For the appellants: Haddow QC; Eversheds LLP

For the respondent: MacIver; Simpson & Marwick

27 June 2012

Introduction

[1] I agree with the Opinion of Lord Hodge and with the disposal that he proposes.

[2] An assessor is not bound to apply a revaluation scheme of the Scottish Assessors' Association (SAA) if in his judgment it is not suited to the circumstances in his valuation area or in any specific part of it. In this case the assessor used local rental evidence in devising his own scheme for the revaluation of industrial properties. The scheme is set out in the Practice Note to which Lord Hodge refers. It is significantly different from the scheme produced by the SAA for the same Revaluation. Each scheme is coherent and self-contained. In the present case the appellants' professional advisers followed the methodology of the assessor's scheme but relied on the quantum discount rates used in the SAA scheme. In my opinion, it is contrary to principle to adjust the assessor's valuation by selecting from the SAA scheme some element that may be more advantageous to the ratepayer. That approach, which the Committee rightly rejected, served only to confuse the issue.

[3] It is at once apparent that the valuation of these subjects was a particularly difficult exercise. There was a paucity of rental evidence of the kind contemplated in section 6(8) of the Valuation and Rating (Scotland) Act 1956 (the 1956 Act). Such rental evidence as there was related to four transactions for units in the Inchinnan-Erskine area that were in the narrow range of 425 sm to 501 sm, one transaction for a unit of 1,556 sm and a sale and leaseback transaction for the unit of 6,142 sm that is the subject of the appeal by Total Repair Solutions Limited (Total Repair).

[4] That evidence left the assessor with the general problem of fixing quantum discounts for units larger than these, and the particular problem of valuing two subjects, those of Rolls-Royce PLC (Rolls-Royce) and Hewlett-Packard Limited (Hewlett-Packard), which stood apart from the other subjects covered by the scheme. These were units of over 50,000 sm. They were more than twice the size of the next largest, the unit of around 20,000 sm occupied by Mackays Stores Limited (Mackays).

The assessor's scheme

The basic rate and the banding
[5] The assessor derived a basic rate per square metre from the rental evidence and classified the subjects according to floor area in five bands. The lowest band was for units of up to 1,000 sm, for which he applied a basic rate of £50 psm. In the bands above that he discounted the basic rate for quantum by 5%, 10%, 15% and 25% respectively, the 25% discount being applied to units of over 50,000 sm.

The assessment of units up to 6000sm

[6] In my opinion, the assessor cannot be faulted for the rates that he adopted for small units in his lowest band and in his second band of 1,001 sm to 5,000 sm. For these he had a basis in rental evidence. There was therefore a proper basis for the valuation of the unit occupied by Teknek Electronics Limited (Teknek). In the third band, 5,001 sm to 10,000 sm, the evidence of the sale and leaseback transaction on the unit occupied by Total Repair had to be treated with caution (Ass for Highland and Western Isles v Marks and Spencer plc [2010] RA 235); but I agree with Lord Hodge that it gave the assessor a relevant basis for his valuation of subjects of around 6,000 sm.

The assessment of the largest units

[7] For the assessment of the three largest units there were two main problems. The first was to find a reliable series of percentages by which the basic rate could be tapered. The second was the lack of any evidential basis for the rate of quantum discount that was applied to the largest units.

The assessment of the quantum discounts

[8] On the question of the quantum discounts to the basic rate, the assessor took as his starting point the valuations that applied in the 2005 Roll. He then quantified the trend in rental values since the 2005 Revaluation by reference to the rental transactions for the five smallest units to which I have referred; the current rent of Rolls-Royce at the valuation date, the sale and leaseback transaction at Fountain Drive and a number of agreed valuations on small units at the 2010 Revaluation.

[9] In my view, this was not a sound basis on which to fix the values of the largest units. It was essentially an exercise in updating the previous revaluation. I do not regard that as a proper revaluation method.

Quantum discounts in relation to the largest units

[10] The problem of assessing quantum allowances at the top end of the range was not new. It arose, for example, in Magell Ltd v Dumfries and Galloway Regional Ass (2006 SC 627) where, in valuing an isolated unit of nearly 14,000 sm, the assessor applied a rate derived from passing rents of units of less than 10,000 sm, two of which had areas of only 1,174 sm and 1,593 sm respectively, and made a quantum allowance of 27%. In that case the subjects had been let on the open market about 20 months after the valuation date on the statutory terms other than duration, which was agreed to be immaterial. That was primary evidence for the purposes of the 1956 Act. It pointed to the unreliability of the assessor's scheme in relation to the largest units.

[11] In this case, however, the assessor relied on the current rent for the Rolls-Royce premises. That rent, in my opinion, had no evidential value at all. The Rolls-Royce subjects were purpose-built in 2003. The subjects are held by Rolls-Royce on a lease that runs from April 2003 for a term of 25 years. The starting rent was £2,999,999 pa. The lease provides for a fixed increase in the rent at the rate of 1.5% every five years. At the 2005 Revaluation the starting rent applied. At the tone date for the 2010 Revaluation the rent was £3,231,850.

[12] The rent payable under the Rolls-Royce lease is completely at odds with the hypothesis set out in section 6(8) of the 1956 Act. In my view, it may be positively misleading in that context.

Conclusions

[13] I conclude therefore that the appeals of Teknek and Total Repair should be refused; and that the appeals by Rolls-Royce, Hewlett-Packard and Mackays should be upheld.

[14] This is not a case where, having rejected the assessor's values in the cases of Rolls-Royce, Hewlett-Packard and Mackays, we can simply adopt the figures proposed on behalf of the appellants (cf Magell Ltd v Dumfries and Galloway Regional Ass, supra). Those figures are suspect for the reasons given by Lord Hodge.

[15] Lord Hardie too agrees with the Opinion of Lord Hodge. In the result, therefore, the cases of Rolls-Royce, Hewlett-Packard and Mackays will have to be returned to the Committee for a re-hearing. For that purpose it will be for the assessor to reconsider his valuations in the light of our decision and to substantiate the valuations, whether existing or revised, for which he will contend.

For the appellants: Haddow QC; Eversheds LLP

For the respondent: MacIver; Simpson & Marwick

27 June 2012

[16] For the reasons given by Lord Hodge I agree that we should refuse the appeals by Teknek Electronics Ltd and Total Repair Solutions Ltd and allow the appeals by Rolls-Royce Plc, Hewlett-Packard Ltd and Mackay Stores Ltd, recall the decisions in their appeals and remit these cases to the Committee to re-hear them and make a decision de novo.

For the appellants: Haddow QC; Eversheds LLP

For the respondent: MacIver; Simpson & Marwick

26 June 2012

Introduction

[17] These are five linked appeals against decisions of the Renfrewshire Valuation Appeal Committee (the Committee) by which it dismissed appeals against entries in the 2010 Valuation Roll relating to large and very large modern industrial buildings at Inchinnan, close to Glasgow Airport and the M8 motorway.

[18] The grounds of appeal are the same in each appeal. In short, the appellants argued that the Committee had erred in law in accepting the Assessor's local scheme of valuation of large industrial properties at Inchinnan and Erskine when there was no comparison evidence of the rents which similar large industrial properties commanded on the valuation hypotheses. They argued that the Committee had failed to give weight to (i) the appellants' comparisons, (ii) the Practice Note No 1 of the Scottish Assessors' Association Industrial Subjects Committee (the SAA Practice Note), and (iii) evidence that the Assessor had agreed reductions in value of large industrial subjects where rental evidence was produced which challenged the valuations derived from his scheme of valuation. They also argued that the Committee erred in giving weight to various considerations which I discuss below.

The relevant law: an overview

[19] Where possible, industrial premises are valued by means of the comparative principle of valuation. The contractor's principle is used only as a last resort and regard may be had to agreed valuations of comparable premises (Callendar Abbotts & Dobbie Forbes Ltd v Ass for Stirlingshire 1962 SLT (Notes) 58).

[20] The quinquennial revaluation is designed to take account of changing circumstances. On revaluation the new roll should be based on a new assessment of the values of the subjects in the existing roll and not simply on an adjustment of those values (Ass for Dunbartonshire & Argyll and Bute v Akram [2011] CSIH 79, Lord Justice-Clerk Gill at para 5). Every revaluation is a fresh start involving a fresh appraisal of the subjects without any necessary regard to their earlier values (Belhaven Brewery Group plc v Glasgow City Ass 2003 SC 395, Lord Justice-Clerk Gill at para 16; Whitwell v Ass for Strathclyde Region 1986 SC 37, Lord Clyde at p.42).

[21] The Valuation Appeal Committee determines the facts of a case and decides on the weight to be attached to evidence. This court will not interfere with its view of the evidence if there is adequate evidence before the Committee to support its decision. Where the Committee has preferred one body of evidence over another this court will not interfere unless it is shown that it has erred in law, such as by taking account of an irrelevant factor or failing to take into account a relevant factor, or by proceeding on an incorrect principle (Miller v Ass for Glasgow [1962] RA 433; Dunfermline Corporation v Ass for Fife 1962 SC 321; Ass for Fife v Dunfermline Cricket Club [1962] RA 461).

The Appeal subjects

[22] The appeal premises were the following:

The principal issue

[23] The principal issue in these appeals concerns the quantum adjustment which is to be made to reflect the market reality that unit rates reduce as size increases. The appellants submit that the Assessor's scheme of valuation is flawed in its treatment of larger industrial units and that the Committee erred in law in dismissing their appeals.

The Assessor's Scheme of Valuation
[24] The Assessor based his scheme on an analysis of the rents of four properties in Inchinnan and Erskine of between 425 sm and 501 sm. This produced a basic rent of £50 psm. There was also rental evidence of a factory of 1,556 sm and the Assessor adopted a basic rate of £47.50 psm for it. But because most of the premises in Inchinnan and Erskine were owner-occupied, he did not have open market rental evidence from those locations to support the valuation of the largest units. For that he relied on (i) the agreed valuations on the 2005 revaluation and (ii) evidence of a general upward movement in rents in the area between the tone dates in 2003 and 2008.

[25] The Assessor made allowance for larger units in his scheme by applying a basic rate of £50 psm for units up to 1,000 sm and tapering that rate thereafter by up to a maximum of 25% as follows:

* reduced to £44 after obtaining post-tone date rental evidence below

[26] The Assessor looked to the following evidence to support his quantum scale for units over 1,500 sm. He identified trends of rental increases since the agreed valuations in the 2005 Revaluation in (i) the five properties for which there was rental evidence (paragraph [8] above) and (ii) the rent for the Rolls-Royce subjects, which admittedly was not an open market rent. No other evidence was adduced to justify the rate of £37.50 psm and thus the maximum discount of 25%. In further support of his scheme the Assessor referred to a post-tone date rent (September 2009) of 32 Fountain Drive, which was part of a series of transactions which included a sale and leaseback and also was not an open market rent. It had been fixed on expert advice in 2006. It supported a rate of £44 psm for units of about 6,000 sm.

[27] He also referred to various valuations agreed with agents in the 2010 Revaluation, including an agreed valuation of 3, Newmains Avenue, Inchinnan, which is a factory of 5,433 sm. As the Committee recorded, that agreement involved an 12% reduction from the issued assessment of £205,000 to £182,000, but the circumstances which justified that reduction were not explored. Beyond that evidence, the Assessor could pray in aid only his professional judgement having regard to the quality of the locality.

The Appellants' valuations
[28] The appellants accepted the Assessor's base rate of £50 psm for units under 1,000 sm. They submitted that there was no evidence to support the Assessor's scheme in relation to the larger units and argued for a quantum adjustment of about 22.5% for units of 5,000 sm, 37.5% for units of 20,000 sm and 50% for units of 50,000 sm or over. They supported their case by reference to (i) the professional judgement of their surveyors, (ii) the quantum adjustments recommended by the SAA Practice Note, and (iii) comparisons in Gourock, Greenock, Glasgow and Glenrothes. They submitted that, because there was no reliable rental evidence from comparable units in the immediate vicinity of the appeal subjects, it was necessary to look to very large industrial units elsewhere.

The Committee's decision
[29] The Committee accepted the Assessor's view that local comparisons were the most relevant evidence. The Committee acknowledged the paucity of local comparison evidence for large industrial units. It considered the quantum adjustment which the appellants proposed to be too high. It held that the Assessor did not need to follow the guidance in the SAA Practice Note as it gave merely a broad indication of possible adjustments on a country-wide basis and deferred to local evidence. It also opined that the appellants' comparisons did not assist, holding that the location of the appeal subjects was more attractive than the comparisons in Gourock and would command a higher value. The Committee recognised that the Rolls-Royce rent was not an open market rent but considered that it indicated an upward rental trend in the locality. The Committee attached some weight to the rent of 32 Fountain Drive, Inchinnan while acknowledging that the initial transaction had been a sale and leaseback.

Discussion
[30] I recognise the difficulty which the Assessor faced in gathering evidence to support the valuation of the largest industrial units. It is a perennial problem for assessors which can make their schemes unreliable in relation to such units (see for example, Magell Ltd v Dumfries & Galloway Regional Ass 2006 SC 627). In this case the appellants accept that the Assessor had reliable evidence of rents in units up to about 1,500 sm. I agree and would go further and hold, for the reasons set out below, that the Committee was also entitled to look to the rent of the unit at 32 Fountain Drive as supporting the Assessor's scheme for industrial premises of about 6,000 sm.

[31] Assessors and the Committee must regard with caution the rental from a sale and leaseback arrangement between connected parties as it may be an unreliable guide to the open market rent (Ass for Highland and Western Isles v Marks & Spencer plc [2010] RA 235, Lord Justice-Clerk Gill at paras [18] and [19]). In this case the sale and lease back of the unit at 32 Fountain Drive was part of a wider series of transactions which involved the sale of the unit by Teknek Electronics Ltd (Teknek) to a related party and, on the sale of Teknek to Regenersis of Glasgow Ltd, a lease to the latter company. The Committee found in fact that the transaction was designed to maximise capital value. But that did not necessarily mean that the rental had departed so far from the statutory hypothesis that it could not be taken into account as an indicator of value. It was the task of the Committee to decide on the weight to be attached to such evidence and it was entitled to take the view that the rent supported the Assessor's revised rate of £44 psm for units of about 6,000 sm and thus a discount of 12% from the base rate.

[32] Application of the quantum adjustments suggested in the SAA Practice Note would have entailed a much larger discount of 22.5% for units of 5,000 square metres. In my view the Committee was entitled not to give greater weight to the SAA Practice Note in the face of this local evidence which suggested that the quantum adjustments should be smaller. The SAA Practice Note emphasised the primacy of local evidence. The Assessor gave evidence that the quantum discounts in the SAA Practice Note were historically derived from assessments of capital costs and yields on investment rather than rental evidence. If that is correct, it would be consistent with the authority in paragraph [3] above to treat its use as a last resort. The Committee therefore did not err in holding that the Assessor did not need to follow the general guidance in the SAA Practice Note.

[33] The inevitable paucity of open market rental evidence means that assessors and ratepayers' surveyors have to take a broad approach in the valuation of larger units. The Assessor is entitled to rely on his professional judgment and does not need to produce mathematical proof of his valuation where he produces evidence on which he can make that judgment (B & Q plc v Ass for Dunbartonshire and Argyll and Bute VJB 2007 SC 135, Lord Justice-Clerk Gill at para [15]; Western Heritable Investment Co Ltd v Husband 1983 SC (HL) 60, Lord Keith of Kinkel at p. 75).

[34] The problem in this case is that the evidence on which the Assessor relied and which the Committee accepted cannot support that judgment. The Committee has erred in two respects. First, in view of the authorities to which I referred in paragraph [4] above, the Assessor was not entitled to rely on agreed valuations under the 2005 scheme and evidence of rental growth from those valuations. The Committee should have so held. Secondly, the Committee should not have placed any reliance on the Rolls-Royce rent as a support for the Assessor's scheme. On the analysis which the Assessor presented to the Committee the Rolls-Royce lease had a rate of £58.07 psm, substantially in excess of the Assessor's base rate for the smaller industrial units. On the information available to the Committee it was clear that it was far from an open market rent and that it could not be relied on to support the valuation of the two largest appeal subjects. It appeared that the rental increases for the Rolls- Royce unit were pre-ordained in the contractual arrangements rather than the product of a contemporaneous review. By relying on those two factors the Assessor had not justified his valuations of the units occupied by Rolls-Royce plc and Hewlett-Packard Ltd.

[35] The Assessor used the same evidence of rental growth from the 2005 Revaluation and the Rolls-Royce plc rent to justify his valuation of the 20,000 sm appeal subjects at 5 Inchinnan Drive which Mackays Stores Ltd occupies. The Committee accepted that evidence. Its decision on that unit cannot stand.

[36] I conclude therefore that while the Committee was entitled to accept evidence which suggested both that a 12% discount was appropriate for a unit of about 6,000 sm and that the quantum adjustments in the SAA Practice Note were too high for Inchinnan, it has to re-consider whether the Assessor can justify the adjustments for units of 20,000 sm or more.

[37] This is not a case where one can simply turn to the valuations which the appellants put forward as an alternative to the Assessor's valuations. Those valuations depended principally on the SAA Practice Note and there was limited evidence, which the Committee were entitled to accept, that its quantum adjustments were too high for Inchinnan and Erskine. Further, the Committee was entitled not to rely on the appellants' comparisons (a) because the Gourock and Greenock units were in less attractive locations and the allowance for quantum may be greater there than in a more attractive location, (b) because the quantum deduction for the Amazon unit in Glenrothes was based on a different assessor's scheme which adopted the SAA Practice Note on quantum adjustments, and (c) because the quantum deduction given by the Glasgow City Assessor for a factory at 1 Linthouse Road, Glasgow also was based on a different scheme.

Disposal

[38] I propose that we should (i) refuse the appeals by Teknek Electronics Ltd and Total Repair Solutions Ltd, and (ii) allow the appeals by Rolls-Royce plc, Hewlett-Packard Ltd and Mackay Stores Ltd, recall the decisions in their appeals and remit those cases to the Committee to rehear them and make a decision de novo.