against the amendment. He did not dispute that there had been a material change of circumstances; but he contended that the subjects should be valued on the comparative principle at an NAV/RV of £7,600.

[5] The Committee decided that a valuation on the contractor's principle was appropriate. It upheld the assessor's valuation and refused the appeal. That is the decision appealed against.

The history

[6] When the land and buildings at Kinkell Farm were in agricultural use, they were exempt from being entered in the roll. In 2001 the appellant carried out a farm diversification project in which he developed part of the farm for off-road driving and quad biking. The entry at the 2005 Revaluation related to the off-road track and to a former cottage that had been converted into a reception building.

[7] The amendment to the Roll in 2006, which added £1,900 to the net annual value, reflected the addition of a toilet block. It resulted from an inspection carried out on behalf of the assessor. At that time the assessor understood that the toilet block was erected to support the off-road track and the corporate events that were being held there. The assessor was not aware that since April 2003 the byre had been used as a function suite known as "Kinkell Byre" and that the toilet block principally served the function suite. When the byre was seen from the outside there was nothing to indicate that it was not in agricultural use. Speaking of this inspection, the assessor's valuer, Mrs Heather Honeyman, told the Committee -

"I would like to make it quite clear that when we went there in 2006, we did not go round what is the function suite, and we didn't go into the storage area. What was visited at that time and what was shown at that time was the toilet block."

It is regrettable that on that occasion the use of the byre as a function suite was not brought to Mrs Honeyman's attention.

[8] In 2008 the appellant applied for and obtained planning permission to use the byre for functions. That brought the true position to the assessor's notice. The assessor thereupon amended the entry in the Roll to reflect the addition to the subjects of byre areas 1 to 6 and two storage areas, one of them on a mezzanine floor. These constituted the function suite. The Byre has a floor area of over 12,000 sq ft.

Methods of valuation

Valuation principles

[9] In the assessment of the net annual value of lands and heritages under section 6(8) of the Valuation and Rating (Scotland) Act 1956 the primary evidence of value is the rent passing. Where the subjects are not let, certain indirect methods have to be used to arrive at the net annual value. The principal method is the comparative method. By this method the subjects can be compared with other let properties that are similar in character, size and location. Where there is no suitable evidence of rents, the assessor can have recourse to the values of comparable subjects that are entered in the roll (Armour, Valuation for Rating, 5th ed, paras 19-28ff). It is preferable to compare subjects in the same valuation area (ibid, para 19-34). Certain subjects are valued on the revenue principle; but that has no relevance to this case and I need say no more about it.

[10] Where no proper comparisons are available, and the revenue principle is inapplicable, the valuer must resort to the contractor's principle (Post Office v Ass for Fife Region 1981 SC 214, Lord Avonside at p 223). This rather contrived method proceeds on the theory that a tenant would not pay more in rent than the annual cost of finance to build similar premises. Using this method the valuer first assesses the capital value of the subjects. Then he applies to that figure a decapitalisation rate to arrive at the annual cost of the capital required. This method has been repeatedly described as a method of last resort (eg Shotts Iron Co v Ass for Edinburgh 1946 SC 283, Lord Keith at p 295; Post Office v Ass for Fife Region, supra; Western Heritable Investment Co Ltd v Husband 1983 SC (HL) 60, Lord Keith of Kinkel at p 74).

Valuation schemes

[11] Licensed premises are valued by a scheme of the Scottish Assessors' Association (SAA). The Scheme is revised at each revaluation (Belhaven Brewery Group v Glasgow City Ass 2003 SC 395, para [16]). It is based on turnover adjusted for certain specific features (cf Ass for Lothian v Belhaven Brewery Co Ltd 2009 SC 120, Lord Justice Clerk Gill at para [4]).

[12] Halls too are assessed in accordance with an SAA scheme (cf SAA Practice Note 17, Revaluation 2005, Valuation of Halls, etc). The scheme applies to ten categories of premises, such as Hall (meeting, concert, exhibition); Community hall; Masonic hall and Community centre (for meetings, recreation, exhibitions). The Note includes recommendations for the valuation of the subjects listed "together with any other subjects of comparable character and use (where there is no bar or table licence or where commercial usage is not the reason for provision)." This scheme applies the contractor's principle to assess net annual value. Therefore the calculation of a percentage of income is irrelevant to it. The Planning Note also advises on the making of allowances for age, obsolescence and so on.

The facts
The subjects

[13] Kinkell Byre is a substantial building of traditional construction. It extends to over 12,000 square feet. The appellant hires it out for ad hoc events such as wedding receptions, discos, ceilidhs and the like. For this purpose he has installed a semi-permanent wooden floor in the dancing area. The hirer has freedom to organize all aspects of the event. It is left to the hirer to arrange his own catering. Kinkell Byre is not licensed for the sale of liquor. The hirer can either employ caterers who can obtain an occasional licence; or engage the appellant to obtain a licence for the event and operate the bar. The Byre is a licensed venue for civil weddings.

[14] After the Byre was opened in 2003, the lack of adequate toilet facilities was a deterrent to some customers. Therefore in 2006 the appellant built toilets appropriate for the size of the venue.

[15] The appellant's income from the Byre consists only of the receipts from hires. The turnovers of the Byre in the years 2003 to 2008 were £23,800; £22,700; £25,232; £27,912, £57,876 and £87,049 respectively.

The comparisons

[16] The appellant's valuer, Mr Calum Innes, relied on two comparisons, Fingask Pavilion, Rait, Perth and Glentanar Ballroom, Aboyne. Fingask Pavilion is a permanent marquee, of about half the size of Kinkell Byre, installed at Fingask Castle. The Committee found that the Assessor for Tayside had valued it on the contractor's principle. However, Mr Innes had obtained figures for turnover in the years 2004 to 2006, namely £25,546, £44,232 and £76,065. From these he concluded that the NAV of £6750 that was entered in the Roll represented 14% of average annual turnover.

[17] Glentanar Ballroom is the ballroom of a now demolished mansion house. It is operated in a similar manner to Kinkell Byre. The event organiser arranges catering and bar facilities. These are licensed premises and were valued as such. The income streams of this ballroom include commissions received on various aspects of the operation. The NAV of £7800 that was entered in the Roll was assessed on the comparative principle and was based on 12.5% of adjusted turnover.

The proceedings before the Committee

[18] It was agreed that the unum quid to be valued consisted of the off-road/quad-biking track, the cottage, the toilet block and Kinkell Byre. It was not suggested that SAA Practice Note 17 (supra) could not apply to subjects such as the byre. The case for the appellant was that a valuation by comparison with Fingask and Glentanar Ballroom was more appropriate.

The parties' valuations

The appellant

[19] The appellant's valuer assessed the NAV/RV as follows. He took the existing value attributed to the off-road/quad-biking facility and the cottage, namely £2,400. He valued the storage areas at £2,100. He then valued Kinkell Byre, including the toilets, on the basis of an average annual turnover in the years 2003 to 2006 of £24,911. To this he applied a factor of 12.5%, the percentage used at Glentanar Ballroom. That produced a figure of £3,114. The total of these figures gave an NAV/RV, rounded off, of £7,600.

[20] The appellant's valuer submitted that the contractor's principle was not appropriate. The subjects were more akin to licensed premises than to a hall. The assessor's figure did not reflect the rent that a hypothetical tenant would pay on the statutory terms. It represented 85% of average turnover for the years 2003 to 2006. On a "stand back and look" approach, that was an unreasonable result. No tenant would pay such a rent.

The assessor

[21] Mrs Honeyman valued the off-road/quad-biking track and the former cottage at £2,415 and the toilet block at £1,904. She valued Kinkell Byre as a hall in accordance with the SAA Practice Note No 17 (supra). She classified it as a category 2 hall, that is to say as a "basic straightforward hall," with a deduction of 50% for age and obsolescence; and she made end allowances of 10% on the valuations of byre areas 1 to 5 and of 5% on the valuation of the mezzanine storage. She therefore valued the main parts of the Byre at £15,597. She valued the storage areas at £5,500. That produced a total NAV/RV, rounded down, of £25,400.

[22] Mrs Honeyman submitted that the respondent's comparisons were inappropriate since both were situated at a considerable distance from the Fife valuation area. No rental evidence had been produced. Moreover, the comparison with Glentanar Ballroom was inappropriate as those subjects were licensed premises. She also contended that the calculations of the appellant's valuer were flawed because he had left out of account the much greater turnover of the subjects in 2007 and 2008. These figures were relevant to the valuation since its effective date was 1 April 2009. This was a significant omission because in those years the venue had the benefit of the new toilet block. Furthermore the appellant's valuer had given no basis for the adoption of a 12.5% factor for average income in arriving at the valuation of the Byre and toilets. The toilets alone were valued at £1,900 as at 1 June 2006. The appellant's valuer had attributed a net annual value to the Byre, including the toilets, of only £3,114, thereby attributing an annual value of only about £1,200 to the Byre itself.

The decision of the Committee

[23] The Committee rejected the comparative method on the view that there were no valid comparisons. It found that Fingask was a completely different structure from Kinkell Byre. It was a marquee and it was only half the size of Kinkell Byre. No rental evidence had been produced for Fingask or Glentanar Ballroom. Both were a considerable distance from Fife. The Committee also observed that the appellant's valuation left out of account turnover for 2007 and 2008. In the absence of evidence of rents for comparable subjects struck in the open market, the Committee was satisfied that the assessor was right in applying the contractor's principle.

Grounds of appeal

[24] The appellant submits that the Committee erred in law in four respects, namely (1) it misdirected itself in relation to the existence and quality of the appellant's comparisons; (2) it failed to test the result of the contractor's principle valuation by a "stand back and look" check; (3) it took into account the absence of income figures after 2006; and (4) it wrongly took into account more than the material change of circumstances that led to the amended entry in the Roll.

Conclusions

Classification of the subjects

[25] The key to the decision in this case is the classification of the subjects. If they are licensed premises, a valuation under the SAA scheme is appropriate. If they are not to be so classified, the only realistic alternative is that they should be valued as a hall. It is well established that the classification of subjects is a question of fact for the Committee to resolve (Fishers Bistro v Lothian Ass 2007 SC 671, Lord Justice Clerk Gill at para [22]). The Committee decided that the subjects were to be valued as a hall. In my opinion, that conclusion was reasonably open to it on the evidence. Therefore we cannot interfere with it.

[26] In any event, I agree with the Committee's conclusion. The case for the appellant is not that the subjects are licensed premises, but that they are "akin to" such premises. That, in my view, is not a convincing argument. The trading of a function venue that is based upon its being licensed, with the proprietor as licence holder, is not comparable with a venue at which the hirer is given only the use of the bare hall; which is licensed only on an occasional ad hoc basis; and, when licensed, is not necessarily licensed for the profit of the proprietor.

The Committee's treatment of the comparisons

[27] In the absence of any comparisons within the Fife valuation area, and in view of the unusual nature of the subjects, it was legitimate, in my opinion, for the Committee to consider whether the valuations of subjects situated in other valuation areas could assist in the determination of the appeal (cf Ass for Fife v Dunfermline Cricket Club [1962] RA 461, Lord Patrick at p 464; Armour, op cit, para 19-34). In my opinion, it was then for the Committee to decide to what extent, if any, the appellants' proposed comparisons were valid. It concluded in effect that the Glentanar Ballroom, being licensed premises, constituted subjects of a different kind and therefore gave no guidance for the resolution of the appeal. That conclusion was in keeping with the converse principle that it is in general illegitimate in the valuation of licensed premises to compare them with unlicensed premises (Snodgrass and Laird v Ass for Glasgow 1937 SC 534). The Committee concluded that in size and in construction Fingask was not truly comparable with Kinkell Byre.

[28] In my view, these conclusions too were reasonably open to the Committee on the evidence; and again I agree with it.

The appellant's valuation

[29] I would add that even if a comparative principle valuation had been appropriate, I would have rejected Mr Innes' application of it. In my view, Mr Innes' reliance on Fingask as a comparator was misconceived. In reality, he did not use the valuation of Fingask as a comparator. Fingask was valued on the contractor's principle. Instead, he revalued it himself by using turnover figures. He then applied to turnover a percentage rate of 12.5% taken from the comparative principle valuation of Glentanar Ballroom. Then he cited his own revaluation of Fingask as support for a comparative principle valuation of the subjects of appeal. That was plainly an unsound methodology.

[30] Mr Innes' valuation was also unsound in relation to the average turnover of Kinkell Byre because he left out of account the figures for 2007 and 2008. In my view, that was a major error. Counsel for the appellant submitted that Mr Innes was right to do this because the turnovers in those years related to a period after the tone date. I do not agree. Counsel for the appellant pointed out that in Suburban Taverns (Glasgow) Ltd v Ass for Glasgow (supra) I observed that in a turnover-based valuation the relevant turnover was the turnover at the tone date. That case, however, concerned a revaluation appeal. This case relates to a material change of circumstances involving a change in the subjects. The material change consisted in the addition to the subjects of the Kinkell Byre, which now became the principal element in the unum quid.

[31] If Mr Innes had been right in his contention that the subjects should be valued on the comparative principle, the correct methodology, in my opinion, would have been to value the subjects as they stood at 1 April 2009, that being the effective date of the amended entry; and then to adjust the resulting valuation to conform to the tone of the Roll; that is to say, to adjust it to the value that would have applied if the subjects, as enlarged, had been valued at the tone date. On that methodology, the turnover figures for years 2007 and 2008 would have been taken into account. The turnover figures for those years were respectively more than twice and more than three times the previous highest figure. The substantial increases in turnover in those years, largely attributable to weddings and corporate events, followed the installation of the toilet block. In my view, Mr Innes' selective use of the turnover figures deprived his calculation of any credibility.

[32] On the view that I have taken of Mr Innes' methodology, I consider that his assertion that the NAV entered in the Roll represented 85% of turnover for the years 2003 to 2006 is meaningless. Therefore, in my view, his "stand back and look" point carries no weight. On the other hand, if one takes the same approach to his own valuation, it is apparent that the addition to the subjects of a 12,000 sq ft function suite generating the turnovers to which I have referred, adds only about £1200 of NAV to the subjects. That suggests to me that the valuation is unreliable.

Disposal

[33] I propose to your Lordships that we should refuse the appeal.

LANDS VALUATION APPEAL COURT, COURT OF SESSION
Lord Justice Clerk Lord Clarke Lord Doherty	[2011] CSIH 78 XA77/11 OPINION OF LORD CLARKE In the Appeal by Stated Case by W A P FYFE Appellant; against ASSESSOR FOR FIFE Respondent: _______

Act: Haddow QC; Gillespie MacAndrew

Alt: Stuart QC; Simpson & Marwick

22 November 2011

[34] I agree with your Lordship in the chair and there is nothing I can usefully add.

LANDS VALUATION APPEAL COURT, COURT OF SESSION
Lord Justice Clerk Lord Clarke Lord Doherty	[2011] CSIH 78 XA77/11 OPINION OF LORD DOHERTY In the Appeal by Stated Case by W A P FYFE Appellant; against ASSESSOR FOR FIFE Respondent: _______

Act: Haddow QC; Gillespie MacAndrew

Alt: Stuart QC; Simpson & Marwick

22 November 2011

[35] I agree with your Lordship in the chair and I have nothing further to add.