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United Kingdom Upper Tribunal (Lands Chamber)
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URL: http://www.bailii.org/uk/cases/UKUT/LC/2014/219.html
Cite as: [2014] UKUT 219 (LC)
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UPPER TRIBUNAL (LANDS CHAMBER)
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UT Neutral citation number: [2013] UKUT 0219 (LC)
UTLC Case Number: ACQ/139/2011
TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007
COMPENSATION – Compulsory Purchase – Acquisition of 0.67 acre waste transfer station in connection with the London 2012 Olympic Park development – valuation – rental value – treatment of tenant’s payment on entry into lease – Land Compensation Act 1961 section 5, rule (2) – compensation determined at £1,475,000
IN THE MATTER OF A NOTICE OF REFERENCE
BETWEEN ECONOMETRIC LIMITED (1)
BREWSTERS WASTE MANAGEMENT LIMITED (2)
COURTVILLE PROPERTIES LIMITED (3)
BARRY, BRIAN AND SHEILA BREWSTER (4) Claimants
and
GREATER LONDON AUTHORITY Acquiring Authority
re: 28 Marshgate Lane, Stratford, London E15 2NH & 4 Knobs Hill Road, Stratford, London E15
Before: HH David Mole QC and P R Francis FRICS
Sitting at: 43-45 Bedford Square, London WC1B 3AS
on
3, 4 & 5 March 2014
Matthew Horton QC instructed by Howard Hyman & Co, solicitors of London N12, for the first claimant
Tim Mould QC instructed by Taylor Wessing LLP, solicitors of London EC4, for the second, third and fourth claimants
Guy Williams instructed by Eversheds LLP, solicitors of London EC2, for the acquiring authority
The following cases are referred to in this decision:
Bishopsgate Parking (No2) Ltd v The Welsh Ministers [2012] RVR 237
Halpern & Ors v Greater London Authority [2014] UKUT 0116 (LC
DECISION
Introduction
1. This is a consolidation of four references relating to the compulsory acquisition by London Development Agency (now Greater London Authority and referred to hereafter as “the acquiring authority”) of a 0.67 acre site occupied as a waste transfer station (“WTS”) at 28 Marshgate Lane, Stratford, London E15 2NH and the adjoining site at 4 Knobs Hill Road, Stratford, London E15 under The London Development Agency (Lower Lea Valley, Olympic and Legacy) Compulsory Purchase Order 2005 (“the CPO”).
2. The CPO was made on 16 November 2005 and, following a public inquiry, was confirmed by the Secretary of State on 18 December 2006. A general vesting declaration was made in respect of the freehold of 28 Marshgate Lane on 2 March 2007, and that interest vested in the acquiring authority on 2 April 2007 – this being the valuation date for the purposes of that interest. The leasehold interest in 28 Marshgate Lane together with all interests in 4 Knobs Hill Road vested in the acquiring authority on 2 July 2007 by a general vesting declaration dated 14 May 2007. 2 July 2007 is the valuation date for all those interests.
The Parties
3. The first claimant, Econometric Limited, referred to in this decision as ”Econometric” was at the valuation date the owner of the freehold interest in 28 Marshgate Lane. The notice of reference in its claim for compensation was dated 8 November 2011 and was allocated the Tribunal reference ACQ/125/2011. Mr Matthew Horton QC of Queen’s Counsel appeared for Econometric and called Mr John Holland who gave evidence of fact. He is the father of Ms Kelly Holland who is the beneficial owner of the company. Mr Horton also called Mr Andrew Philip Sedgley Crawford MRICS MIQ AIWM a partner in Matthews & Son LLP of London WC1, who gave expert valuation evidence.
4. The second claimant, Brewsters Waste Management Limited (“BWML”) (ACQ/139/2011), was the occupier of 28 Marshgate Lane under the terms of a lease between Econometric and the third claimant Courtville Properties Limited (“Courtville”) (ACQ/140/2011). The fourth claimants, Barry, Brian and Sheila Brewster (“the Brewsters”) (ACQ/142/2011) were the freehold owners of 4 Knobs Hill Lane. Mr Tim Mould of Queen’s Counsel appeared for the second, third and fourth claimants and called Mr Barry Brewster, managing director and majority shareholder in BWML, who gave evidence of fact. Mr Brian Brewster, (Barry Brewster’s father) had also provided a witness statement of fact but could not appear due to illness. Mr Kirk Macdiarmid MRICS, an associate director in the Development Department of Savills gave expert valuation evidence.
5. Mr Guy Williams of counsel appeared for the acquiring authority and called Mr Mark Jonathan Barden BSc MRICS, a partner in Gerald Eve LLP, Chartered Surveyors of London W1, who gave expert evidence on valuation.
The Issues
6. By an order dated 27 July 2012, the Tribunal determined that the references should be allocated to the Special Procedure, and consolidated for determination together at a single hearing under the reference ACQ/139/2011. It was ordered that, at that hearing, the following substantive issues were to be determined:
(1) Econometric’s claim for the freehold value of 28 Marshgate Lane,
(2) Courtville’s claim for its leasehold interest therein, and
(3) The Brewsters’ claim for the value of the freehold interest in 4 Knobs Hill Road
Further, the Tribunal determined that the following matters should also be resolved as preliminary issues:
(4) The appropriate rent for 28 Marshgate Lane on the valuation date
(5) The appropriate rent for 4 Knobs Hill Road on the valuation date
(6) Whether the second claimant was in lawful occupation of 28 Marshgate Lane and 4 Knobs Hill Road, and
(7) If so, the period for which the land occupied by the second claimant might reasonably have been expected to be available to it for the purposes of its business
7. Subsequently, issues (3) and (5) have been resolved as the result of a consent order. Agreement was reached between the relevant parties that the value of the freehold interest in 4 Knobs Hill Road was £320,000 and that the appropriate rental value for that site was £21,500 pa (£2.02 per sq ft). The amount of the basic loss payment, pre-reference fees and statutory interest, have also been agreed. It has also been agreed that BWML was in lawful possession of the two sites (issue (6)) and that it could be expected that BWML would have been available to continue in occupation of 28 Marshgate Lane at least until the natural expiry of the lease on 28 November 2028 (issue(7)).
8. It is also common ground that there would only be a claim in respect of issue (2) if the Tribunal determines that the appropriate rent for 28 Marshgate Lane was more than the passing rent under the lease (thus giving rise to a profit rent). However, as it is Courtville’s case that the £104,000 represented a “full market rent”, no formal claim in this regard has yet been made to the acquiring authority.
9. It follows that the substantive issues that remained to be resolved at the hearing of these references were (1) and possibly (2). Issue (4) is critical to arriving at a conclusion on issue (1), and in that regard there is a further question that needs to be addressed: Was the payment of £270,000 made by BWML to Econometric at the commencement of Courtville’s lease of 28 Marshgate Lane a premium, “key money” or payment, as the receipt stated, for equipment remaining on the site. Or was it simply a contribution to the development of the site and construction costs?
10. The principles of Econometric’s claim for reinvestment costs under section 10A of the Land Compensation Act 1961 (the 1961 Act), together with its pre-reference costs, reasonably and properly incurred, under section (5) rule 6, of the 1961 Act, are accepted by the acquiring authority, subject to any such claim being properly set out and evidence provided that such costs have been so incurred. No such evidence had been produced by Econometric by the date of the hearing, and therefore the Tribunal is unable to determine those issues in this decision.
Factual background
11. The parties helpfully produced a statement of agreed facts and issues from which, together with the witness statements and experts’ reports, the evidence and counsels’ helpful skeleton arguments and closing submissions (which were all received by the Tribunal by 27 March 2014), we find the facts set out below. It was agreed that, in the light of the close proximity of the reference land to 151 Marshgate Lane, which was another waste transfer station acquired under the same CPO, and was the subject of a recent hearing by us (Halpern & Ors v Greater London Authority [2014] UKUT 0116 (LC), the decision in respect of which was published on 18 March 2014, and the comprehensive inspection that was undertaken of the area in connection with that reference, no further inspection was necessary. This was particularly so as the reference land in these cases and the whole of the immediate area is now subsumed within what is now known as the Queen Elizabeth Olympic Park.
12. 28 Marshgate Lane comprised a site of 0.2716 hectares (0.67 acre) which occupied a corner plot on the north-east side at the junction with Knobs Hill Road. Historically it had been owned by Mr Patrick Gladwell who owned a number of waste sites in the area, including 151 Marshgate Lane from where he had operated his own waste transfer business known as Clearun Ltd. Mr Gladwell had previously let 28 Marshgate Lane to a Mr Barry Meyer who operated it in the name of City Waste Ltd as a waste transfer station and for which planning consent and a waste transfer licence existed. Whilst it had initially been a successful operation, City Waste eventually vacated voluntarily due to business difficulties, leaving an old and dilapidated tipping hall, a considerable amount of waste and a large quantity of redundant plant and machinery on the site. In July 2001 Mr Gladwell offered the freehold of the, by then unoccupied, site to Mr Holland.
13. After discussing and agreeing with his daughter Kelly (who at the time had recently commenced operating a refuse collection, recycling and disposal business known as A3 Waste), that 28 Marshgate Lane offered a good business opportunity for her to expand into licensed waste disposal and recycling from her own premises, the site was acquired in August 2001 (following negotiations) for £500,000. The acquisition was by Econometric Ltd, a company set up and incorporated for the purpose and of which Ms Holland was at all material times the sole beneficial owner. Mr Holland assisted his daughter in the running of the business, and also used part of the site in connection with his own commercial interests. Clearance of the site and trading commenced immediately.
14. Subsequently, following an approach in autumn 2003 from Mr Barry Brewster (via Mr Gladwell) who was in urgent need of a site to replace his family’s existing business, Brewsters Waste Management Ltd (BWML) which was being compulsorily acquired in connection with the redevelopment of the Arsenal FC’s Highbury Stadium in North London, a lease was entered into between Econometric and the third claimant, Courtville Properties Ltd (a nominee company of BWML). It was dated, and commenced upon, 28 November 2003 and was for a term of 25 years at a commencing rental of £104,000 pa with an upward only rent review on 28 November 2008 and every 5 years thereafter, such rent to be determined in default of agreement by an independent surveyor acting as an arbitrator. The lease contained a tenant only break clause exercisable on 28 November 2008 upon giving three months notice. Although the lease was in Courtville Properties’ name, BWML at all times paid the rent when demanded, and occupied the site for the purposes of its waste management business.
15. At the commencement of the term, BWML made a payment to Econometric in the sum of £270,000 plus VAT at 17.5% (total £317,250) for which a receipt dated 1 December 2003 was provided, describing the payment as being “For the sale of contents of transfer station at 28 Marshgate Lane, Stratford, London E15 2NH as per attached inventory” The inventory listed the items as follows:
“1 Grapple Grab, 1 Rotating Grab, 2 Steam Cleaning Machines, 1 Rough Terrain Fork Lift, 1 60ft Weighbridge, 2 36ft Portakabins, 1 Steel Framed Building, 791 Secondhand Skips, 24 Second-hand Rollon/off Bins”.
16. During the months following the grant of the lease, and before BWML took occupation, Econometric continued the site preparation works, including construction of the replacement tipping hall (from two deconstructed second-hand buildings that Mr Holland had acquired for the purpose). On 11 May 2004, the Environment Agency granted a new Waste Management Licence for 28 Marshgate Lane for 1,000 tonnes per day of inert wastes, metal waste and degradable non-hazardous commercial and industrial waste up to a maximum of 275,000 tonnes per annum.
17. As to 4 Knobs Hill Road, which adjoined the north-eastern boundary of 28 Marshgate Lane, the freehold of this 0.24 acre (0.097 ha) site was acquired by the Brewsters in 2004. Part of it was occupied and used by BWML in conjunction with the waste management business, and part was let to Meyers Skip Hire Ltd. Compensation having now been agreed in respect of Knobs Hill, the only further reference to it necessary in this decision relates to the valuation evidence in connection with the relevance or otherwise of its agreed rental value at the valuation date.
18. In September 2007, following the compulsory acquisition of 28 Marshgate Lane, Econometric acquired the freehold of a site at Lynchford Lane, Farnborough, Hants. The site, which fell partly in Hampshire and partly in Surrey, extended to about 0.53 ha. Planning consent was obtained for a waste recycling facility from Surrey County Council in October 2009 and from Hampshire County Council on January 2010. The requisite Environment Agency Permit granted under regulation 13 of the Environmental Permitting (England and Wales) Regulations 2010 allowing up to 1,010 tonnes of material per day was dated 21 December 2010. Pursuant to an Agreement for Lease dated 30 September 2010 which was conditional upon Econometric constructing, at its own expense, all of the operational facilities on the site, a formal lease, at a rental of £208,000 pa was completed by Taurus Waste Management Ltd in May 2013.
The Evidence
19. The first claimant contends for a value of the freehold interest in 28 Marshgate Lane at the valuation date, subject to the lease to Courtville, in the sum of £2,813,592 based upon its estimate of the open market rental value at that date of £208,000 pa, capitalised at 7%. That rental value was based, principally, upon the agreement for lease and subsequent letting of the waste transfer site at Lynchford Lane, Farnborough (“Farnborough”), and upon the belief that the £104,000 pa commencing rental at 28 Marshgate Lane was a substantial undervalue that reflected the fact that a premium of £270,000 had been paid.
20. Mr Holland set out the historical background to Econometric’s acquisition of 28 Marshgate Lane (which we have briefly summarised above) and said that he assisted his daughter, Kelly, in the management of the company. He explained that when Mr Gladwell approached him in July 2001, 28 Marshgate Lane was in a very untidy and run down state. The steel framed and corrugated iron clad building that was on it did not comply with modern day requirements for a tipping hall and was fit only for demolition. Indeed, at that time, the extant waste transfer licence was the subject of an Enforcement Notice prohibiting any more waste to enter the site until it had been cleared. The previous tenant when vacating had left a large amount of redundant plant and equipment, much of which was buried under the piles of waste, and only came to light when the site was eventually cleared. Most of any serviceable equipment, including hundreds of skips and a fork lift truck, were taken away by Mr Gladwell in lieu of the rent arrears that had accrued.
21. Mr Gladwell was seeking £600,000 for the site, but due to the amount of clearance and other preparation works that would be required Mr Holland said that he persuaded him to accept £500,000. The intention had been to remove and dispose of what was estimated to amount to about 6,000 tonnes of waste, obtain planning permission for a replacement tipping hall and thence acquire a new waste transfer licence in Econometric’s own name to cover recycling and various types of waste. The new tipping hall would require pile foundations and substantial “push walls” (as now specified under the 2002 Waste Act),
22. As soon as the site was acquired (in August 2001) and following agreement with the Environment Agency, Mr Holland said that during the first six months he and his daughter cleared the rubbish, moved the redundant equipment to one corner of the site and commenced trading. Ms Holland used the majority of the site for storage of concrete and hardcore pending the necessary consents being obtained, and Mr Holland said he used part of the site for the storage of commercial vehicles in connection with his own business.
23. The requisite planning application was made in July 2002 for the “erection of a new tipping hall (light industrial building)” and permission was granted on 14 May 2003. Econometric then obtained a Waste Transfer Licence in its own name on 11 May 2004. Two second-hand buildings were acquired (to be re-constructed as one building) at a total cost of £70,000, and the company eventually went on to spend a total of £471,000 including VAT in preparing the site.
24. Although a number of approaches had been made from people in the waste transfer business virtually as soon as they took occupation, Mr Holland said it had been his and his daughter’s initial intention to run their businesses from there. Due to the cost of carrying out the permitted development on the site, Mr Holland said that they had considered seeking funding from their bankers, Lloyds TSB. However, in the autumn of 2003, Mr Gladwell approached him and asked him if he would be prepared to let the site as Brewsters had told him they desperately needed somewhere due to the fact that their existing site in north London was also the subject of a CPO, and they had been let down on a proposed relocation site that they had been negotiating for.
25. Mr Holland said (at paragraph 20 of his first witness statement) that he discussed this approach with his daughter who welcomed the idea as she was finding it difficult to run the business and bring up her young children. He therefore told Mr Gladwell that “if the price was right” he would consider it, and they went on to discuss rental values. Although from his knowledge of the business Mr Holland said he thought it was worth £3,000 per week (£156,000 pa), Mr Gladwell said that Mr Meyer had been paying £1,600pw and suggested he should ask for £2,000pw together with £300,000 “key money”. Mr Holland said that he “took the view that if suitable terms could be agreed, it would not be necessary to rely on bank finance for the construction of the tipping hall.” Mr Gladwell then went back to Mr Brian Brewster (who was his brother-in-law) to say that Mr Holland might be interested. Mr Holland, negotiating on behalf of Econometric, then commenced “extensive discussions” with Mr Brewster (first quoting a rental of £104,000 pa along with “a capital sum” of £300,000) and a deal was eventually struck in August 2003 with Barry Brewster, Brian’s son, who offered to pay £270,000 plus VAT provided the rent was agreed at the said £104,000 pa. The lease was agreed to be for 25 years with 5 yearly upwards only rent reviews and with a tenant only break clause after the first 5 years, and was to be subject to the requisite waste management licence being granted. A deposit of £50,000 was paid to Mr Gladwell who was to act as a stakeholder pending completion of the deal.
26. At paragraph 24 of his witness statement, Mr Holland went on to say:
“In the middle of November 2003, I received a phone call from Brian Brewster saying that the introduction of stamp duty on leases would take effect on 1 December and asking if, in order to avoid having to pay it, the lease could be issued before the end of November. Although I have been informed subsequently that stamp duty would not have been payable due to the premises benefitting from disadvantaged area relief, I did not know that at the time I contacted the solicitor whom Econometric used at the time who advised that, if the lease was to be backdated, a rent free period should be granted until the development was completed. Accordingly, work started in order to complete the documentation by 30 November. On the last Thursday of November 2003 (the 26th) I received a phone call from the solicitor to say that the lease was being sent for Kelly to sign. It was received on Saturday 28th November 2003, and Kelly signed it without reading it. Without reading it myself, I delivered it to Mr Brewster’s solicitor on Sunday morning (29th November) so that it could be signed by BWML on Monday 30th. Unbeknown to my daughter and myself, in the hurry to get the lease completed, there were some major errors made in the wording of the lease: the tenant named on it was not BWML but Courtville Properties Ltd; there was a break clause in favour of the Lessor and in the user clause there was no specific reference to waste recycling.
25. On the 1st December, Mr Brian Brewster telephoned me to say that, the lease having been signed, he would pay the balance of the £270,000. Over the telephone, he suggested that the £270,000 should be expressed to be for the redundant plant and machinery left on site and that I should provide him with an invoice and inventory to reflect that. [I took it] round personally to his office in Emily Place, whereupon Brian Brewster gave me a cheque for £270,000. I explained to Mr Brewster that work was to start soon on preparing the site for construction of the tipping hall and I asked him what he would like me to do with the articles in the inventory. He replied that I should dispose of them as scrap.
26. I was not aware at this time that I could have sought this payment in the form of a premium for the lease. My objective was simply to obtain a capital sum to contribute towards the cost of redeveloping the site as a recycling facility. I have been informed subsequently that it would have been more advantageous in relation to tax if the sum had been expressed as a premium… Econometric would not have granted the lease if Mr Brewster had not agreed to the payment. The advantage to him was the reduction in rent for the first 5 years.”
At paragraph 30, Mr Holland said that to take into account the payment of the “premium” of £270,000 plus VAT, Econometric agreed the rent at £104,000 pa for the first 5 years. Adding the premium created an equivalent annual rent of £158,000 which was virtually what he believed the market rental value to be at that time, and he said he expected that the rent would rise to £208,000 pa (£4,000pw) at the first review. Whilst that increase was acknowledged to be much higher than the general trend in industrial rents, it reflected the significant value created by Marshgate Lane’s excellent location near to the City of London and the pressure on consumers to recycle waste and avoid having to pay Landfill Tax.
27. In examination in chief, Mr Holland was asked what his response would be if it were suggested that the £270,000 was a payment to include the new tipping hall. He responded that that would be ludicrous. It had never been suggested or implied that Brewsters were buying anything other than was shown on the inventory. It would be financial suicide to let the tenant own the building, and such an idea was akin to “renting out your house and letting the tenant buy the roof.” He said he could not speculate why Brewster’s wanted the transaction dealt with in the way that it was. Asked what he would have done if the tenants had exercised the break clause, Mr Holland said “Happy days – we would probably have gone back to running it ourselves as by then my daughter’s children would be at school.”
28. In cross-examination, Mr Holland reiterated that the objective for getting the up-front payment was purely to obtain a capital sum towards the cost of the works that were to be undertaken (at a cost of over £470,000) and that in hindsight he thought it should have been expressed as a premium. He did not accept the suggestion that the money was needed in order to be able to defray the costs, although he did say that the deal to BWML would not have gone ahead if they had not been prepared to pay it. The plans for the site, he pointed out, had been hatched long before the Brewsters came along, and whilst Econometric considered borrowing to pay for the works, they did not in fact need such funding as they had made some £973,000 profit before tax in 2003 and there was plenty of cash to pay for the works. In fact, he said, the £270,000 was principally used in connection with another matter. The statement that Mr Brian Brewster had made in paragraph 8 of his witness statement that “in around mid-November 2003, Mr Holland approached me and requested an interim payment to cover his construction costs”, and that as a result BWML had made the payment on completion of the lease rather than waiting until the site was ready for occupation, was simply untrue. He insisted that he would never have told the Brewsters he needed the money because, for the reasons he had given, he did not. However, he accepted that the Brewsters’ apparent understanding (as set out in Barry Brewster’s witness statement at paragraph 17) that the money was to be used to put the site into the required order was broadly correct.
29. Mr Holland said he acknowledged that the money was not for the materials left on site but that it was “to get the lease” and was a contribution towards the cost of getting the site ready for BWML. Whilst he agreed that he had referred in paragraph 30 of his witness statement to the payment being a premium, he accepted in cross-examination that the payment had not been sought as that, and agreed with Mr Mould that it was therefore unnecessary to speculate as to whether it might have been a premium, or simply a contribution to the required site works. He accepted Mr Barry Brewster’s statement that the payment had never been suggested as a premium, and that it was “key money”. Nevertheless, he insisted that if it had not been for the up-front payment, BWML would have had to pay £3,000pw (£156,000 pa). As to the suggestion that they would think that was too much, he said they could have walked away from the deal, but that “they knew it was worth the money.”
30. The fact was, Mr Holland said, that BWML offered £270,000 for a collection of worthless “stuff” that would have cost him £20,000 to remove and dispose of. The payment was offered early (before the site was ready), so he said he rushed to collect the cheque before Mr Brewster changed his mind. On being asked by Mr Mould to agree that this was a capital contribution to put the site into the required state for BWML to be able to use it, Mr Holland then said “if they didn’t value it [the site] at more than £104,000 pa, why give me the £270,000”, and he reiterated that it was never stated by either party that the money was a contribution to anything. Having said that, he agreed that due to BWML’s circumstances, Econometric had been in a strong bargaining position.
31. In re-examination, Mr Holland said that he did not know what the VAT implications would have been if the payment had been declared to be a contribution towards the works.
32. In his supplementary witness statement, Mr Holland gave a number of opinions in respect of the comparables referred to in the valuation evidence in the light of the evidence that had been before the Tribunal in the Clearun case (151 Marshgate Lane). He said he had eventually received (after many attempts) information from GLA’s solicitors regarding the cost to the authority of making the three sites at Thames Wharf suitable for the relocation of waste transfer stations that were being acquired under the Olympic CPO. It appeared that over £5 million had been spent (on top of the £11,650,000 cost of the land). At the rental figures that Mr Barden said were applicable (£2.00 psf) it would take almost 30 years to recoup the investment even without interest at a yield of 3.44%. If the yield suggested by Mr Barden (7%) was used the total annual rental for the sites would need to be almost £560,000 pa. This proved just how tainted these transactions were, particularly considering that the planning permissions for waste transfer use were restricted to only a few years. If only £2.00 psf could be achieved in such circumstances, no-one would ever invest and there would be no waste transfer sites.
33. Mr Holland went on to discuss the Olympic Skips site at 80 River Road, Barking which was just an open storage site with no waste transfer facilities or licence, no buildings and no services. The £2.00 psf quoted there was, therefore, just rent for a storage site. Similar comments applied to the Knobs Hill /Road site where the rental value was agreed at £2.02 psf. As to the Clearun site, Mr Holland said that despite what Mr Barden claimed, that site was vastly inferior to 28 Marshgate Lane, and apart from its nearby location, should not be compared with the subject property in terms of rental or capital value.
34. Regarding the Farnborough site, relied upon by Mr Crawford in his valuation evidence, Mr Holland said that they had been looking for somewhere to move to since 2006, and eventually found this one, which was much larger than the one from which they had been dispossessed, but in a significantly less favourable location. He said that Econometric spent three years obtaining the requisite planning and other consents, including a waste transfer licence for similar volumes to Marshgate Lane. In July 2008, they were approached by Taurus Waste Recycling Ltd (“Taurus”) and in August there was an Agreement for Lease for a term of 25 years at an initial rent of £208,000 pa with five yearly rent reviews. This Agreement was subject to Econometric gaining planning consent and the licence. Consent was obtained in January 2010, following delays caused by power lines and local objections. Taurus took up occupation in September 2010 but the lease was not completed until March 2013 because of having to wait for a Building Regulation certificate.
35. In cross-examination, Mr Holland said that Taurus paid “under a type of licence thing” £156,000 pa for approximately half of the site between 2010 and when the lease was completed.
36. Mr Andrew Crawford is, in addition to being a chartered surveyor, a member of the Institute of Quarrying and an associate of the Chartered Institute of Waste Management. He is also a past chairman of the Minerals and Waste Management Faculty of the RICS, and has specialised for some 20 years in the valuation and planning of such properties throughout the UK and overseas. In his report, he said that he had some general acquaintance with the vicinity of Marshgate Lane, but had not visited the Econometric site prior to the compulsory acquisition. He said he understood that, when the site was acquired by Econometric, it was in a vastly worse state than it was at the valuation date. He was aware of the extent of works that had been undertaken by Mr Holland before the site was let to BWML and said that in his view, the Waste Management Licence that was subsequently obtained in May 2004 was of significant value due to the very high volumes and broad range of waste types including putrescible (food) waste that were permitted under it. The site had formerly been a waste transfer station, but the extended licence enabled it to become a recycling facility.
37. The site was also one of the nearest to Docklands and the City of London and this was of particular value as it meant journey times and distances from there (where there was significant development occurring) were shorter than those to most of the comparables that had been considered. Thus, wear and tear on the contractor’s vehicles was less, as were fuel costs, and more round trips could be covered. Factors to be taken into account in assessing the value include the location and source of the waste arisings that the site would handle, the nature and extent of the waste transfer licence and the quality of buildings on the site. It was most unusual, Mr Crawford said, for waste management sites to be purchased or sold as an individual property asset. The use of such sites is sui generis (in a class of its own) and thus will be outside the presumptions contained within a local plan. Comparable evidence, therefore, relating to either capital transactions or rental values in the vicinity for such sites was non-existent, and, he said, none of the supposed comparables referred to by Mr Barden for the acquiring authority were appropriate for varying reasons – principally that all of them were less conveniently situated to the city, were tainted by the Olympic scheme or were materially different as to size and/or quality of infrastructure.
38. There were two probative factors upon which Mr Crawford relied in support of the contention that, on review in November 2008, the rental value of 28 Marshgate Lane would be £208,000 pa (£7.12 psf). Firstly, upon the basis of what he had been told in connection with the £270,000 capital payment made by BWML, he thought that it could be considered to be a premium for a lease, and thus should be capitalised for the period to the first rent review. This was, he said, his primary argument. Secondly, and only if the Tribunal does not accept the lease premium contention, the acquisition of the site in Farnborough by Econometric in 2007 and the subsequent letting to Taurus Waste Management Ltd, once the site had been prepared for their occupation and the relevant Environment Agency permit had been obtained.
39. In arriving at a capital value for the site at the valuation date, Mr Crawford said that he used a yield of 7%, this figure not being in dispute. This produced a value of £2,813,592 to which he added re-investment costs at 5.7625% and a basic loss payment of £75,000 giving a total claim of £3,050,726.
40. In examination in chief, Mr Crawford said that the alleged premium would be seen by a hypothetical purchaser to equate to about £1,000 per week over the first 5 years of the lease, and he would thus expect the rent to rise on the first review to at least that amount, and would thus be £4,000 pw from that date. The waste industry, he said, tended to work, in assessing rental values, on a weekly basis. The rental value for Farnborough was in the same sum and due to the similarities, particularly in terms of the permitted tonnages, that was a good proxy for his assessment of the value of 28 Marshgate Lane.
41. In cross-examination by Mr Williams, Mr Crawford accepted that there was nothing that would lead a hypothetical purchaser, who he thought would be “someone like Mr Holland” rather than an institutional investor, to think that there was any real likelihood of vacant possession being obtained before the end of the term. He agreed that the rent review provision in the lease was “upward only” and that clause A(IV) stated that an independent surveyor appointed to determine the rent on review shall assume that “the Tenant has not carried out any work which has diminished the rental value of the property” and that “it is available to let by a willing lessor to a willing lessee as a whole without premium…” He accepted that there was nothing in the lease, or anywhere else (such as in a side letter), that encapsulated the £270,000 payment as a premium. That sum was not, therefore, a characteristic of the interest being sold. However, he did say that it could be expected that the agent for the landlord would point out to the arbitrator that the £270,000 had been paid, but equally he accepted that the agent for the tenant would be quick to point out that it was nowhere recorded as a premium. Further, Mr Crawford acknowledged that, in the hypothetical sale at the valuation date, there was nothing in the lease that could lead a hypothetical purchaser to conclude that he could secure a higher rent on review.
42. As to his reliance upon the Farnborough transaction, Mr Crawford conceded that there was no evidence which could lead to the conclusion that a hypothetical purchaser of 28 Marshgate Lane in April 2007 would have either had, or have been able to obtain, any knowledge of the transaction that eventually took place at Lynchford Lane – either Econometric’s purchase, or the subsequent lease to Taurus. He also acknowledged that the Farnborough site was almost twice the size, had a tipping hall two and a half times as big as that which was constructed at Marshgate Lane and, being some 45 miles from central London was in a significantly different area. Further, the buildings were three times larger at Farnborough and were purpose built. The only thing that was broadly similar was the permitted tonnages, although Mr Crawford accepted that permitted tonnages in excess of that which could reasonably be processed within the confines and other restrictions of a site would have no additional value.
43. Mr Crawford accepted that, if the issue of Econometric’s case on the premium was not accepted by the Tribunal, and if it found that Farnborough could not be considered comparable, then there was nothing from which it could be concluded that the rental value on review should be more then the passing rent, and that in that case the capital value could be no more than £1.4 million.
44. Cross-examined by Mr Mould QC, and asked to put himself in the position of a hypothetical bidder for 28 Marshgate Lane as an investment, Mr Crawford said that he would have taken account of the £270,000 payment, and could have established from the vendor what he thought it was for. However, he accepted once again that there was no documentary evidence to support that contention, and that if he had spoken to the tenant, he would have had the other side of the story. He would also have considered the position of the tenant through inspecting its accounts and accepted that if the payment was to be considered to be a premium, with its consequent effect upon the rental payable at review, there would be a question as to the tenant’s ability to pay such a significant increase. If there was a risk of the tenant “going bust”, Mr Crawford acknowledged that there was no evidence in the market at the valuation date, other than that upon which he was relying, to support such an increase. Therefore, if there was a rental void due to the demise of the tenant, it could not be anticipated that any increase, significant or otherwise, could be expected.
45. Mr MacDiarmid is a chartered surveyor and associate director with Savills Development Department. He has some 6 years experience of development and CPO related valuations in the Stratford area of east London. Acting on behalf of the second to fourth claimants, he said he had been instructed to assess the rental value of 28 Marshgate Lane at the valuation date of 2 July 2007, the value of Courtville’s leasehold interest (if any) and the value of the Brewster family’s freehold interest in 4 Knobs Hill Road. It was accepted that if it were found that there was no profit rent in 28 Marshgate Lane at the valuation date, there would be no value in the leasehold interest. As to Knobs Hill Road, this issue has now been resolved and we do not therefore deal with it further here.
46. Regarding the rental value of 28 Marshgate Lane, Mr MacDiarmid said his investigations of the market revealed the general tone of rents for industrial land in the area in 2007 to be between £2.00 and £2.80 psf. He produced a schedule of the rental evidence he had considered together with location plans. In his view, the land (as a bare site) would have been worth in the region of £2.50 psf at the valuation date (£73,087.50pa) and thus at £104,000 pa (£3.56 psf) it would be regarded as significantly over-rented.
47. However, he said he had also been asked to consider whether the £270,000 payment made at the commencement of the lease and described as being for various assets, machinery and a steel framed building, might be deemed to be a premium, and if so what effect that would have on rental value. In order to formulate his opinion, he said he sought to look at the situation mathematically by analysing the rent in two ways. Firstly, on the assumption that the rent was for a bare site with BWML having purchased the new tipping hall and the benefit of it with a suitable rental adjustment. The passing rent of £104,000 pa therefore equated to £3.56 psf for the 29,235 sq ft site area.
48. Alternatively, on the assumption that the tipping hall was not purchased, and the rental value of it was therefore included within the passing rent. The gross internal area of the tipping hall was 7,750 sq ft and in accordance with usual market convention, he said he had assumed that an area of yard would be given over for circulation and parking (an equal amount). This would leave 13,735 sq ft of useable remaining yard area. Being of modern construction, he assumed a rental value for the hall (to include the circulation/parking area) at £4.00 psf giving £31,000 pa. This left £73,000 for the additional yard which equates to a rent of £5.31 psf.
49. Mr MacDiarmid then sought to reconcile those figures using comparable evidence relating to yards and buildings in the area, and also took into consideration the RICS definition of market rent applicable in 2003 which states:
“The estimated amount for which a property, or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease teems in an arms-length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.”
50. He said that whilst he accepted the rent agreed in 2003 would satisfy the RICS definition, and the transaction would be regarded as a relevant comparable, a valuer acting at that date would be aware of the circumstances prevailing (the prospective lessee’s “desperate” requirement to relocate) and would thus place less weight on that figure than on other transactions.
51. Taking all these factors into account, Mr MacDiarmid said that whichever of the two scenarios was considered, the rental agreed in 2003 was overstated to the tune of about £45,000 pa.
52. It was a fact that the rent payable would be affected not only by whether key money or a lease premium was payable, but also by any other incentives including rent free periods or a contribution to tenant fit out. Those incentives have the effect of distorting the headline rent, which can result in under or over valuing the property. If therefore, the £270,000 were to be rentalised for the 5 years up to the first review date, and under the lease terms from that point on the rent would be determined in accordance with the rent review clause (upwards only), this would produce a net effective rent of £158,000 pa. This, he said, had the effect of further increasing the amount by which he thought the property was over-rented.
53. Mr MacDiarmid went on make some assumptions as to what he thought would have been in the minds of the parties to the transaction in 2003 and concluded that “the payment of £270,000 should not be considered a lease premium and should be considered a payment for the chattels including the tipping hall” and it would not therefore be appropriate to take the rental value of the tipping hall into consideration when determining the rent at the 2008 review.
54. Regarding the Farnborough comparable relied upon by Mr Crawford, Mr MacDiarmid said in cross-examination that a hypothetical purchaser would attribute no weight at all to this property – he would have no knowledge of it at the valuation date, because the deal had not happened. Even if the rent was agreed in October 2008, as Mr Crawford said, that was still well over a year after the valuation date and, in any event, there is no documentary evidence before the formal agreement for Lease dated September 2010. The site was also a long way away and in terms of comparability therefore it was a non-starter. It was his view that the local comparables in east London produced by himself and Mr Barden were more indicative the tone for the local market, even if were found that some of them had been tainted by the CPO scheme. Mr Crawford, he said, had chosen to completely ignore the local market and had thus failed to objectively consider relevant transactions.
55. Mr Barden is a partner in Gerald Eve LLP and has more than 30 years experience as a valuer and planning adviser specialising in work relating to the mineral, waste and industrial sectors. He said that in assessing the rental value of 28 Marshgate Lane at the valuation date, the appropriate yield to apply, and thus the capital value, he put himself in the position of the valuer acting for a hypothetical purchaser who, he said, would be likely to be a private investor or a personal pension fund seeking an income stream, but which was prepared to accept an element of risk. Particular risks included the fact that there was relatively weak covenant strength, and there was a tenant only break option in 2008 which could lead to a potential rental void.
56. He went on to provide a general market over view as at 2007 and commented on the likely specific demand for waste transfer sites before considering a number of comparables from which he produced his conclusions. As to the £270,000 alleged premium, Mr Barden said that due to the fact that there was no reference to the payment of a premium in the lease, he would have advised a purchaser not to rely on the payment as evidence for assessing the rental value unless there were clear comparables demonstrating that the property had been under-rented.
57. Mr Barden said that a rental increase of the scale proposed by the claimant’s valuer would need strong confirmation from comparables that, at the valuation date, there was evidence to suggest the passing rent was below market value. In his view, on the basis of the comparable sites that he had referred to, a purchaser would be extremely cautious about assuming there would be any increase on review. There is, it was accepted, little evidence available for waste transfer sites, and that which there is needs to be subject to subjective adjustment and specialist knowledge to interpret.
58. Having considered a number of comparables (set out in Appendix 3 to his report) based on both bare-sites and those with buildings, he said he could not find any that supported a rental value at the valuation date in excess of £3.56 psf. He had referred to four waste management sites at Thames Wharf which had been acquired by the authority for the purposes of relocation of sites affected by the scheme, so he accepted that some of them were tainted and included elements of compensation. However, he stressed that the agents had been instructed to negotiate rents consistent wit the industrial market and reflecting he users’ requirements. He also accepted that on those properties, the leases were relatively short, being for only 7 years.
59. Mr Barden said that his analyses of the land only comparables showed rental values of between £1.71 and £2.01 psf, and land/buildings between £1.77 and £2.85 psf, the highest being in respect of BWML’s relocation from 28 Marshgate Lane. Even if the assumption were to be made that the tipping hall is not a tenant’s improvement and falls to be valued for rent review purposes, the market rent based upon the comparables still falls below the £3.56 psf passing rent. At an appropriate yield of 7% (agreed), the capital value of 28 Marshgate Lane based upon the passing rent of £104,000 pa becomes £1,400,000.
60. In a supplemental report dated 28 January 2014, Mr Barden referred to the Clearun case (Halpern & Ors v Greater London Authority [2014] UKUT 0116 (LC), relating to 151 Marshgate Lane and the evidence that had been produced in it, but said none of that altered his opinion of the value of 28 Marshgate Lane.
Discussion and conclusions
61. We consider firstly the question of the £270,000 capital payment.
62. A lease premium is a capitalised payment of rent. Since it is a payment of rent, it is to be expected that it would be recorded as such, probably in the lease but possibly in some other document such as a side letter. It is common ground that this payment was never recorded as a premium in any document. The invoice agreed to have been given in exchange for the £270,000 is the only document that says what the payment was for. It records that it was a payment for plant and machinery. No one now maintains that was in fact the case but it does not support the proposition that the payment was a premium. It does suggest caution is needed in considering the evidence of the parties. The sworn statement of Mr Brian Brewster says the payment was being requested as an interim payment to cover Mr Holland's construction costs. We bear in mind that Mr Brian Brewster was not available to be cross-examined and that Mr Holland said Mr Brewster was simply telling a lie; Mr Holland insisted he did not need the money. On the other hand, he agreed that he did not seek the money as a premium at the time the lease was being negotiated. He said that through naïveté he did not realise that was something he could have done. He agreed he had been in a strong bargaining position. In his written statement he said "My objective was simply to obtain a capital sum to contribute towards the cost of redeveloping the site as a recycling facility." He agreed that the money did, at least in part, go towards developing the site.
63. As Mr Williams submitted for the acquiring authority, the payment would only have a bearing on the hypothetical transaction upon which compensation is assessed if the hypothetical purchaser was confident that, on the basis that the payment of £270,000 was really a premium, he could secure a higher rent on review than the passing rent in the lease. If necessary he might have to demonstrate that fact to an arbitrator on the basis of the available evidence.
64. Mr Mould submitted for the second to fourth claimants that Mr Holland was in a strong negotiating position against the Brewsters. They were desperate to relocate their business from Highbury and would have been aware of the significant capital sums that needed to be expended to make the site operational as a waste management station. Mr Holland’s protestations that he did not need the money are nothing to the point. He is a businessman, and saw the commercial opportunity to secure a substantial contribution to the costs, the incurrence of which was a pre-requisite of the lease going ahead.
65. On the evidence, we have no hesitation in concluding that it is more probable than not that the true nature of the payment was a contribution towards the development of the site and its construction costs, rather than a capitalised payment of rent. In our judgment, no hypothetical purchaser, aware of the evidence on either side, would conclude that this payment gave him a reasonable basis for establishing on a review that the market rent was not to be measured by the passing rent. It follows therefore that the payment of £270,000 is not something we take into account in assessing compensation.
66. We thus turn to the rental evidence. Econometric’s case, aside from the treatment of the up-front payment, was based solely upon the Farnborough transaction. Mr Williams submitted that notwithstanding the fact that the agreement for lease and the eventually completed transaction to Taurus took place significantly after the valuation date, it took Econometric over two years and £250,000 in fees just to get the planning consent. The site then had to be readied and a permit obtained. The actual letting transaction did not therefore occur until 2013.
67. Mr Williams referred to Bishopsgate Parking (No2) Ltd v The Welsh Ministers [2012] RVR 237, a case in which post valuation date comparables were considered in connection with the valuation of three multi-storey car parks. It was held that section 5A of the 1961 Act does not make irrelevant comparable transactions that post-date the valuation date, but it excludes any adjustment to the valuation in respect of anything that happens after the valuation date; that is an increase or decrease in the value. In the light of Mr Crawford’s approach, and his statement that Farnborough was a valuable “proxy”, the following paragraphs from the judgment were set out:
“62 The clear acceptance in Millwood of the potential relevance of post valuation date transactions has not in our judgment been rendered of no application in claims for compensation under the 1961 Act by the recent insertion of section 5A. Subsection (2) does not say anything that happens after the valuation date “shall not be taken into account” (cuff rule (3) in section 5). This is what it could, and no doubt would, have said if the intention had been to achieve the effect for which Mr Humphries [counsel for the claimants] contends. What it says is that no adjustment is to be made to the valuation in respect of anything which happens after the valuation date. “Adjustment” we take to imply an increase or decrease in value. What is excluded, therefore, is any increase or decrease in value that the land would have had if a post valuation date event had occurred before the valuation date. If the value of the land, or an element of that value, can only be established by reference to the knowledge that the market would have had at the valuation date, post valuation date events are necessarily excluded. Thus hope value, a value based on the hope of a future event occurring, cannot be established by reference to post valuation date events showing whether such hope was, or became more likely, to be fulfilled (see e.g. Swansea City Council v Griffiths, sub nom, Griffiths v Swansea City Council [2004] RVR 111). To take such events into account could cause the valuer to increase or decrease the hope value that the land in fact had on the valuation date.
63. By contrast, in our judgment, evidence of a post valuation date event may be relied on to establish an objective fact as at the valuation date. Thus a comparable may provide evidence of what the hypothetical vendor and purchaser would in fact have agreed. That an actual vendor and an actual purchaser have agreed a price on a property that is comparable with the reference property is undoubtedly capable of constituting evidence of what would have been agreed in the hypothetical transaction for the reference property itself. It is this evidential function that was accepted in Melwood. To put it in the most obvious way, the open market value of a precisely comparable property on the day after the valuation date would clearly be good evidence of the price that would have been agreed the day before for the subject property since the factors affecting the minds of the parties to the actual transaction would have been the same as those which would have affected the minds of the parties to the hypothetical sale on the previous day. Of course, the degree to which the comparable transaction will assist in determining the price of the reference property will depend on how similar the factors that are material to the valuation were at, respectively, the date of the transaction and the date of the valuation and on whether adjustments can satisfactorily be made for such differences as there were. But this applies both to pre valuation date comparables and to post valuation date comparables.”
68. It was submitted that the term “proxy” used by Mr Crawford in his heavy reliance on the Farnborough site is not helpful in the valuation issue which is before us. A relevant transaction may be of assistance in two ways. It may be known to the market at the valuation date, in which case the valuer advising the purchaser would have regard to it in formulating the bid. Secondly, and if relying upon a post valuation date transaction, it might provide evidence of an objective fact at the valuation date by demonstrating through the market principle what factors would have been in the minds of the parties to the hypothetical transaction. This requires that the same factors are shown to exist between the hypothetical transaction at the valuation date and the date of the comparable transaction. Differences within those factors may be the subject of an adjustment. It is impermissible, however, to use later transactions simply as a proxy for the hypothetical transaction as this is not evidence of what the hypothetical purchaser would have had in mind in the round in formulating his bid. To identify only certain factors from one post valuation date transaction, for example, licensing capacity, and apply those selected factors ignoring the other factors will plainly give an unbalanced view as to the outcome of the hypothetical transaction. It is not, in reality, a comparable transaction, and as Mr Crawford admitted, there was nothing to which the hypothetical purchaser of 28 Marshgate Lane could have had regard in respect of Farnborough at the valuation date.
69. Mr Williams also pointed out, as identified by Mr Barden in his evidence, just how different Farnborough is to 28 Marshgate Lane in terms of size, fit out, location and market. Further, if the Farnborough rent was analysed on a unit basis per sq ft, it discloses a value of £3.58 psf which is comparable to the passing rent at Marshgate Lane at the valuation date. That is vastly different to the £7.12 psf which Mr Crawford contends as a rental value for Marshgate at the 2008 review date.
70. We agree. This last point brings into stark reality the error of Mr Crawford’s methodology. Although the precise date upon which the new rent for Farnborough was agreed with Taurus is not clear, it certainly would not have been until well after the review date for Marshgate Lane. We were not advised of the figure which Econometric paid for Farnborough in 2007 (surprisingly) but the deal with Taurus was so long after the valuation date (and the actual “transaction” was not until 2013) that for that to be attributed any weight at all would be to completely fly in the face of the principle set out in the extract from Bishopsgate set out above.
71. Even if this transaction could be taken into account, we are satisfied that the circumstances in terms of the site’s location, market, size and other factors are so different as to mean little if any weight could be attributed to it. Thus, the two grounds upon which Econometric base their arguments fall away, and in reality therefore, it has not been necessary to analyse in any detail the comparable evidence that has been referred to by Mr Barden and by Mr MacDiarmid. However, what we would say is that none of the comparables relied upon by the acquiring authority indicate a rental value of the £3.56 psf passing rent at 28 Marshgate Lane at the valuation date. Even if we conclude that there should be a significant uplift from the range of rental values that Mr Barden’s comparables do indicate to account for 28 Marshgate Lane’s much closer proximity to the city, the rental value would not, in our view, increase beyond the passing rental figure – and certainly there is absolutely nothing to suggest anywhere near the figure argued for by Mr Crawford. Indeed, he admitted just that when he said that, excluding Farnborough, there was nothing to indicate that a profit rent existed at Marshgate Lane.
72. We conclude therefore, that Econometric’s case has simply not been made out and determine the compensation for the compulsory acquisition of 28 Marshgate Lane in the sum of £1,400,000 to which should be added the basic loss payment of £75,000 creating a total figure of £1,561,000.
73. It follows that, with no profit rent having been established, Courtville has no claim.
74. This determines the issues in dispute, and the decision is final. We now invite the parties to make submissions on costs and an addendum will be added once that matter has been determined.
DATED 22 May 2014
HH David Mole QC
P R Francis FRICS