|
UPPER TRIBUNAL
(LANDS CHAMBER)
|
|
|
UT Neutral citation number: [2013] UKUT 237 (LC)
UTLC
Case Number: RA/56/2012
TRIBUNALS,
COURTS AND ENFORCEMENT ACT 2007
RATING
– hereditament – valuation of hotel and conference centre – 2005 Rating List –
assessment based upon scheme agreed with British Hospitality Association -
whether full Receipts & Expenditure method of assessment appropriate in
light of “exceptional circumstances” – held circumstances not exceptional –
appeal dismissed
IN
THE MATTER OF AN APPEAL AGAINST A DECISION
OF
THE VALUATION TRIBUNAL FOR ENGLAND
BETWEEN HOLDEN VALE (CONFERENCE
CENTRE) LTD Appellant
and
ANDREW WHITEHEAD
BA (Hons) MRICS Respondent
(Valuation
Officer)
Re: Holden
Vale (Conference Centre) Ltd
Holcombe Road
Helmshore
Rossendale
Lancashire BB4 4NF
Before:
P R Francis FRICS
Sitting
at: 45 Bedford Square, London WC1B 3AS
on
4 April 2013
Vernon
Powell, a director of Holden Vale (Conference Centre) Ltd, for the Appellant
Company Richard Moules for the
Respondent VO
The following case is referred
to in this decision:
DECISION
Introduction
1.
This is an appeal by the ratepayer, Holden Vale (Conference Centre) Ltd,
against a decision of the Valuation Tribunal for England (VTE) dated 23 August
2012 in which the ratepayer’s appeal seeking a nil assessment on The Holden
Vale Hotel and Conference Centre, Holcombe Road, Helmshore, Rossendale, Lancs
BB4 4NF (the appeal hereditament) was dismissed, and the entry in the compiled 2010
rating list was confirmed at RV £33,500.
2.
The appeal to this Tribunal was conducted in accordance with the Lands
Chamber’s Simplified Procedure. Mr Vernon Powell appeared as a director of the
appellant Company. Mr Richard Moules of counsel appeared for the Valuation
Office and called the respondent Valuation Officer, Mr Andrew Arthur Whitehead
BA (Hons) MRICS who gave expert valuation evidence.
3.
The appellant’s case is that the exceptionally low occupancy rates
achieved, and resultant lack of historic or potential profitability was due to
the fact that the hotel was, at 35 bedrooms, too large for its catchment area.
On the basis of the returns, a hypothetical tenant would not be prepared to pay
rent for it and the RV should therefore have been assessed at nil. The VTE
was wrong, it was argued, to accept the VO’s evidence based upon application of
the Provincial Hotels (England & Wales) 2010 Agreed Valuation Scheme (the Agreed
Scheme), and due to the exceptional circumstances prevailing at the subject
hereditament (in accordance with the definition in paragraph 5.3 of section 510
to Rating Manual Number 5) it should have accepted the appellant’s evidence
based upon the full Receipts and Expenditure (R & E) method.
4.
The respondent VO says that none of the circumstances described by the
appellant can be classed as exceptional within the definitions of paragraph
5.3, and his assessment, based upon the agreed hotels scheme and supported by a
proper analysis of comparables, shows that the VO was correct in fact and law to
confirm the RV at £33,500.
Facts
5.
The parties helpfully produced an agreed statement of facts and issues.
The appellant provided a comprehensive statement of case together with, on the
morning of the hearing, a further written skeleton argument to which he
spoke. The respondent VO, Mr Whitehead, spoke to his expert valuation report
and Mr Moules produced a skeleton argument on the law. It was not suggested
that a site viewing would be necessary. From the evidence and documentation, I
find the following facts.
6.
The subject hereditament comprises a 35 en-suite bedroom hotel together
with a restaurant, bar, conference/function facilities and fitness room located
in a semi-rural position in the valley of Ogden Brook, a tributary of the river
Irwell, on the edge of the west Pennine village of Helmshore, which is close to
Haslingden (a former industrial market town) in the Borough of Rossendale about
15 miles north of Manchester. The property was licensed for civil weddings.
There are historic industrial buildings close-by including the Helmshore Textiles Museum and there is a modern, mixed commercial and residential area on
the opposite side of Holcombe Road. The 90 square mile West Pennine Moors are within
easy reach, there are good local shopping facilities and there is good access
to the principal regional motorway network (M65 and M66). There is car
parking provided on land on the opposite side of Ogden Brook, vehicular access being
gained from further along Holcombe Road, with the hotel itself thence being
accessed by a footbridge.
7.
The original part of the building, which is of typical local stone and
slate, was constructed in the 19th Century as offices for a bleach
works. In 1998 planning consent was obtained for conversion to a conference
centre and offices with a condition that bedroom extension accommodation should
only be utilised in conjunction with conferences. This restriction was removed
in 1999 and the property opened as a conference centre in 2000, with a further
bedroom extension completed in 2001. The freehold of the hotel is owned by
the appellant, with the car park and adjacent land held, on the material day,
on a long-leasehold interest.
8.
The Holden Vale Hotel and Conference Centre closed for business on 5
April 2009, and at the material day (1 April 2010) was vacant and for sale.
The Antecedent Valuation date is 1 April 2008.
9.
The appeal hereditament was entered into the compiled 2010 Rating list
as ‘Training Centre and Premises’ at Rateable Value £47,000. Following
discussions and agreement with the appellant ratepayer’s then appointed
representative, The Beattie Partnership, in 2011 relating to the 2005 Rating
List, the VO altered the 2010 Rating List entry to RV £38,250 on 27 July 2011
with effect from 1 April 2010. After further discussions with the appellant
ratepayer’s representative, the VO revised his opinion of value and the entry
was further reduced on 14 October 2011 to RV £33,500 with effect from 1 April
2010. The Beattie Partnership then, on 28 November 2011, made a proposal
seeking a reduction in the assessment to £1. Subsequently Mr Powell, on
behalf of the appellant ratepayer, advised that he would henceforth be dealing
with the matter and proceeded with the appeal to the VTE, which was heard on 30
July 2012.
10.
On dismissing the appeal on 23 August 2012, and confirming the entry at
RV £33,500, the VTE also acceded to a request from the VO that the description
in the Rating List should be changed from ‘Training Centre and Premises’ to
‘Hotel and Premises’. Having identified that the main issue in dispute was
one of valuation methodology, the VTE said, at paragraph 45:
“The panel is satisfied
that the Hotel was best classified as an ‘Older & Historic 3 star hotels’
as described in paragraph 2.1 of the General Guidance. Having regard to the
photographs and the trade information supplied, the panel was satisfied that
rather than being ‘exceptional’ the property was a standard hotel in terms of
the “physical characteristics, facilities, level of service and location.””
The VTE continued,
at paragraphs 50 and 51:
“50. The panel
accepted that the appeal property fell short of the benchmarks contained in
paragraph 3 of Practice Note 1 but was not persuaded that this meant the
property was in any way ‘exceptional’. The panel noted that if the property
had been achieving the benchmarks then the turnover and estimated fair
maintainable trade would have been higher, which would have resulted in a
higher rateable Value. The panel also noted that the number of rooms and the
level of occupancy was also reflected on the scale.
51. As regards
the decline in the business, the panel was satisfied that most of this was
attributable to the recession which had begun to show signs after the
Antecedent Valuation date but the effects of which had not been fully felt
until later in the year….”
11.
Mr Powell, on behalf of the appellant ratepayer, submitted the appeal to
the Upper Tribunal (Lands Chamber) on 19 September 2012, and the VO’s Notice of
Intention to Respond was submitted on 2 November 2012.
Issues
12.
The parties have agreed the issues thus:
1. Whether the appeal hereditament should be valued
in accordance with the Provincial Hotels (England & Wales) 2010 Agreed Valuation Scheme, or whether it should be regarded as “exceptional”
under paragraph 5.3 of the VOA Rating Manual No. 5 and should be valued on the
full Receipts and Expenditure model;
2. If it is regarded as exceptional, and thus to be
valued on the full R & E method, what is the correct valuation of the
premises?
In particular:
(a) should the valuation
be based upon the actual yearly expenditure, or on average
yearly expenditure over a specified period; and
(b) should the
valuation include a deduction for directors’ pay?
13.
It is agreed that if the Agreed Scheme is determined as the appropriate
method of valuation, the VO’s calculations are correct. In terms of trading
information, it is also agreed that the fair maintainable trade of the business
was £600,000pa and that the actual trading information provided by the
appellant ratepayer is not in dispute.
The case for the appellant
14.
Mr Powell said that the circumstances of the Holden Vale Hotel and
Conference Centre were such that it would be inappropriate and unfair to adopt
the Agreed Scales. They applied a scale to turnover that did not reflect the
true value that the hypothetical tenant would be prepared to bid in terms of
rent. He would be influenced primarily by the profit rather than the income
potential of the business. As there was no profitability reflected in the
accounts, and no prospects of achieving a reasonable return, no rent would be
offered and thus the Rateable Value should be assessed at nil. The full Receipts
and Expenditure basis of valuation, if used, would prove this because, in
respect of this property, the level of turnover sustained by the business was
far removed from the industry norms that were used to set the Agreed Scales. It
was not reasonable, Mr Powell said, for the VO to apply a linear valuation
methodology based on turnover to a business whose performance was so out of
line with what the industry would normally expect.
15.
The basis for valuation for non-domestic rating purposes is by reference
to rental value as at the AVD as set out in paragraph 2 of schedule 6 to the
Local Government and Finance Act 1988, and Mr Powell said that the primary
methods to be applied are summarised in Volume 4 of the Rating Manual. At
paragraph 1.3 it states:
“1.3 Application
Of the three
primary methods of valuation for rating the rental method is usually preferred
where the hereditament is rented or where there are sufficient comparable
rented properties to provide reliable evidence.
Where there is
a paucity of conclusive rental evidence it may be necessary to undertake a
valuation on either the R & E method or the contractor’s basis.
The R & E method is likely to be the
preferred method of valuation in those cases where rental evidence is sparse or
non-existent and the rent is likely to be dictated by the actual or anticipated
profit of the business carried on at the hereditament. This is in line with
the Court of Appeal decision in Garton v Hunter (VO) 1969 RA 11 which
held that all evidence of value is admissible but the question is the weight
which should be attached.”
16.
Mr Powell said that, firstly, this hereditament was not rented – it was
owned by himself and his wife who had bought it in 2004. Secondly, the VO has
not put forward any evidence of local rented properties to provide a benchmark
for the valuation. The crucial statement, he said, was reference to the rent
being dictated by the “actual or anticipated profit”. The Garton case
held that all evidence was admissible but it was a question of weight. Whilst
the shortened R & E method as adopted in the Agreed Scale is designed to be
a convenient and time-saving way to estimate the value, he said that an
analysis using the full accounts basis that he had undertaken contains evidence
that results in a markedly different conclusion as to value. Surely, he said,
the full R & E method should be used as this provided a comprehensive
analysis of the actual profitability from which the hypothetical tenant could
formulate his rental bid.
17.
Mr Powell referred to the relevant parts of “Section 510: Hotels” in the
VOA Rating Manual Volume 5 at paragraph 5. Paragraph 5.1 states:
“5.1 General
Rental
evidence will normally form the basis of valuation for smaller hotels valued by
groups. However, due to the paucity of unimpeachable evidence for chain
operated hotels it will usually be necessary to have regard to the Receipts and
Expenditure method in order to derive a basis of valuation for these
properties.”
Paragraph 5.2
refers to the shortened R&E method of valuation agreed with the BHA by
applying a single percentage to fair maintainable trade (FMT). The key
paragraph in respect of this dispute, he said, was paragraph 5.3 which read:
“In exceptional circumstances, where the
hotel does not fit with those covered by the agreed scheme – in terms of
physical characteristics, facilities, level of service and location – it may be
necessary to value it individually using full accounts and the Receipts and
Expenditure method of valuation. Valuers should however be mindful that the
valuation must reflect the value of the hereditament and not the business of
the actual occupier and should therefore exercise caution before adopting an RV
derived from this approach where it falls outside the expected percentage range
when taking a wider view of the particular type of property.”
18.
Although he accepted in cross-examination that this paragraph gave just
four specific heads for departing from the scheme, Mr Powell said the wording
should not be read narrowly, and should be construed in the spirit of the
provision. The guidance suggests that there may be exceptional circumstances,
but the examples given are not exhaustive and there could be other reasons –
for instance where the businesses performance falls well outside the norm. Where
a hotel clearly did not fit into the scheme parameters, as his did not, the
full R&E method should be adopted. In any event, the fact that this was a
35 room hotel which was much too large for the area went to both physical
characteristics and location.
19.
That the business was too big for the local market was the determinative
factor in the occupancy rates being, at 33.8%, less than half of the industry
norm (70.8%) and an average room rate being nearly 25% below the average for
that type of hotel. This gave revenue per available room which was barely a
third of the industry norm, and meant the hotel fell outside the benchmarks by
which FMT was judged in the Agreed Scheme. It was fundamental, Mr Powell said,
for regard to be had to profitability rather than turnover. As the Rating
Manual said, rent is likely to be dictated by actual or anticipated profit, and
with there being no profits (after directors’ fees), shown in the accounts and
no likelihood of achieving them due to excess capacity in the local market, a
rental value assessment of £33,500 was simply not appropriate.
20.
In response to what the VTE said at paragraphs 50 and 51 of its decision
(see paragraph 10 above), Mr Powell produced a calculation which showed the
effect of a 10% increase in turnover based upon the business’s 2007/2008
accounts making the requisite adjustments on costs of sales, which are
variable, and no adjustments to fixed costs. This resulted in a 250% increase
in operating profit. However, the hotel’s performance in reality was
significantly more than 10% below the benchmark rates adopted for the Agreed
Scheme. By his calculations, turnover would have to increase by more than 20%
before a rental value of £33,500 could be justified. Whilst it was accepted
that the national scales were appropriate for businesses whose turnover fell
within the benchmark ranges, in a case such as this where the performance
deviated so substantially from the norm, the result of applying those scales
was unfair and unsustainable.
21.
Mr Powell said that he had produced his own full R&E calculations to
the VTE and included a copy within the appellant’s statement of case. These
calculations showed an average loss for the three years to 31 March 2008
(excluding property costs) of £2,237 and accordingly there was no ‘divisible
balance’. Hence the RV should be nil.
22.
In cross-examination, Mr Powell agreed that, apart from the issues of
the size of the hotel and the lack of an adequate market locally, there were no
factors that could be considered exceptional. It was well located
geographically and was well positioned for the civil weddings market. He
acknowledged that it was the value of the hereditament that was in issue, and
not his own particular business or its historical profitability that was to be
taken into account in the assessment of RV.
23.
As to his full R&E analysis, Mr Powell agreed that the company
accounts showed abnormally high costs. The business employed a general manager
who had accommodation provided in a flat on the third floor of the hotel and
whilst it was accepted that businesses of this nature were typically occupied
and run by the owners who would take their remuneration from the tenant’s
share, he did not agree that a full-time manager was an unnecessary expense.
He said his wife was in day to day charge of the business and as to his own
input, he said his involvement tended to be just at weekends in a “book-keeping
and accounting” capacity, as his main business was as a chartered accountant.
In the year ended 31 March 2008 he and his wife had drawn just £5,100 as
salary. However, in calculating the losses the “market value of directors
services” had been deducted to the tune of £45,000 (benchmarked against the
£40,000 that was being paid to the general manager) plus £5,091 employer’s NI
and £12,000 fees to Mr Powell totalling £63,091. In response to a question
from me, Mr Powell said that these costs were in addition to the costs of the
general manager, and as to why his own charges were on top of £7,925
accountancy fees shown in the accounts, he said those charges were for matters
that he had not had time to cover.
24.
Mr Powell, when asked to explain certain ‘spikes’ in costs of wages and
salaries, accountancy and legal/professional fees in the three years’ accounts
that had been presented, said he was unable to do so as he did not have the
relevant information to hand. He concluded by referring to Sharp v Griffiths [1999] RA 265 in which he said the Lands Tribunal had established to
position that if trading was poor and there was a history of non-profitability,
one could depart from the normal valuation matrix.
Case for the respondent VO
25.
Mr Whitehead is a chartered surveyor who has been employed by the VOA
since 1984. He said that as part of the North West Specialist Rating Team he
had dealt with all types of hotel assessments (mainly through negotiations with
specialist hotel valuers) and had settled over 200 hotel valuations without
recourse to the VTE. He outlined the history and background to the formation
of the Agreed Scheme which had been used (and modified as necessary to reflect
changes in the hotel and hospitality industry and economic factors) for the
2000, 2005 and 2010 Rating lists.
26.
It was fully accepted, he said, that nobody could expect that one
nationwide scheme would be appropriate for every hotel in the country and the opportunity
for ratepayers to have their premises assessed outside the Agreed Scheme is not
precluded. However, he was not aware of any instances where there has been a
departure from the scheme and as some 1,500 hotels have been settled within the
2010 Agreed Scheme, this was testament to its credentials.
27.
Mr Whitehead set out what, for the 2010 Rating List, the Agreed Scheme
requires the VO to do and what he did in this instance:
a) Adjust the bedroom accommodation to a common
denominator of a double bed unit (DBU) – agreed here to be 33.5.
b Ascertain the Fair Maintainable Receipts (FMT):
that is the trade a competent operator would be able to achieve from the
hereditament – agreed here at £600,000pa.
c) Ascertain the accommodation receipts from the FMT
expressed per DBU. In this case, Mr Whitehead took accommodation receipts from
the accounts provided at 37.5% FMT, or £225,000. The room receipts therefore
were £225,000 /33.5 DBU = £6,716 per DBU.
d) Apply the valuer’s judgement in deciding which
hotel category the hereditament comes into and assess where in the range of
percentages appropriate for that category the particular premises come. The
range allows adjustment for such factors as physical characteristics,
functionality and the ease of trading having regard to the location. In this
case the hotel was, in his view, “Hotels – Standard Service Provision at 3
& 4 star or Equivalent Quality” where the range was from 5.625% to 7.625%. As
the hotel, whilst it had certain advantages, was not in a traditional tourist
location or an established business centre, was a conversion and had smaller
than average bedrooms he adopted the lowest end of the scale at 5.625%.
e) Apply that percentage to the FMT to obtain the
rateable value (£600,000 x 5.625% = £33,750). This was close to the VTE’s
assessment of RV £33,500 hence no appeal or counter appeal by the VO.
f) “Stand back” and consider whether the answer is
reasonable. In his view, in the light of the comparables he had considered,
this was a reasonable figure.
28.
Mr Whitehead said that, in the light of the appellant’s approach, he had
also undertaken a full Receipts and Expenditure calculation. He provided a
detailed breakdown of his workings which produced an estimated RV of £35,326.
This was 6.2% of the FMT which fell within the range applied under the Agreed
Scheme and proved beyond doubt, he said, that a calculation on the Agreed Scheme
was justified, and indeed his own adoption of 5.625% appeared generous to the
ratepayer.
29.
The comparable hotels that Mr Whitehead said he considered were The Old
Mill Hotel, Ramsbottom, Bury; Egerton House Hotel, Egerton, Bolton; Birch
Hotel, Manchester Road, Heywood; The Old Stone Trough, Kelbrook, Barnoldswick
and the Broadfield Hotel, Rochdale.
30.
In summary, Mr Whitehead said that he thought the appellant had
misconstrued the wording of paragraph 5.3 as to the circumstances under which a
detailed R & E valuation might be deemed appropriate. He said that in
respect of the physical characteristics, facilities, level of service and
location there was nothing so exceptional in this case as to warrant a
departure from the Agreed Scheme. The comparable hotels he had considered were
all in similar locations and offered similar facilities. In his view the main
contributory factor to the appellant’s alleged lack of profit was the higher
than average operating costs, particularly in respect of the fact that Mr
Powell had made “a deduction for market value of directors’ services” and the
fact that the hotel, as well as being run principally by Mr Powell’s wife, also
employed a general manager. Hotels of this type were normally run by husband
and wife teams and staff costs could thus be expected to be much lower. The owner’s
salaries were taken from the tenant’s share of the divisible balance. There
were also some other exceptional costs that Mr Powell had been unable to
explain. If the directors’ charges had not been included, the accounts would
have shown the business to be profitable.
31.
Mr Whitehead said that he had taken Mr Powell’s accounts at face value
and, despite the fact that he thought wages and salaries at 40% of FMT were
high, he had built that figure into his full R & E analysis, and even with
that were it not for the directors’ charges, the business would have shown a
profit and there would have been a divisible balance. In any event, he said
that when undertaking a valuation for rating purposes the actual hereditament,
assumed vacant and to let, is what has to be considered and the business
undertaken by the actual occupier, whilst it may yield useful evidence, is not
the sole arbiter in determining value.
32.
In submissions, Mr Moules said that the appellant ratepayer’s reference
to Sharp v Griffiths was not of assistance. Each case was to be taken
upon its facts and merits, and the circumstances there were entirely different.
Conclusions
33.
I agree with Mr Powell that paragraph 5.3 of the Rating Manual No 5 is
important in the context of this appeal. However, I disagree with his arguments
for departing from the Agreed Scheme and in my judgment the sentence “Valuers
should however be mindful that the valuation must reflect the value of the
hereditament and not the business of the actual occupier and should therefore
exercise caution before adopting an RV derived from this approach where it
falls outside the expected percentage range when taking a wider view of the
particular type of property” holds the key to my decision.
34.
It would clearly be wrong to focus entirely upon the accounts of the
existing business to determine the RV of the appeal hereditament – that would
fly directly in the face of paragraph 5.3. In considering the rent that he
would be prepared to pay for a property, whilst the hypothetical tenant would
undoubtedly be interested in the accounts of the business that was currently
being carried on there, he would have his own plans and aspirations for what he
might be able to make out of it. I cannot foresee a situation where a
hotelier, pub chain or whoever, in the market for another business opportunity,
would walk away from a prospective opportunity such as this solely on the
grounds that the existing owner had been unable to make a go of it. I accept
Mr Moules’ proposition regarding the relevance of Sharp in that the
circumstances were entirely different. That case related to a public house in
which the turnover and profitability achieved by an “operator of above average
competence” could not be expected to have been replicated by the average
hypothetical tenant. That was not what was being argued here – in this case
it was being suggested that because there was no apparent opportunity to make
the required level of profits to justify the rent, the Agreed Scheme (which was
based solely on hotels ) should not be used.
35.
I find the VO’s evidence and opinion for not departing from the Agreed
Scheme entirely persuasive particularly as there have, to his knowledge, been no
instances where the full R & E method has been used in preference. I
accept his views (and those of the VTE) that the circumstances, as specifically
defined in paragraph 5.3, are not exceptional in this case, and am not
persuaded by Mr Powell’s arguments either that they are or that the provision
in paragraph 5.3 should not be read narrowly. To broaden the guidance as he
suggests would potentially take matters of interpretation into a grey area
which would certainly not have been in the minds of those drafting the
guidance. I note also that Mr Powell admitted that apart from the hotel
allegedly being too large for the local market which was inadequate, he
accepted that within the parameters set by paragraph 5.3, there were no other
exceptional factors.
36.
Determining, therefore, that the Agreed Scheme is the appropriate
vehicle for assessing the RV, I accept Mr Whitehead’s evidence in its entirety
and consider that he has been fair in adopting the lowest percentage in the
range available within the hotel category that he considers the appeal
hereditament to come within and that, as he said, the Agreed Scheme does
provide a level of flexibility sufficient to deem a wider form of analysis
unnecessary. I also agree with his opinion that it is principally the
treatment of directors’ charges that has affected the profitability of the
business as shown in the accounts, and were it not for that there would be no
question of the required benchmarks not being reached.
37.
In the light of what I have said, it is not necessary for me to consider
the value based upon the full R & E method. However, were I to have done
so, I would determine that (a) the valuation should be based upon the average
yearly expenditure over the three year accounting period adopted – this serving
to iron out any exceptional costs in any one year and (b) in this instance the
valuation should not, in my view, include deductions for directors’ charges for
the very reasons promulgated by Mr Whitehead.
38.
In summary therefore, I find that there is nothing in fact or in law to
force me to the conclusion that the VTE’s determination was wrong, and the
appeal is dismissed. The RV is confirmed at £33,500 with effect from 1 April
2010.
39.
The appeal, having been conducted under the Tribunal’s Simplified Procedure,
and in the absence of any exceptional circumstances, I make no award of costs.
DATED
16 May 2013
P
R Francis FRICS
