UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2013] UKUT 348 (LC)

UTLC Case Number: RA/1/2012

 

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

RATING – valuation – 2010 list – second generation supermarket comprising part of a larger food store originally purpose built to suit requirements of a different operator – comparables – whether to be valued by reference to all stores occupied by the ratepayer or second generation stores only – effect on value of catchment and competition – appeal allowed – RV reduced from £210,000 to £182,000

 

IN THE MATTER OF AN APPEAL AGAINST A DECISION

OF THE VALUATION TRIBUNAL FOR ENGLAND

 

BETWEEN Lidl (UK) GmbH Appellant

and

JANET RYDER Respondent

(Valuation Officer)

 

 

Re: Supermarket and premises

41-51 New Street

Ashford

Kent

TN24 8TN

 

Before: N J Rose FRICS

 

Sitting at: 43-45 Bedford Square, London WC1B 3AS

on 9 and 10 May 2013

 

Jenny Wigley, instructed by Stuart Ward, solicitor of Barton upon Humber, North Lincolnshire, for the Appellant

Galina Ward, instructed by HMRC solicitor, for the Respondent

 

No cases are referred to in this decision.

© CROWN COPYRIGHT 2013

DECISION

Introduction

1.           This is an appeal by the ratepayer, Lidl (UK) GmbH (Lidl), against a decision of the Valuation Tribunal for England (the VT), confirming the assessment in the compiled 2010 non domestic rating list of a supermarket and premises known as Pt 41-51, New Street, Ashford, Kent TN24 8TN (the appeal hereditament) at RV £210,000.  Lidl contended that the correct assessment was £172,500.  The respondent valuation officer, Ms Janet Ryder BA (Hons), MRICS, considered that the assessment determined by the VT was fair and reasonable.

2.           Ms Jenny Wigley of counsel appeared for Lidl.  She called factual evidence from Mr Graham David Burr, a regional property director whose responsibilities for Lidl’s property portfolio include non-domestic rates, lease renewals and rent reviews throughout England, Scotland and Wales.  She also called two expert witnesses, namely Mr Colin Proctor Clark FRICS, Lidl’s estate manager responsible for some 300 stores from the Midlands down to the south coast of England into Wales (who reports to Mr Burr), and Mr Anthony Rogerson BSc, MRICS, of Rogerson Associates, chartered surveyors.  Counsel for the respondent VO, Ms Galina Ward, called expert evidence from Ms Ryder herself and from Ms Janet Smart MRICS.  Ms Ryder is the lead valuer responsible for the rating valuation of food stores in an area extending from Oxfordshire to Hampshire and eastwards to include Surrey, Sussex and Kent and was responsible for valuing retail properties and negotiating appeals for the 1995, 2000 and 2005 lists for all the major food store operations in that area.  Ms Smart is a member of the specialist rating business stream of the VOA.  She valued the superstores and large food stores occupied by all the major food operators in the London boroughs for the 1995, 2000 and 2010 lists.

3.               The effective date and material day are both 1 April 2010.  The antecedent valuation date (AVD) is 1 April 2008.  I inspected the appeal hereditament internally and externally, accompanied by Mr Rogerson and Ms Ryder, on 14 June 2013.  On the same day I made accompanied inspections of four of Lidl’s premises which had been cited as comparables, at Tonbridge, Horley, Canterbury and Brighton.

Facts

4.           From an agreed statement of facts, the evidence and my inspection I find the following facts.  The appeal hereditament is situated on the northern edge of Ashford town centre.  It forms part of a brick and tile building of 3,135m² that was constructed as a purpose built food store for Safeway in 1985.  Lidl took a sub-lease of the entire building from Safeway in December 1998 and sub-divided it, sub-letting part as a gymnasium to Fitness First and retaining the rest for its own use as a food store.  The food store has an area of 1,166m² at ground floor level, with 112.6m² of offices and w.c.s on the first floor.  Within the ground floor sales area are six pillars, each 82cm by 53cm.  There is a surface car park which serves customers of both the appeal hereditament and the gymnasium. Although the precise number of parking spaces was not agreed, the experts did agree during the site inspection that it was between 175 and 185 and that the precise figure within that range was not value significant.

Evidence for the appellant

Mr Burr

5.           In his witness statement Mr Burr said that Lidl was a discount food retailer, and more specifically a limited assortment discounter (“LAD”).  The industry accepted definition of a LAD was one which:

(a)   operated from simple, standardised store formats,

(b)  had a limited produce range/limited range of brands, typically 1,600 lines (compared to one of the “Big Four” with 30,000 lines), and

(c)   implemented efficient operations and merchandising practices. 

The majority of such stores were built to a uniform specification to maximise operational efficiency and minimise costs.

6.           Mr Burr said that Lidl had entered the UK market in 1994 with an ambitious expansion programme.  Initially it had to achieve a market presence through critical mass.  It set out to achieve this by acquiring a portfolio of properties throughout the UK as quickly as possible.  In doing so it acquired some existing supermarkets which were no longer required by their operators.

7.           By about 2000 Lidl had become more established in the UK.  Its expansion policy then changed to focus on the development of stores to a standard design and specification so as to promote its brand.  The new stores had the following characteristics: customer orientated sites with simple, straightforward access through broad and spacious car parks incorporating HGV access; car parks located to the front of the store and at ground level for ease of access; parking spaces clearly marked to generous dimensions; functional, attractive architecture; spacious sales areas with wide aisles to specific dimensions; sufficient warehouse space to ensure constant product availability built to specific dimensions. 

8.           Thus, since about 2000 Lidl had concentrated on building standard stores, either by demolishing existing buildings or acquiring brown field or green field sites. 

9.           Mr Burr referred to new build stores, designed to Lidl’s specification, as “concept stores.”  Subject to exceptions within the M25 and Greater London, Lidl generally stopped acquiring existing stores from approximately 2000 and concentrated on building concept stores, unless an existing building could be reconfigured to provide a concept sales floor.

10.        Mr Burr referred to former supermarkets or other existing stores acquired by Lidl as “second generation stores”.  Such stores were typically Lidl’s older units, dating back to its entry in the UK market in the 1990s.  The exceptions to this consisted of stores within the M25 and Greater London.  This area presented a specific challenge.  Because of population density and competition for property it was virtually impossible for Lidl to build concept stores within the M25.  Consequently they had to acquire existing properties, including those which simply did not fit their business model, purely to obtain market share.  Mr Burr said that to his knowledge other discount food retailers had adopted the same approach.

11.        In practice this meant that an extraordinary market existed within the M25/Greater London area, where rents were typically higher than and in no way comparable with property in Kent.  At no time would his department have looked to rents of properties within M25/Greater London when acquiring property or negotiating rent reviews outside this area.  It was like comparing chalk and cheese.

12.        Lidl operated a sophisticated business model based upon demography and competition within a geographical location. Turnover was of great commercial sensitivity.  Nevertheless Mr Burr was able to say that the turnover at the appeal hereditament was lower than at Lidl’s two second generation stores which he considered to be most comparable, namely those in Quarry Hill Road, Tonbridge, Kent (the Tonbridge store) and Victoria Road, Horley, Surrey (the Horley store).  Whilst the appeal hereditament was not identical to the Tonbridge store or the Horley store, the way in which the three stores were operated was very much the same.  The difference, in his opinion, was competition.  The food retail competition in Ashford was far greater than in Tonbridge or Horley, which made Ashford a less desirable location.  In Mr Burr’s view, Lidl would not have been in the market to acquire any store in Ashford at the AVD because of the excessive competition which existed at that time, nor would they have considered acquiring the existing store without comprehensively redeveloping it to form a concept store.

13.        In oral evidence in chief Mr Burr was asked to comment on Mr Rogerson’s emphasis, when considering the relative catchment areas of the appeal hereditament and Lidl’s stores at Tonbridge and Horley, on relative population figures in the district area of each town (which showed that the population of Ashford in 2001 was less than that in Horley or Tonbridge) rather than in the more limited urban area.  He replied that, when looking at the catchment area of a particular site, Lidl would look at the population in the district area; to limit consideration to the urban area alone would unreasonably exclude a large number of potential customers living in adjoining rural areas.

14.        Mr Burr added that the car park at the appeal hereditament was below the standard required in a concept store in that it was elongated and irregular in shape; contained fewer dedicated spaces that the ideal; was shared with Fitness First, making it difficult to prevent its use by those who intended to walk to the town centre rather than shop in the food store; in places had a gradient in excess of 2%; and contained a vehicular access and egress point in an inconvenient location directly in front of the store entrance.

15.        Mr Burr said that the presence of pillars in the appeal hereditament was a significant disadvantage compared with concept stores, which had no pillars because the roofs were supported by the external walls alone.  The pillars prevented the operator from maximising the number of products on display; in certain locations pillars had to be located in shopping aisles, resulting in inconvenience for shoppers with trolleys; and they restricted surveillance of customers within the store.  In addition the internal width of the sales area in a second generation store such as Ashford did not conform to the ideal of 20.1m or 23.85m, which would provide 5 or 6 aisles of merchandising respectively.  Any departure from the ideal compromised the aisle width, resulting in less merchandising being displayed or aisle congestion.  An internal sales width of 20.1m would correspond to a floor area of 1,063m².

16.        The appeal hereditament was on two levels.  This resulted in staff time being wasted on journeys between floors, and the inability of the manager to view the shop floor, with an adverse effect on security.

17.        Because of the greater food store competition in Ashford than in Horley or Tonbridge the disabilities of the appeal hereditament had a more significant adverse effect on customers’ shopping habits.  Where competition was limited people were more prepared to put up with physical deficiencies.

18.        Mr Burr was asked to comment on the fact that the two Lidl stores with the highest rents, the one in Crawley (£217.26 per m², shell, in August 2008) and that in Reading (£210.46 per m², fitted out, in September 2007), were not concept stores and were located outside the M25.  He replied that both units were on retail parks, where rents were driven by non food retailers.  That was why 90% of Lidl’s estate was owned freehold, to avoid major financial liabilities arising on rent review.

19.        Mr Burr accepted that in some cases high rents had been paid for non-concept stores in Greater London.  He said that such locations were very profitable because of high population densities, and there was therefore more competition for sites.

20.         In the course of cross-examination Mr Burr said that, based on his inspection of the three towns, Tonbridge and Horley had a “better feel” than Ashford.  He could not dispute Ms Ryder’s evidence, however, that Ashford was one of the fastest growing areas in England.

21.        At the conclusion of Mr Burr’s oral evidence I asked whether be would be prepared to disclose details of the turnover achieved by Lidl at its stores in Ashford, Horley and Tonbridge, on condition that the precise figures would not be mentioned in this decision.  He replied in the affirmative and provided the information requested for the year to 31 December 2008.  I subsequently made an order, pursuant to rule 15 of the Tribunal Procedure (Upper Tribunal) (Lands Chamber) Rules 2010, prohibiting the disclosure or publication of that information.

 

Mr Clark

22.        In his expert report Mr Clark expressed the view that the stores in Tonbridge and Horley provided the best comparable evidence of the value of the appeal hereditament.  Both were second generation stores.  He devalued the revised rent determined for the Tonbridge store as at 19 January 2010 at £136.36 per m².  He considered that there was no reason why the RV of the appeal hereditament should be based on a higher figure, even though the review date post dated the AVD.  In the 2005 list the assessments of both the Tonbridge store and the appeal hereditament had been based on a value of £105 per m².

23.        The rent review for the Horley store had been agreed at £138 per m² as at 1 August 2008, or £134 per m² in respect of the shell only.  It was difficult to say that there were any material differences between the appeal hereditament and the Tonbridge and Horley stores in terms of layout and location.  All were constructed around the same time, adapted for the appellant’s use and, importantly, both the Tonbridge and the Horley store formed the subject of direct rental evidence.

24.        Further helpful evidence was provided by the two rent reviews, either side of the AVD, in respect of the Fitness First gymnasium adjoining the appeal hereditament.  The lease was for a term from 7 July 2000 until 4 November 2020.  It provided for the rent to be reviewed upwards only on 11 November 2005 and at five yearly intervals thereafter.  On each occasion the revised rent payable was to be 36.84% of the “current market rent” of the “whole of the Building” (that is the former Safeway food store of 3,135m²).  The current market rent was defined as:

“the open market yearly rack rent at which the whole of the Building constructed to a shell finish might reasonably be expected to be let at the review date as a supermarket or retail shop for a term equal to the larger of the unexpired term or 15 years.”

The revised rent for the Building was agreed at figures which equated to £10.25 per sq ft (£110.29 per m²) in 2005 and £12.00 per sq ft (£129.12 per m^s) in 2010.

25.        Mr Clark considered that the two rent review agreements provided good evidence of value, since the review dates fell either side of the AVD.  They suggested that the rental value, and therefore the RV of the appeal hereditament might lie between £110.29 and £129.12 per m².

26.            Mr Clark said that the gross internal area of the Tonbridge store was 1,614m².  This included a corridor to the side which afforded access to a pedestrian ramp leading down to the rear car park.  The unit was let on a 25 year lease from 19 January 2000 subject to 5 yearly rent reviews.  The 2005 review was agreed at £178,000 per annum, but the rent actually payable was £171,236.  The difference reflected a discount specified in the lease in recognition of the depreciating effect of the corridor area.  The rent was further reviewed at January 2010.  The rent was determined by an independent expert at £220,000, reduced to £211,640 to reflect the corridor.

27.            Mr Clark thought that, although the 2010 rent review post dated the AVD, the RV of the appeal hereditament – based on values on 1 April 2008 – could not be more than the figure of £136.36 per m² determined for the Tonbridge store nearly two years later.  In that connection it was significant that both stores had been valued for the 2005 list at £105 per m² .

28.            The Horley store had been constructed for Waitrose in the mid 1980s.  Its gross area was 1,152m².  Lidl acquired a 19 year lease from 1999 at a commencing rent of £129,000 per annum.  The rent was subject to review as at 1 August 2003, but it was agreed that there would be no increase.  The rent payable from the next review date, 1 August 2008, was agreed at £160,000 per annum.

29.            Mr Clark considered that the Horley store was no better and no worse than either the appeal hereditament or the Tonbridge unit in terms of layout and location.  In his expert report Mr Clark said that it was necessary to deduct 3.5% from the agreed rent for the Horley store to reflect the value of fixtures and fittings.  Under cross-examination, however, he agreed that such a deduction was not justified when valuing for rating purposes.

30.            Mr Clark pointed out that the assessment of the Horley store in the 2005 list had been agreed at £131,000 (£115 per m²), or £2,000 more than the 2005 rent review figure.  The property had been entered in the 2010 list at the same figure, but the VO had served notice increasing the RV to £162,000 with effect from 3 November 2011 (£2,000 more than the rent agreed in 2010).  The increased assessment was equal to £142.50 per m² and was the subject of an outstanding appeal.

31.            In Mr Clark’s opinion, the combined rental evidence provided by the rent reviews at Fitness First and the Tonbridge and Horley stores indicated that the rental value of the appeal hereditament on 1 April 2008 was £172,611 (£135 per m²).

Mr Rogerson

32.        In his expert report Mr Rogerson pointed out that the basis of the VO’s assessment of the appeal hereditament in the 2010 list (£165 per m²) was 57% higher than the accepted basis of £105 per m² in the 2005 list, which was in turn 16% higher than the £90 per m² which had been agreed in the 2000 list.  The 57% increase between the two most recent lists – based on values in April 2003 and April 2008 respectively – was surprising, given the significant competition which existed in April 2008 from superstores in Ashford operated by Asda, Tesco (two stores) Sainsbury’s and Waitrose.

33.        Mr Rogerson said that the layout and design of the appeal hereditament had been compromised by the envelope of the original supermarket.  Moreover, the car park was long, narrow and shared with Fitness First and the internal finishes were dated.  In contrast, Lidl’s concept stores were designed to optimise the amount of retail space and minimise storage (both areas at ground level) and to include exclusive car parking facilities.

34.            In Mr Rogerson’s opinion it was significant that Aldi, the main competitor to Lidl, was not represented in Ashford.  This suggested that Aldi did not think that a store in Ashford would be viable.

35.        Mr Rogerson considered that the rents agreed on the Fitness First rent reviews as at November 2005 and 2010 (£110.29 and £129.12 per m² respectively) provided the best evidence of the rental value of the appeal hereditament at the AVD.  The Tonbridge and Horley  stores provided further helpful guidance as to that value.  Like Ashford, both were second generation stores in towns with similar population characteristics and trading profiles.  The Tonbridge store was approximately 36 miles and the one in Horley approximately 60 miles to the west of the appeal hereditament.

36.        Mr Rogerson considered that, given the similarities between the three stores, useful guidance as to the value of the appeal hereditament was to be obtained from the basis of assessments in the 2010 list for  the Tonbridge and Horley stores.  The revised rent payable for Tonbridge as at 19 January 2010 was determined at £211,640.  Whilst this evidence post dated the AVD, it suggested that the assessment of the Tonbridge store in the 2010 list (RV £209,000) was in line with the direct rental evidence.  In the case of the Horley store, the rent was agreed at £160,000 as at 1 August 2008, close to the AVD.  The assessment in the compiled 2010 list was £131,000, £115 per m², but the VO altered this to £142.50 per m² shortly before the VT hearing of the appeal in respect of the appeal hereditament.  The increased valuation of the Horley store was the subject of an outstanding appeal, but Mr Rogerson thought it must provide a ceiling level of value for the appeal hereditament.

37.        Mr Rogerson did not consider that the other comparables relied upon by the VO were of assistance.  Those located in Greater London were in an entirely different economic and demographic area.  Of the others some, the concept stores, were quite different in character and others could not be considered to be in the same location as the appeal hereditament.

38.        In Mr Rogerson’s view the relative trading performances of the Ashford, Horley and Tonbridge stores were relevant.  Since the turnover at Ashford was the lowest of the three stores, and since the rent that an operator would be prepared to pay depended on predicted revenue, it was reasonable to assume that the rental value of the Ashford store per square metre would not exceed the rental value of the other two units, namely £136.36 per m² (Tonbridge) and £138.88 per m² (Horley).

39.        Taking these various considerations into account Mr Rogerson’s valuation of the appeal hereditament was £172,500, based on £135 per m².

40.        Mr Rogerson also made the following points.  The car park at the appeal hereditament was not like those at a concept store, being elongated, irregular in shape and shared with Fitness First.  Lidl had been forced to design the appeal hereditament around the existing envelope and internal pillars. He did not agree with Ms Ryder’s opinion that the Tonbridge store was a poor one.  The layout was similar to that at the appeal hereditament.  Ms Ryder’s analysis of the rent paid for the Horley store as at August 2008 at £142.50 was too high, resulting from an incorrect treatment of fit-out costs.  The Horley store was superior to the appeal hereditament.

41.        In cross examination Mr Rogerson accepted that Ashford was not the only town where Aldi were not represented.  He agreed that they were not in Horley and he did not know whether they were in Tonbridge.

Evidence for the respondent

Ms Smart

42.        In her expert witness statement Ms Smart said that in April 2011 she and Ms Ryder had met Mr Clark to discuss and agree the breakdown of rental evidence relating to Lidl stores.  During August and September 2011 she had agreed the 2010 compiled list appeals on more than 20 Lidl stores in the London area.  Ms Smart produced a schedule containing descriptions of 22 Lidl stores, together with a breakdown of their RVs which had (a) not been appealed, or (b) been reduced following negotiations, or (c) been the subject of an appeal against the compiled list figure which was subsequently withdrawn.

43.        Ms Smart said that the value of a large food store depended upon a number of factors  including: location; whether purpose built or a conversion; adequacy of car parking including number of spaces, whether level, underground or multi-storey and whether under the control of the occupier, shared, or controlled by the local authority; accommodation and layout; size and quality of catchment; competition; physical characteristics of store and site; unit size.  The comparables produced by Ms Smart related to a variety of purpose built and converted stores, both rented and freehold.  They showed values ranging from £152.50 to £190 per m².

44.        In cross examination it was suggested that the comparables which she had produced were all located in the M25/Greater London area, which was an entirely different geographical area from Ashford. Ms Smart replied:

“I didn’t say they were directly comparable.  But it is a basket of evidence which shows that there is a band of values for concept and converted stores. You have to look at all the factors which have an effect on value.”

Ms Ryder

45.        In her expert report Mr Ryder said that Ashford was a thriving and expanding town.  It was one of the fastest growing areas in England, with rapid population growth and the infrastructure needed to support it.  The population was about 111,000, the town benefited from a designer outlet centre and attracted over 3 million visitors a year.

46.        In 2004, regional planning guidance for Ashford set out plans to deliver over 13,000 homes by 2016.  Overall, the area had the capacity to deliver 31,000 new homes and 28,000 new jobs by 2031.  New housing estates were planned, in particular in the area of Cheeseman’s Green to the east of the town.

47.        Ashford was served by junctions 9 and 10 of the M20 motorway.  Significant improvements to junction 10 had been completed, giving faster access to other parts of the UK and the continent.  High Speed 1, the superfast rail service, opened in December 2009.  There were 2 trains an hour, all day every day, connecting Ashford to London St Pancras in just 37 minutes.

48.        The town centre combined modern shopping malls and pedestrianised streets.  County Square shopping centre was extended in 2008 and offered over 60 stores including Next, Debenhams and H&M.  Plans for a John Lewis store were approved in October 2011.  There were four superstores: Asda Kimberley Way, Tesco Park Farm, Sainsbury’s Simone Weil Avenue and Tesco Hythe Road, Willesborough, plus a small Waitrose.  Both Tesco Park Farm and Sainsbury’s were substantially extended in November 2011.

49.        Ms Ryder produced two schedules of comparable evidence.  Both contained information relating to food stores occupied by Lidl within the area for which she is responsible.  The first contained details of rents paid for units in Canterbury (equivalent to £188 per m² in terms of RV for 1,200m, a modern purpose built food store with accommodation all at ground level, its own surface car park at a ratio of 1 space per 20m²);  Tonbridge (equivalent to £133 per m² in terms of RV for 1,554m², a visually unattractive 1970s ex Safeway store, with accommodation split over 3 floors, poor access up a ramp and along a passageway from the cramped rear car park – ratio 1:25 and basement loading); Horley (equivalent to £142.43 per m² in terms of RV for 1,144m², an ex Waitrose store and a warehouse at the rear); and Crawley (£217.26 per m² for 948m², shell, a semi-detached single storey portal framed unit, originally occupied by Carpet Warehouse and then Tempo, with a shared surface car park – ratio 1:23, in a prominent location on the A2220).

50.        Ms Ryder considered that the Canterbury rent provided good evidence of the value of a modern purpose built store which was worth more than the appeal hereditament; the  Tonbridge and Horley rents related to stores with disabilities which were inferior to the appeal hereditament; and the Crawley rent showed that in 2008 Lidl were still prepared to take non-purpose built stores with shared car parking on a small retail park where higher rents prevailed.

51.        Ms Ryder’s second schedule contained details of eight 2010 list assessments of Lidl properties which she had discussed and settled with Mr Clark.  Six of these (in Farnham, Basingstoke, Brighton, Woodley, New Milton and Andover) were single storey, purpose-built stores erected at various times between 1995 and 2010 and agreed at between £155 and £180 per m².  One (Reading) was a 1997 purpose built, semi-detached unit on a small retail park.  The other half was occupied by Dreams Beds and McDonalds was represented on the same site.  It was agreed at £200 per m².  The final comparable (Waterlooville) was a 1960s ex-Waitrose store  on two floors with warehousing at first floor level, forming part of a secondary shopping parade, agreed at £120 per m².

52.        Ms Ryder considered that Lidl had oversimplified the issue by concentrating on the difference between second generation and modern purpose built stores.  In her opinion the comparables to which she had referred demonstrated that her valuation of £210,000 based on £165 per m² was fair and reasonable.  In reaching this conclusion she had taken the following factors into consideration: location (the appeal hereditament was both on a main road and on the fringe of the town centre); car parking (availability, type and ratio); nature of accommodation and layout of store; size of store; catchment area and competition; physical characteristics of site; and whether purpose built or conversion.

53.        In her rebuttal report Ms Ryder disagreed with Mr Rogerson’s reliance on the rent per square foot which had been adopted for the purposes of the Fitness First rent review.  She pointed out that the “Building” as defined in the lease was 2.35 times the size of the appeal hereditament.  There was limited demand for a unit of that size in this location.  Safeway vacated the store in 1998 and Lidl chose to occupy only part.  The rental growth between 2005 and 2010 was only 17%.  Even Lidl’s other comparables at Tonbridge and Horley, both stores with disabilities, showed rental growth of 24%.  Smaller properties, such as the appeal hereditament of some 1,300m², would normally command a higher rental value per m².

54.        Ms Ryder emphasised that only 36.84% of the rental value was apportioned to the Fitness First demise even though its floor area was significantly larger than that of the appeal hereditament.  It had therefore been recognised that the latter was more valuable that the Fitness First section.

Discussion

55.        I start by considering the second generation store/concept store question.  Mr Clark and Mr Rogerson restricted their search for comparables to second generation stores. Ms Ryder saw no reason to ignore rents paid for stores which had been purpose built by Lidl for their own occupation.

56.        In principle I prefer Ms Ryder’s approach.  The units opened by Lidl outside the M25 since about 2000 have all been constructed to Lidl’s specification.  It is not the case, however, that all such units conform precisely with Lidl’s ideal requirements.  For example, the store at Arundel Way, Brighton was purpose built in 1995, but extended in 2008.  The effect of the extension was to compromise the store layout.  As a result of site constraints the warehouse is now at the rear of the store, not at the side, leading to certain operational difficulties.  Moreover, as Mr Clark accepted in cross examination, some second generation stores might in fact be very similar to concept stores.

57.        In my judgment there is no justification for excluding rents paid for concept stores from the evidence to be considered when valuing a second generation food store.  Nevertheless, the accuracy of a valuation is likely to be greatest if it is based on evidence derived from properties with similar characteristics to the subject property.  The greater the differences between the property to be valued and the comparables, the less helpful will be the evidence of the comparable rents.  With that consideration in mind I turn to the evidence relied upon in support of Ms Ryder’s valuation.

58.        Although Ms Smart stated in her witness statement that the rental and rating assessment information she had supplied provided direct and substantive evidence of the range of values to be applied to Lidl stores, she did not express a view as to the value of the appeal hereditament itself.  Rather, the purpose of her evidence was to show that, in the Greater London area with which she was concerned, a variety of values were achieved for both purpose built and non-purpose built stores.  Moreover, Ms Ryder accepted in cross examination that food stores in the M25/Greater London area could not be compared with the appeal hereditament. The evidence upon which she relied was restricted to the 12 comparables outside the M25 referred to in her expert report.

59.        Whilst Ms Smart’s evidence is therefore of limited assistance to the determination of the present appeal, it is in my view relevant in one significant respect.  One of the factors which Ms Smart considered would affect the value of a large food store was competition, about which she said this:

“This is the level of representation in the  immediate area of other competing food operators.  The more stores the less an operator would pay.” (Emphasis added).

60.        Ms Smart thought that rental value was also influenced by the catchment of a particular store.  She said:

“This [catchment] is the geographical area around a store.  The quality of the catchment varies according to the area in which it is located, e.g. primarily residential or mixed, and the socio-economic make-up of the catchment population.”

61. These considerations were reflected in the schedules of comparable evidence included in Ms Smart’s witness statement.  In many cases information was provided about the catchment, or the competition, or both.  The following examples illustrate the point:

Stanmore “A reasonably affluent area of north London, providing a good catchment for a store of this nature.”

Neasden “The catchment area of this store is poor.  The majority of the surrounding residential area is local authority housing which generally has a lower spend per household.”

Edmonton “This store has substantial competition.  In less than three quarters of a mile there is a 6,000m² Asda and a 4,000m² Tesco at Edmonton Green Shopping Centre, a 4,500m² Sainsbury’s along the High Road and a 7,000m²  24 - hour Tesco along the North Circular Road.”

Old Kent Road “Significant competition from Asda, Tesco and Aldi stores.  All less than 0.5 miles away.”

Deptford “Located in mixed residential/commercial deprived area of Deptford.  Nearby competition comprises Tesco at Surrey Quays shopping centre.”

62.        The comments on catchment in Ms Ryder’s report were broadly similar to those of Ms Smart quoted in paragraph 60 above.  On the subject of competition, however, her approach was somewhat different.  She said:

“The competition refers to the other food stores located in the area which will be competing for trade.  The appeal property is located on the fringe of the town centre.  Ashford is a thriving and expanding town.  There are four superstores in Ashford, two of which were extended in November 2011.  This, in my opinion, demonstrates demand for space.” (Emphasis added).

63.        It was put to Ms Ryder in cross examination that the high level of competition in Ashford would depress the rental value of the appeal hereditament.  She replied:

“A level of competition can lead to an increase in value if it results in a shortage of sites.  Superstore values have a very robust level of value supported by rental evidence.”

64.        As a generality I accept Ms Smart’s opinion that an increase in competition will have a depreciating effect on rental value.  It follows that, in my judgment, Ms Ryder may have underestimated the adverse effect of the four other superstores (and the smaller Waitrose unit) in Ashford on the rent which the hypothetical tenant would be willing to pay for the appeal hereditament.

65.        Furthermore it is noteworthy that, in contrast to those produced by Ms Smart, Ms Ryder’s schedules of comparables contain virtually no information about catchment or competition.  Of the 12 properties mentioned, the only references to competition are contained in the descriptions of Canterbury and Woodley.  Even in those cases the information provided – “opposite an Asda store” and “There is a Waitrose store within the shopping centre” – do not suggest that a careful investigation of the full extent of competing food stores had been undertaken.  Nor did Ms Ryder’s schedules provide any information as to the size or quality of the catchments.

66.        Mr Burr commented on the importance of demography and competition in his statement in these terms:

“The Appellant operates a sophisticated business model based upon demography and competition within a geographical location.  Essentially and put very simply, the Appellant will predict the revenue it can achieve from a store’s location and use that prediction as the basis for what it is prepared to pay for a store either by way of rent or by acquiring freehold.  This business model has been applied since 1994.”

67.        In the course of cross examination Ms Ryder agreed that the level of turnover was a factor that would affect the hypothetical tenant’s rental bid.  I accept Mr Burr’s evidence as showing the approach likely to be adopted by any potential tenant of the appeal hereditament and not just by Lidl.  It follows in my judgment that details of the catchment and competition are required if a reliable estimate of value is to be produced.  The virtual absence from Ms Ryder’s schedules of any helpful information on competition or catchment means that, with two exceptions, the assistance that can be obtained from them is very limited.  The exceptions are the rents paid for the Tonbridge and Horley stores, where there was some evidence as to catchment and competition.  I deal with that evidence later in this decision.

68.        Mr Clark and Mr Rogerson considered that the appeal hereditament was not worth materially more than either the Tonbridge or the Horley store.  Ms Ryder did not agree.  In her opinion the Horley store was less valuable because it had the following disadvantages: an inferior layout; a warehouse at the rear of the store rather than along the side; and car parking at lower ground floor level, cramped and with poor access to the store.  In a subsequent letter to the Tribunal in response to a question I had raised following my site inspection, Ms Ryder said that the location of the warehouse depended on whether the orientation was approached from the front of the property in Victoria Road, where the windows were located, or from the sales check-outs and aisles.  On the latter approach Ms Ryder accepted that the warehouse would be to the side of the property.

69.        Ms Ryder thought that the Tonbridge store was worth less than the appeal hereditament because its layout was very much worse; the accommodation was split over three floors rather than two; access to the car park was poor; and loading was at basement level.

70.        I find that, notwithstanding the deficiencies of the shared parking facilities at the appeal hereditament, the Tonbridge store is less valuable than the appeal hereditament, essentially for the reasons given by Ms Ryder.  I consider, however, that she has over-estimated the extent of the disadvantages of the Horley store.  In the light of my inspection I do not agree that the quality of the layout at the Horley store (including the warehouse) is inferior overall, bearing in mind in particular that the foodstore, warehouse and offices at Horley are all at ground floor level.  I agree with Ms Ryder, however, that the car parking and access facilities are worse at the Horley store. I bear in mind that the appeal hereditament is the only one of the three food stores to occupy a prominent position on a main road and that it is located on the fringe of the town centre.  On balance I consider that the appeal hereditament is 5 per cent more valuable than the Horley store.

71.        The conclusions in the preceding paragraph relate to the respective physical characteristics of the three stores.  It is at least as important, however, to consider the respective merits in terms of catchment and competition.  The evidence relating to catchment was restricted to details of population, which may be summarised as follows:

2001 Population Town Urban Area District

Ashford 58,936 102,661

Horley 22,582 126,523

Tonbridge 35,833 107,561

 

In terms of population in the urban area only, the figure for Ashford was very much higher than that for Horley or Tonbridge.  On the other hand, the population levels in the three district areas were much more similar to each other, that of Ashford being the lowest (although it had increased to approximately 110,000 by the material day).

72.        Turning to competition, I accept Ms Ryder’s evidence given in cross examination that the amount of floor space occupied by superstores in the three towns at the material day was:

Ashford 32,076m²

Horley 16,860m²

Tonbridge 11,577m²

The extent of the catchment areas, expressed in terms of population per square metre of accommodation, was therefore as follows:

Urban area

Ashford 58,936 ÷ 32,076 = 1.83

Horley 22,582 ÷ 16,860 = 1.34

Tonbridge 35,833 ÷ 11,577 = 3.10

District

Ashford 102,661 ÷ 32,076 = 3.20

Horley 126,523 ÷ 16,860 = 7.50

Tonbridge 107,561 ÷ 11,577 = 9.29

73.        It is apparent that, whether considered by reference to the district area or the more confined urban area, there are many more potential customers in Tonbridge for each square metre of available superstores than in Ashford, notwithstanding Ms Ryder’s evidence – which I accept – that Ashford is a thriving and expanding town.

74.        The comparison with Horley is less clear cut.  Within the urban area there were 36.5% more potential customers per m² in Ashford than in Horley.  The position appears to be reversed if the analysis is conducted within the wider district area.  Ms Ryder challenged the relevance of potential customers outside the urban area, because residents of Tenterden, Hythe and Romney Marsh, with their own supermarkets, would not necessarily travel to Ashford for their food shopping.  There is, in my view, some force in Ms Ryder’s caution about relying on statistics based on the population of the district area of Horley, which show that Horley had 2.34 times as many people per m² of food stores as Ashford.  Nevertheless, I accept Mr Burr’s evidence that the catchment of the appeal hereditament extends beyond the urban area of the town.  I have not overlooked the fact that the available population statistics relate to 2001 and not the AVD, and that there is no evidence as to the socio-economic make-up of the population within the catchment areas of the three stores under consideration.  I find that the evidence demonstrates that the catchment of Tonbridge in relation to available superstore floor space was significantly larger than that of Ashford and that the corresponding ratios in Ashford and Horley were broadly similar to each other.  It follows that, other things being equal, the demand for large food stores was similar in Ashford and Horley, and significantly greater in Tonbridge.

75.        I turn to the consequences of these conclusions on the value of the appeal hereditament.  Ms Ryder considered that the rent agreed for the Tonbridge store in terms of RV, interpolated to the AVD, was £133.44 per m².  I accept that analysis.  I take into account my conclusion that the value of the Tonbridge store, based purely on physical characteristics, was significantly below that of the appeal hereditament.  On the other hand I have concluded that the general demand for food stores was much greater in Tonbridge than Ashford.  In my judgment there two considerations are of roughly equal weight.  I find that the rental evidence for the Tonbridge store  suggests that the appeal hereditament was worth £135 per m².

76.        Ms Ryder considered that the rent agreed for the Horley store with effect from 1 August 2008, £144.75 per m², was equivalent to £142.43 per m² in terms of RV as at the AVD.  Again, I accept that evidence.  Given my conclusions that food store demand was similar in Ashford and Horley and that, physically, the appeal hereditament was 5 per cent more valuable, this evidence suggests that the appeal hereditament was worth in the region of £150 per m².

77.        The remaining evidence relied upon by Lidl was derived from the rent reviews of the Fitness First gymnasium, agreed at £110.29 per m² and £129.12 per m² as at November 2005 and 2010 respectively.  I accept Ms Ryder’s opinion that at the AVD the demand for a food store of 3,018m² would have been weaker than for a much smaller store such as the appeal hereditament.  In my judgment the only assistance to be obtained from this evidence is that it suggests that the value of the appeal hereditament was in excess of £129.12 per m².

78.        I would add that, in her rebuttal report Ms Ryder sought to establish that, since the lease apportioned 36.84% of the value of the whole building to the section demised to Fitness First, the space occupied by Lidl was worth 63.16% of the rent agreed for the entire building.  Ms Wigley submitted that it was artificial to seek to derive the relative values of the appeal hereditament and the Fitness First hereditament by reference to the rent review formula as the actual uses of the two hereditaments were entirely different.  I accept that submission and derive no assistance from this rent review evidence other than that mentioned in the final sentence of the previous paragraph.

79.        In the light of the conclusions I have reached based on the stores in Tonbridge and Horley, the rental value of the appeal hereditament would appear to be as follows:

Value based on the Tonbridge store 1,278.6m² @ £135 per m² = £172,611

Value based on the Horley store 1,278.6m² @ £150 per m² = £191,790

 

I consider that the Tonbridge and Horley stores are of equal evidential weight.  I find that the RV of the appeal hereditament was £182,000, equivalent to £142.34 per m².

81 For completeness I should add that Lidl placed considerable reliance on the respective turnover figures for the Ashford, Tonbridge and Horley stores.  In the year ended 31 December 2008 the turnover expressed in terms of sales per m² was slightly higher at the Tonbridge store and much higher at the one in Horley than at the appeal hereditament.  Ms Ryder considered that  information limited to turnover in only one year was insufficient to produce a reliable indication of relative value.  One would need to have details of turnover over a number of years in order to obtain a true picture.  I accept that the limited turnover information before me has real limitations. Bearing those limitations in mind, the turnover figures for  the Tonbridge store are nevertheless sufficiently close to those for the store in Ashford to suggest that the valuation which I have arrived at based on rental evidence at Tonbridge is about right.  The turnover at the Horley store was so much higher than at the store in Ashford, however, that I have given anxious consideration as to whether my valuation might be too high, bearing in mind that such different results were achieved by the same experienced international operator from two stores in fairly close proximity.  I have finally concluded, however, that the available turnover information is insufficient to justify a departure from my valuation of £182,000.

82.        I would also state that I have attached no weight to Lidl’s arguments based on the relationship between the RVs of the Ashford, Horley and Tonbridge stores in the 2005 list, in the light of the fact that the percentage increases in the value of Lidl’s properties in the 2010 list varied very considerably from store to store.

83.        Finally, Ms Ryder was strongly criticised for not having carried out an adequate internal inspection of the appeal hereditament.  I am satisfied that such criticism was unjustified.

Conclusion

84.        The appeal is allowed.  I direct that the RV of the appeal hereditament in the 2010 non domestic rating list be amended to £182,000 with effect from 1 April 2010.

85.        A letter concerning costs accompanies this decision, which will become final when the issue of costs is determined.

Dated 6 August 2013

 

N J Rose FRICS

Addendum

86.        I have received written submissions on costs. 

87.        Lidl asks to be awarded its costs.  It says that its appeal has succeeded and there is no reason why the ordinary rule, that costs follow the event, should not apply.

88.        The VO asks the Tribunal to consider awarding any costs on a proportionate basis.  She points out that the Lands Chamber’s discretion in awarding costs is usually exercised in accordance with the principles applied in the High Court and county courts (Practice Directions 29 November 2010, para 12.2).  The factors that the Tribunal will consider in exercising its discretion, as stated in para 12.2, mirror those in CPR 44.3  The editorial note to CPR 44.3 in the White Book 2012 begins: “Although this rule preserves the general rule that the unsuccessful party will be ordered to pay the costs of the successful party, Lord Woolf MR (the architect of the reforms that led to the CPR) was anxious to move away from the position that any success is sufficient to obtain an order for costs.  He therefore envisaged far more partial orders for costs which more accurately reflect the level of success achieved by the receiving party…”

89.        The VO also asks the Tribunal to have regard to the following circumstances.  Lidl hardly complied with any of the Tribunal’s directions on time, resulting in many delays and Lidl incurring unnecessary expense.  For example, it took almost a year for Lidl to respond to the draft statement of agreed facts produced by the VO.  Lidl also sought a one week extension to exchange skeleton arguments a couple of days before the due date.  Although the appeal was brought by the appellant, the hearing bundle was prepared by the VO as Lidl’s representative failed on a number of occasions to engage in its production.

90.        In reply Lidl point out that it made a Calderbank offer to the VO by way of a letter dated 17 November 2011.  It offered to agree a valuation based on £145 per m² which was higher than the value determined by the Tribunal.  Lidl do not accept that it failed to comply with the Tribunal’s directions.  Although the VO prepared the hearing bundle, this simply means that Lidl will not be claiming this as a cost to be paid by the VO.

91.        I attach no weight to the Calderbank offer, which was made prior to the VTE hearing and required a response by close of business on the following day.  Nevertheless, the appeal has resulted in a substantial reduction in the assessment from £210,000 to £182,000; a saving of 13.33%.  There is in my judgment no reason (including Lidl’s conduct) to depart from the general rule that the successful party should receive its costs.  The VO must pay Lidl costs of the appeal, such costs to be assessed in default of agreement by the registrar on the standard basis.

Dated: 3 October 2013

N J Rose FRICS