[2023] UKUT 153 (LC)

Mr. Henderson carried out a comparison of the rating assessments relating to both the reference and the relocation properties. In relation to the 2010 rating list he noted that the compiled list assessment for the reference property was rateable value £47,250 in comparison to the relocation property which began the 2010 rating list at rateable value £111,000 and was subsequently reduced to rateable value £103,000 with effect from 11 January 2016.

Regarding the 2017 rating list, which has a valuation date of 1 April 2015, the relocation property was initially assessed at rateable value £75,000 but altered to rateable value £69,500 with effect from the compiled list date to take account of the building works in Charter Place. This concession was removed in December 2020 thereby reinstating the original rateable value of £75,000 with effect from first September 2018.

Mr. Henderson explained that the Valuation Officer (‘VO’), who is responsible for the maintenance of the rating list and assessing each property within it, is an independent valuer and uses evidence of net effective open market rental values to arrive at his opinion of value. He concluded that the rateable value would therefore reflect the Valuation Officer’s opinion of the merits of the two properties, and this suggested that he considered the reference property was inferior to the relocation property, as reflected in its net effective rental value.

At the hearing we asked Mr Henderson why there was a disparity between the 2017 rating list assessment of rateable value £75,000 and the agreed headline rent of £100,000 per annum bearing in mind that the latter was agreed only six months after the valuation date for the 2017 rating list. Mr Henderson considered that the VO were often very conservative in their approach and this was evident in the level of assessment.

Neither Mrs Okell nor Mr Henderson had devoted much attention to the question of what would have happened to the rent payable at the reference property in the no scheme world had it been the subject of a lease renewal in 2017. We viewed this as an important consideration and asked them both to comment on it.

In his first report Mr Henderson said that the passing rent, notwithstanding that it was effective from 2012, reflected the plans to redevelop Charter Place and a lack of active asset management. Rent reviews had not been implemented and there were a number of empty units. When we asked for his opinion on the likely terms of a lease renewal in the no-scheme world he considered that a public body such as Watford would have required a longer term of 10 years, with no rent free period and no break, as per the original lease. He agreed that the reference property had been a ‘clever’ choice, as described by Mr Lightowler, because it was parasitic on the adjacent Intu Watford whilst benefitting from a lower Zone A rent.

Mrs Okell considered that whilst the renewal would have provided an opportunity for rental uplift, it was unlikely to have been significant. She disagreed with Mr Henderson about lease length and considered that a shorter lease of six years with a three year break clause would have been more likely.

Neither Mrs Okell nor Mr Henderson provided any details or analysis in relation to other shops in Charter Place so we have no means of judging whether the terms under which the reference property was occupied were particularly advantageous. It is therefore impossible to come to any judgement about whether the claimant’s level of profit was unusually good as a result of beneficial lease terms, or eminently achievable by another similar business.

Mr Henderson conceded in cross examination that available alternative properties within Intu Watford were not suitable for the claimant, so we need say nothing further in this regard. We therefore turn to relocation options outside Intu Watford.

We take the view that only four of the five properties identified by the parties in November 2022 are worthy of consideration in this context as the property located in the Lower High Street cannot, by any stretch of the imagination, be considered comparable with Charter Place. The same can be said of the properties, other than those in Intu Watford, that were the outcome of Mrs Okell’s original search.

There are several metrics which can be utilised to assist in reaching a judgement as to whether any of these properties were suitable to the extent that they provided equivalence for the claimant’s business. The first of these is occupational costs. Nos. 52 and 122 High Street had the highest costs at £152,081 and £144,264 per annum respectively. No service charge details were provided. No.5 Parade is closely aligned with the reference property. The costs were stated as totaling £89,826 per annum including the service charge. No meaningful comparison is possible with No.68 as we have only been provided with the rent payable of £50,000 per annum.

The second is location. We have, unfortunately, not been provided with any information about footfall in Watford town centre other than in Charter Place and Intu Watford. Equally, neither party has provided any analysis of the transactions that were concluded. Our assessment cannot therefore be described as empirical.

Numbers 52 and 68 High Street are situated in a part of the High Street that was affected by works associated with the scheme. The positive aspect of this location is that once the scheme had been completed there were a number of bus stops nearby, but the buses disgorge their passengers on to the eastern part of the street where they are immediately confronted with the facilities of Intu Watford. Moreover, both units occupy sites on the less attractive western side of the street which contains a mixture of occupiers including banks, restaurants and bars. The adjacencies were not therefore exclusively retail in nature, and we conclude that both positions are inferior to Charter Place.

From a positional perspective 122 High Street seemed to us to be a better prospect. We observed on our inspection that this part of the High Street had a reasonable level of footfall, perhaps resulting from those using the lower entrance to Intu Watford, the presence of Marks and Spencer and Primark, and possibly McDonald’s and Costa Coffee, both of whom have large units at this end of the High Street.

We reached a similar conclusion about 5 Parade which appeared to benefit from footfall generated from those entering the town from the northern parts of Parade and possibly from Clarendon Road. Although this unit was located close to a number of food and beverage outlets, and was subsequently let to Greggs, it was also close to the extension to Intu Watford and in a pedestrianised part of the town centre.

The next aspect of our comparison was configuration and size. All of the units were on two floors, with what appeared to us, to be equal floor space on each level. Each was substantially larger than either the reference or relocation properties, in some cases nearly three times as large. We note that the claimant does not stock an extensive number of products and has no requirement for a large stockroom. We consider that whilst each had adequate frontage and no visible disabilities in terms of layout, they were all too large for the claimant’s business and had they acquired any of them the claimant would be paying for floorspace that they had no requirement for. All of the shops lack any kind of protection from the weather, a notable disadvantage when much of the shop’s stock is displayed in the window. We note that most of the claimant’s competition is in Intu Watford which is fully enclosed.

The final criterion is security. We acknowledge that a shopping centre location would usually afford better security to both retailers and their customers, but since jewellers often base themselves in normal shopping streets it would not appear to be a locational prerequisite. All four units are in shopping streets but two are close to restaurants and bars, whose clientele might congregate outside, which might have discouraged the claimant’s customers from lingering in front of the window display.

Notwithstanding that two of the locations benefited from reasonably prominent positions with good levels of footfall and those individual properties fulfil some of the selection criteria, none have the optimum combination of physical attributes and outgoings that would make them suitable for the claimant’s business.

We therefore conclude from the evidence we heard and the benefit of our inspections that there was no equivalent, alternative store to which the claimant could have relocated in lieu of the relocation property.

We have already concluded that we lack the information with which to form a view as to whether the claimant was benefiting from a concessionary rent at the reference property. In relation to the relocation property we know that the landlord of Intu Watford considered that the rent achieved was in excess of the estimated rental value of the unit. However, it is not clear by how much. We also know that there was interest in the unit from at least one other party and the experts agreed that the initial rent for the property of £100,000 per annum was likely to have represented the open market rental value at that point in time.

We note that the rateable value is £75,000 and that the antecedent valuation date for rating purposes is only a few months ahead of the valuation date in this case. Mr Henderson explained this discrepancy as being possibly due to use of historic data and a conservative attitude on the part of the VO. We have seen no evidence to substantiate this point. We note that the initial rent included a rent free period of six months and taking the whole of that concession over the period to the first review the equated rent is £90,000 per annum. At the hearing the experts agreed that it would not be unreasonable to make the assumption that the inclusion of a break clause in favour of the tenant would have inflated the rent by about 5%. Stripping out this element results in a figure of £85,714 per annum which, although it is closer to the rateable value, is not wholly aligned.

Having considered these various aspects, and the opinions of the experts, we conclude that there is no convincing evidence that the claimant paid more than the market rent for the relocation property.

The floor areas referred to in paragraph 80 indicate that the two properties were very similar in size, but they failed to take into account the remote store room of 25.5m² at the reference property and it is evident that the relocation property is smaller in overall size than the reference property if the remote store room is included in the comparison. It has a larger frontage to the mall, but lacks a return frontage resulting in a lower overall figure. It is compromised by changes in floor level and the bulkhead forming part of the mezzanine intrudes in to the sales space, resulting in a shop that appeared to us to be more difficult to fit out and operate. Notwithstanding these deficiencies, the property was identified by the claimant as suitable for their business and had previously operated as a jewellery shop.

That said, and having taken into account all of the attributes of the properties under consideration, we conclude that the relocation property was the only suitable option that was available at the time to the claimant. It was in a better position than their former premises, the retail shop was comparable in overall size and was capable of accommodating their corporate fit out merchandising albeit the end result involved a degree of compromise. It had a wider primary frontage than the reference property. Mr Henderson correctly pointed out that the Zone A area was 25% larger but did not acknowledge the disabilities inherent in its layout. It seems to us, on the evidence of Intu Watford itself, that retailers prefer rectangular sales floors with the smaller side forming the frontage. A shop configured with the larger side comprising the frontage will necessarily have a larger Zone A area leading to a higher rent in comparison to an identically sized shop of conventional layout. Additionally, in this case part of the ground floor sales area has been lost to an access area and the headroom compromised in part by the presence of the mezzanine. Regarding shop fitting, we have limited information about the quality of the fit out in the reference property although from photographs taken just before possession was secured, and included in Mr Henderson’s supplemental report, it appears contemporary in design and in good condition. Accordingly, we perceive there to be no material difference between it and the relocation property at the valuation date in this regard.

The annual occupational costs associated with the relocation property were £162,112 as an average for the two years to 31 March 2019. This figure includes the annual cost of membership of the Merchants Association. We have ignored YE 2020 because the 2020 rate liability we have been provided with appears to be erroneous and would lead to an unreliable result.

These compare to the reference property average of £79,383 for the three years to 31 March 2015, that is the last three full years of trading prior to the compulsory acquisition. We have used these three years. Even after taking inflation in to account it is obvious that after the relocation the claimant’s occupational costs were nearly 90% higher than before. We have no expert evidence to guide us, but take the view that in the no scheme world the costs at the reference property would not have been significantly different to those in 2015. The rent had not increased over the life of the lease, and neither expert stated that the lease renewal would have generated an increase of significance. The same can be said for the rate liability after the 2017 revaluation, although a lower rateable value in the 2017 List would not necessarily have resulted in an appreciably lower liability owing to the incidence of the transitional scheme.

Although we regard the relocation property as superior to the shop it replaced, the claimant operates a retail business and the primary measure of whether value for money was achieved must be the extent to which the profit margin altered after the move to new premises. We therefore turn to the evaluation of that loss and the quantification of the compensation that should follow.

For clarity, we produce here again the management accounts for the Watford store for the trading years 2013 to 2020:

Mr Epstein did not assess any permanent loss of profit to which a multiplier should be applied, but he agreed with Mr Woodward a potential multiplier for annual loss of 9.1 years in total. Mr Woodward’s assessment of temporary loss covered the period from 15 November 2015 to 31 March 2017, a total of 1.37 years. It was therefore agreed that the multiplier remaining for (any) permanent loss was 7.73 years, ending in December 2024. We note that this end date arises simply from the quantum of the agreed multiplier and has no other significance relating to trading or letting periods. The reality is that, having exercised the break clause and entered into the 2021 lease outside the Landlord and Tenant Act 1954, the claimant has no security of occupation in the relocation property beyond 22 June 2023. We do not have any evidence to support a claim for loss of profit beyond that date, so we adopt a multiplier of 6.23 to cover the period from 1 April 2017 to 22 June 2023.

By contrast with his use of the YE 2015 EBITDA of £306,166 for the assessment of temporary loss in YE 2016 and YE 2017, in order to assess permanent loss of profit Mr Woodward assumed that in the no-scheme world the EBITDA for YE 2016 would have increased to £327,011. This was assessed by grossing up the sales achieved in the relocation store from 1 July 2016 to a whole year basis (using the number of days), applying the gross profit percentage from YE 2015 and deducting the costs as in YE 2015. Figures for the two years were then weighted by 2:1 in favour of the YE 2015 (actual) figures to get a benchmark no-scheme world EBITDA of £313,114. The average of the actual profits achieved in YE 2018 (£101,332) and YE 2019 (£101,026) was £101,179 and Mr Woodward used that as the settled post-scheme EBITDA in the relocation property. His assessment of the permanent annual loss was therefore:

In order to reach a lump sum claim for permanent loss of profits Mr Woodward applied the agreed remaining multiplier of 7.73, to avoid double counting for the temporary loss between 15 November 2015 and 31 March 2017, as set out below. We note that the product of the two numbers is actually £1,638,258, but we show Mr Woodward’s figure for consistency.

The impact of Covid 19 closures and constraints in 2020 and 2021 had led the claimant to exercise the break clause in the lease at the relocation property, resulting in a two year rent-free lease from June 2021. The experts agreed that from the point in June 2021 when rent ceased to be paid for the relocation property, the £200,000 saved should be deducted from the claim for permanent loss, after adding back the £25,000 penalty for exercising the break clause to give a net deduction of £175,000.

We asked the parties and their financial experts to consider any additional impacts of Covid-19 on trading and profit in the affected years. It was agreed that the impact would relate only to YE 2021 and that the claim for permanent loss (if any) should be reduced further by £21,933 to reflect saved costs from Covid rates relief. Regarding the impact of Covid 19 on sales in YE 2021, it was agreed that a deduction should be made for the difference between the expected reduction in gross profit in the reference property and in the relocation property. The claimant assessed the amount to be deducted at £54,403 and the respondent assessed the deduction to be made at £69,284. The difference between the figures arose primarily from a difference in opinion between the accounting experts as to the extent to which loss of store sales can be evidenced to have been offset by an increase in internet sales.

The claimant’s figure for permanent loss after the adjustments is set out below:

Like the experts, we are hampered by the lack of disclosure of management accounts for comparator stores within the claimant’s company, which would have given us a context for the likely performance of the Watford store in the no-scheme world, against which to judge the impact of compulsory acquisition and relocation of that store. However, we heard no evidence which would lead us to conclude that the management accounts provided for the Watford store for the trading years 2013-2020 were unreliable, and both experts relied on figures drawn from them in their assessments. We further note that the claimant’s auditors commented in a letter to Mr Lightowler dated 14 November 2021, that having reviewed the CPO loss calculation spreadsheet, the underlying records and statutory accounts for the years 2015 to 2019, they concluded that the trading results for the periods 1 April 2014 to 16 November 2015 and 26 June 2016 to 31 March 2019 materially agreed with the underlying company records. We therefore adopt figures from those accounts where appropriate as the best available to us.

We will overlook the fact that in the assessment of permanent loss Mr Woodward introduced a higher predicted no-scheme world EBITDA for YE 2016, and weighted it with the 2015 EBITDA to create an even higher benchmark net profit than that used in his assessment of temporary loss. We see this not only as a contradiction, but one which exaggerates further the unrealistic approach to future budgeting which we commented on earlier. Mr Woodward’s essential and simplistic assumption was that sales, gross profit and overheads in the no-scheme world would all have remained unchanged for the next nine years so that net profit would never have dropped below the high point of YE 2015. That is just not a credible assumption to make and there is no evidence available from any comparator stores to support it. Moreover, Mr Woodward then chose to compare his unrealistic benchmark no-scheme world net profit with a real world benchmark based on the average net profit achieved only in the two years YE 2018 and YE 2019, even though net profit picked up a little in YE 2020. We find this selective approach unattractive and agree with Ms Clutten’s submission that adopting Mr Woodward’s figures would be likely to result in the claimant being over-compensated.

We turn to Mr Epstein’s use of gross profit as a potential alternative approach to establishing loss of profit over the longer term. The difference between a gross profit and net profit approach to permanent loss is an assumption that, subject to any (limited) adjustment for different overheads, a difference in profitability would arise essentially from a difference in net sales. Mr Epstein relied on Mr Henderson’s opinion that higher overheads in the relocation store provided value for money, so did not propose any adjustment to overheads beyond the two years of temporary loss. Actual net sales achieved through until YE 2020 are evidenced from the management accounts, so it is necessary to establish a hypothesis by which to estimate what the level of net sales would have been in the no-scheme world.

Mr Epstein’s hypothesis, in the absence of comparator stores, relied on the national average sales trends over the period from 2013 through to 2020. This has the advantage of providing an objective continuum of sales trends across the period before, during and after the events which took place in Watford. But its weakness is that over that period the total number of Warren James stores increased by over 90% from 115 in 2013 to 220 in 2020. Mr Easton submitted that an element of the recorded year on year fall in average sales per store would be attributable to the effect of diminishing returns, and also to new stores opening in smaller towns with a smaller total spend. Mr Lightowler had given evidence of the reduction in turnover in individual Glasgow stores which had resulted from opening more stores in the same city. However, as no new stores had been opened in the catchment of the Watford store to dilute the available custom, the use of a national average which included the effect of dilution was misplaced. This proposition was refuted by Ms Clutten on the basis that there was no evidence produced for the Tribunal to see and understand exactly how and where any dilution had occurred, or which towns were to be regarded as ‘smaller towns’.

We agree with Mr Easton that the very significant expansion of the national business during the period under consideration means that we can place little weight on the national average sales trends as an indication of what might have happened at Watford. Whilst we agree with Ms Clutten that evidence to assist us in interpreting the national results in terms of dilution and town size would have been helpful, and we appreciate the attempt made by Mr Epstein to analyse the data in more detail, we consider that even with better information the approach could not have provided a reliable guide.

We have previously assessed the temporary loss of profits suffered by the claimant for the two trading years 2016 and 2017, so the assessment of any permanent loss begins with the trading year 2018. In the management accounts we have figures for the three full trading years 2018 to 2020. These show that net sales recovered to £518,448 in 2018, then fell by 6% over the period to 2020, averaging £504,572 across the three trading years. This figure is 15.8% lower than the average net sales of £599,510 achieved by the claimant in the three years 2013 to 2015, prior to relocation. In looking to explain this significant reduction we cannot see any evidence to suggest that simple relocation was the cause. However, we were provided with evidence of weekly footfall records taken between 2015 and 2020 in the Intu Centre outside M&S (and therefore close to the relocation property) which show a very significant and enduring reduction in footfall from Q2 2016. Neither expert was able to see a reason for the timing of the reduction, or the scale of it, but it would certainly provide an explanation for an overall lower level of net sales after relocation than before.

We have come to the view that the claimant’s profit level at the reference property was not exceptional in the sense that it was not out of all proportion to what might be expected in similar circumstances elsewhere. The occupational overheads in the relocation property of rent, service charges, merchants’ association membership and rates are at least double the level of those in the reference property, and this is at the heart of the claimant’s case for permanent loss of profit. Against a backdrop of reducing footfall and net sales which cannot be attributed to the compulsory acquisition and relocation, we consider that the further losses incurred by the additional burden of higher property overheads can be directly attributed to the relocation. In short, the claimant achieved a lower turnover from more expensive premises and has suffered a permanent loss as a result. On that basis the additional burden of higher overheads should be compensated. We have set out in paragraphs 115 and 116 our assessment of the average annual occupational costs of the reference property and the relocation property and it is the difference between these two figures which we assess as compensation for permanent loss. That assessment, before adjusting for Covid 19 and exercise of the break clause, is set out below:

We determine the reference as follows:

Statutory interest and post-reference costs may be payable in addition.