LANDS VALUATION APPEAL COURT, COURT OF SESSION

Lord Justice Clerk Lord Hardie Lord Hodge

[2012] CSIH 50 XA22/12 OPINION OF THE LORD JUSTICE CLERK in the Appeal by Stated Case by THE ASSESSOR FOR LANARKSHIRE VALUATION JOINT BOARD Appellant; against (1) JANE NORMAN LIMITED; (2) RIVER ISLAND CLOTHING COMPANY LIMITED; (3) LA SENZA; (4) SUPERDRUG STORES PLC; (5) HMV UK LIMITED; (6) TUI UK LIMITED; (7) WEST COAST CAPITAL (USC) LIMITED; (8) STARBUCKS COFFEE COMPANY (UK) LIMITED; (9) ZARA UK LIMITED; (10) NEXT; (11) DUNE Respondents: ______

For the assessor: Stuart QC; Simpson & Marwick

For the respondents: Haddow QC; McClure Naismith

7 June 2012

Introduction

[1] The respondents appealed to the Lanarkshire Valuation Appeal Committee (the Committee) against the entries made for certain shop units in the East Kilbride Shopping Centre (EKSC) at the 2010 Revaluation. By a decision dated 4 October 2011 the Committee allowed the appeals. This is an appeal by the assessor against the decision of the Committee.

East Kilbride Shopping Centre

[2] EKSC has floorspace of 1.2 million sq ft. It consists of six linked malls; namely The Plaza, Centre West, Princes Mall, Olympia, Southgate and Princes Square. Centre West was the last to be built. It was completed in 2003.

[3] The Plaza is at the heart of EKSC. The footfall there is significantly higher than at Centre West.

[4] The Committee considered that Centre West is the least attractive of the malls. It meets The Plaza at one end and is anchored by Debenhams at the other. There is a car park at each end. It is on two floors. There are 28 units on the ground floor. Some units in Centre West have remained unlet since it opened.

[5] Since the EKSC opened, it has had an over-supply of fashion retail. The letting strategy at Centre West is directed at fashion retailers. The landlords have found it difficult to attract multiple retailers into Centre West in recent years. At or about the tone date most of the units in Centre West were let on fixed base rents with provision for top-ups based on turnover. Initial rents were heavily discounted to attract tenants. Turnover top-ups had rarely been triggered. Latterly some units had been let on straight turnover rents.

[6] The other malls in EKSC are mainly let on conventional leases with market rent reviews.

The Silverburn Centre

[7] The Silverburn Centre opened in October 2007. It has floorspace of about 1 million sq ft. It is about 15 minutes drive time from EKSC. It too is focused on fashion. Its opening has had an adverse impact on Centre West.

The hearing before the Committee
The case for the ratepayers

[8] The ratepayers' proposed Zone A rate was based on new rentals within Centre West. It left out of account nil-increase rent reviews, temporary licence agreements and rent concessions. From the following rental agreements the ratepayers' valuers derived the following Zone A rates psm.

(a) £294 from 26 February 2007 (Early Learning Centre);

(b) £425 from 14 June 2007 (Starbucks);

(c) £995 from 15 July 2008 (Jane Norman);

(d) £305 from 28 July 2008 (Joy);

(e) £573 from 27 November 2008 (Premaman);

(f) £207 from 25 July 2009 (Internacionale);

(g) £468 from 2 July 2010 (Teddy Mountain);

(h) £633 from 20 October 2010 (Limetree); and,

(i) £563 from November 2007 (Zero and Zero).

Rental transactions (c) to (h) were concluded after the tone date; but the ratepayers contended that they supported a picture of weak demand.

[9] Looking to this evidence, the ratepayers' valuers proposed a Zone A rate of £600 psm throughout the lower storey of Centre West.

The case for the assessor

[10] The assessor at first gave a list of comparisons to the ratepayers' agents based on Centre West. After the ratepayers provided more detailed grounds of appeal, the assessor intimated a new list of comparisons based on lets throughout EKSC. The assessor's analysis indicated that there was a greater variation in Zone A rates in Centre West than in the other malls. Many of the rents in Centre West were based on turnover. The percentage rates applied to turnover rents varied widely. The assessor examined the Zone A rates for other parts of EKSC. There was a prime agreed rate in the Plaza of £1200 psm. In the adjoining malls there were agreed rates in the range £900-£1100 psm. William Dunsmore, one of the assessor's valuers, said that he thought that Centre West, as the newest mall anchored by the largest retail unit in EKSC, with prime parking at either end, should fall somewhere within that range. He therefore fixed the Zone A rate at £925 psm. In cross-examination he said that he had adopted this approach because at the time of his valuation he did not have turnover figures for Centre West and therefore did not have the full picture.

[11] Mrs Christine Maxwell, a divisional valuer, supported Mr Dunsmore's approach. She acknowledged that a number of the lets at Centre West had been concluded at a very low rate. She thought that they could have been influenced by an unusual letting strategy. EKSC had been sold to a company that thereafter got into financial difficulties. The previous landlord might have been influenced by the need to fill vacant units before it sold EKSC. The present landlord could have been influenced by its inability to offer up-front capital incentives because of cash flow problems.

[12] Mrs Maxwell based these views on information gleaned from press reports and the internet. She said that Mr Dunsmore's approach was defensible given the spread in rents in Centre West, the distortions in rents possibly caused by an unusual letting strategy, the agreed valuation of units immediately adjacent to Centre West at £925 psm, the presence of major retailers there and the consistency of the proposed rate with certain expected rents set out in sales particulars for EKSC.

[13] Mrs Maxwell considered that the ratepayers' valuation was unrealistic in light of the prevailing rates in other malls. She gave the assessor's answer to the ratepayers' case in the following vivid words.

"I would ask you to stand back and consider what the appellants are suggesting. That the newest mall in the shopping centre, a mall whose occupiers include the major retailers such as Next, Zara, River Island, Superdrug, Starbucks and is anchored by Debenhams, a flagship department store, should have a Zone A rate lower than a much inferior mall namely Princes Mall which has been agreed at £700 per square metre. The appellants are suggesting the rate to be applied should be half the rate of the adjoining mall, The Plaza, which seamlessly joins on to the Centre West and has been agreed at £1200 per square metre. As a result of all these factors it's obvious to me that the appellants' proposed Zone A rate of £600 is clearly wrong."

Mrs Maxwell and Mr Dunsmore did not propose any refinement to the ratepayers' valuation based on Centre West rentals; nor did they propose any intermediate position between the assessor's valuation and that of the ratepayers.

The Committee's decision

[14] The Committee, by a majority of four to one, allowed the appeals. The majority view was that the assessor had not adequately explained his valuation. The rental evidence did not support his proposed Zone A rate. On the contrary, in the majority view, his valuation was based on unreliable evidence consisting of material drawn from the internet, speculation regarding the sale of the shopping centre based on hearsay and on one set of sale particulars. The assessor's suggestion that the spread of rentals in Centre West was linked to the landlord's need to fill the mall before selling EKSC did not make sense. EKSC had been sold at the same time. There was evidence that supply had exceeded demand. Centre West was the least attractive of the malls. Leading retailers had been able to lease units at low rents. It was not appropriate to disregard rental evidence of new lets at Centre West which was consistent in showing a fall in rental values. The dissenting member of the Committee agreed with the assessor that the wide range of rentals for Centre West made it necessary to have regard to the wider scene, including values from lets in close proximity to it. Most of the ratepayers' evidence related to transactions after the tone date. In his view, the ratepayers' approach was unsound.

The assessor's grounds of appeal

[15] The assessor submits that (1) the Committee erred in holding that he failed adequately to explain his valuation; and (2) the Committee erred in concluding that having rejected his proposed figures, it was bound to accept the ratepayers' valuations.

Conclusions

Appropriate rental evidence

[16] The case for the assessor on this point is that the Committee should have accepted the argument that a Zone A rate derived from evidence of rents throughout EKSC was more reliable than one that was derived from Centre West only, since the rents there lay within a wide range and most of them were turnover-based.

[17] In my opinion, the Committee was entitled to conclude that a Zone A rate derived solely from rental evidence within Centre West was a more reliable guide to value than a rate derived from rental evidence from EKSC overall. The Committee's findings indicated that Centre West stood apart from the other malls within EKSC. It had been the least successful mall from the outset. Some units had remained unlet throughout the eight years since it opened. Whereas the units in the other malls were generally let on conventional leases with rent reviews to market rent, most of the units that were let at Centre West were let on rentals that contained a turnover element, the turnover element rarely having been triggered; and latterly some units had been let on straight turnover rents. It was open to the Committee to conclude (1) that all of these findings were signs of a mall that was not commercially successful; and (2) that since Centre West was unlike the other malls in these respects, rental evidence from the other malls was not a reliable guide.

[18] The Committee was also entitled, in my view, to take into account that in the evidence for the assessor it was at least acknowledged that a number of the lets at Centre West had been concluded at low rates. Taking that into account along with the evidence that Centre West had been in difficulties from the start, it was entitled to conclude that the obvious explanation for the low rental levels there was that the mall was simply unattractive to shoppers and to retailers. It was entitled to regard the explanations suggested on behalf of the assessor as being speculative only. The fact that some major retailers had units in Centre West does not, in my view, support the assessor's case. It may simply indicate that they have been attracted by the low rents that are available. Starbucks, for example, took a ten years lease from 14 June 2007 on a base rent and turnover arrangement with a capital incentive contribution of £110,000 and a six-months rent-free period. The turnover top-up has never been triggered. The base rent was £65,000 pa. On the respondents' figure, which the Committee accepted, that produced an analysed rent of £425 psm.

[19] For these reasons, I consider that the Committee cannot be said to have erred in law in reaching its decision on this point.

Was the Committee entitled to adopt the ratepayers' figures?

[20] In Belhaven Brewery Group plc v Glasgow City Ass (2003 SC 395, at para [16]) this court held that even if the assessor's valuation had been unsound, that would not have justified the Committee in substituting the appellant's valuation, which was based on a method that was contrary to principle. In Ass for Highland and Western Isles v Marks and Spencer plc ([2010] RA 235, at para [20]) we held that the fact that a Committee had rejected the assessor's valuation did not mean that it had to accept the ratepayer's valuation, particularly where there were indications that it was unsound. In that case the ratepayer's figure was based on a passing rent that appeared not to have been struck on terms set out in the valuation hypothesis, and which, in the view of the Committee, had to be regarded with caution and was of "very limited value." We held that the Committee's conclusion that in upholding the ratepayer's appeal it was bound to substitute the ratepayer's proposed value was a serious error.

[21] In my opinion, these decisions have no bearing on the present case. In this case the Committee was presented with two competing approaches to valuation, both of which had a basis in rental evidence. It was clear that the rental evidence from Centre West showed a wide variation in rents and in rent formulae. It was therefore difficult for the ratepayers' valuers to derive a Zone A rate from evidence that was so lacking in uniformity. But, having regard to the evidence on which the ratepayers' valuers relied, it cannot be said, in my view, that their proposed Zone A rate was adopted at random, or was based on an unsound methodology (eg Belhaven Brewery Group plc v Glasgow City Ass, supra), or was otherwise unreasonable. On the contrary, having examined the productions and the transcript, I consider that the reasoning by which the ratepayers' valuers arrived at their proposed rate, and the evidence on which it was based, was clearly and succinctly before the Committee. That rate was one that was derived on a professional judgment from primary rental evidence that pointed to there being a serious commercial weakness in Centre West. In my view, therefore, the Committee was entitled to adopt the ratepayers' proposed Zone A rate as being a valid alternative to that of the assessor, which it had found to be deficient.

[22] In his concluding remarks, counsel for the assessor put it to the Committee that the case involved "a fairly stark choice" between the two rates contended for; but he then suggested that it was "possible that the Committee could come to a view that either (sic) rate was necessarily correct or justified on the evidence and then it would really be a matter for the Committee to take it from there." He concluded by repeating that, as far as the parties were concerned, they were putting forward their particular rates and seeking to have them upheld. That was clearly the correct stance to take, since counsel for the assessor had led no evidence in support of any other possible Zone A rate. There is therefore no substance in the submission now made by counsel for the assessor that the Committee erred in failing to consider the possibility of its fixing a rate somewhere between the parties' respective figures.

[23] Counsel for the assessor submitted to us that in any event the Committee had erred in law in taking account of transactions relied on by the ratepayers that were concluded after the tone date. In my opinion, these transactions were not necessarily to be ignored on that account (Magell Ltd v Ass for Dumfries and Galloway 2006 SC 627). The Committee was entitled to regard them as at least confirming the overall conclusion that Centre West was significantly less successful than any of the other malls.

[24] Counsel for the assessor also made the point that since one end of Centre West was contiguous with The Plaza, which is agreed to be the prime mall in EKSC, it was unreasonable that units at that end of Centre West should have a Zone A rate that was so much lower than that applied to The Plaza. I do not accept this argument. Since Centre West was plainly at a serious disadvantage to the other malls in the respects to which I have referred, it was reasonable in my view for the ratepayers' valuers to take the pragmatic approach adopted by the assessor himself elsewhere in EKSC in applying a uniform Zone A rate for the entire mall.

Disposal

[25] I propose to your Lordships that we should refuse the appeal. It will be for the parties to reach agreement on the net annual value/rateable value of each of the units in this case by applying the Zone A rate of £600.

Postscript

[26] In these cases a hearing before the Committee was fixed for 15 June 2011. On that occasion the Committee accepted that each of eight of the respondents, being the respondents other than HMV, Next and Starbucks, had produced a written statement that failed adequately to specify (a) its grounds of appeal and (b) the valuation that it considered should be entered in the Roll and the grounds on which that valuation was arrived at (cf Valuation Appeal Committee (Procedure in Appeals under the Valuation Acts) (Scotland) Regulations 1995 (SI No 572) (the 1995 Regulations), reg 10(1)). In addition, in the case of one of the eight, West Coast Capital (USC) Limited, the written statement, such as it was, had been lodged late.

[27] The Committee therefore accepted that in each of these respects the eight respondents had failed to comply with the 1995 Regulations; but instead of granting the assessor's motion to dismiss the appeals under regulation 10(3), it ordained the respondents, other than HMV, Next and Starbucks, to produce further and better grounds of appeal within 21 days and it adjourned the hearing on all eleven of the appeals until 22-23 August. In effect, therefore, the Committee extended the time limit for compliance with the Regulations in all eight cases where there had been default. This had the result that the cases of HMV, Next and Starbucks, who had complied with the 1995 Regulations, were also adjourned so that all of the appeals could be heard together.

[28] Regulation 19 entitles a Committee, with one exceptional case, to extend the time limit for compliance with the Regulations if it is satisfied that "no substantial prejudice would thereby be caused to either party to the appeal." In my view, there could be substantial prejudice where the extension of a time limit would inflict additional expense on the other party. Even where there is no such prejudice, the power of the Committee under regulation 19 remains discretionary. A failure to comply with the Regulations, in my opinion, should not readily be excused. It may put the other party at an unfair disadvantage and, where it necessitates an adjournment, may cause expense and inconvenience to the other party, to other appellants whose cases are to be heard along with it, and to the Committee itself.

[29] A Committee might justifiably show indulgence to a party litigant who had an imperfect understanding of the Regulations; but in the absence of a cogent justification I can see no reason why it should excuse professional practitioners for a failure to observe them. I remind Committees of their power under regulation 10(3) and of the comments of this court in Tesco Stores v Fife Ass (2011 SC 316, at paras [17]-[19], and [24]-[26]).

LANDS VALUATION APPEAL COURT, COURT OF SESSION

Lord Justice Clerk Lord Hardie Lord Hodge

[2012] CSIH 50 XA22/12 OPINION OF LORD HARDIE in the Appeal by Stated Case by THE ASSESSOR FOR LANARKSHIRE VALUATION JOINT BOARD Appellant; against (1) JANE NORMAN LIMITED; (2) RIVER ISLAND CLOTHING COMPANY; (3) LA SENZA; (4) SUPERDRUG STORES PLC; (5) HMV UK LIMITED; (6) TUI UK LIMITED; (7) WEST COAST CAPITAL (USC) LIMITED; (8) STARBUCKS COFFEE COMPANY (UK) LIMITED; (9) ZARA UK LIMITED; (10) NEXT; (11) DUNE Respondents: ______

For the assessor: Stuart QC; Simpson & Marwick

For the respondents: Haddow QC; McClure Naismith

7 June 2012

[30] For the reasons given by your Lordship in the chair I agree that we should refuse the appeal.

LANDS VALUATION APPEAL COURT, COURT OF SESSION

Lord Justice Clerk Lord Hardie Lord Hodge

[2012] CSIH 50 XA22/12 OPINION OF LORD HODGE in the Appeal by Stated Case by THE ASSESSOR FOR LANARKSHIRE VALUATION JOINT BOARD Appellant; against (1) JANE NORMAN LIMITED; (2) RIVER ISLAND CLOTHING COMPANY; (3) LA SENZA; (4) SUPERDRUG STORES PLC; (5) HMV UK LIMITED; (6) TUI UK LIMITED; (7) WEST COAST CAPITAL (USC) LIMITED; (8) STARBUCKS COFFEE COMPANY (UK) LIMITED; (9) ZARA UK LIMITED; (10) NEXT; (11) DUNE Respondents: ______

For the assessor: Stuart QC; Simpson & Marwick

For the respondents: Haddow QC; McClure Naismith

7 June 2012

[31] I agree with your Lordship in the Chair that the appeal should, for the reasons given, be refused.