[2023] UKUT 217 (LC)

The evidence of both hospitality experts was inconsistent and unsatisfactory. Having identified the site as a development opportunity neither produced a residual valuation and Mr Hunter relied on evidence of unidentified sites and unverifiable transactions which was of no assistance to us at all. Inexplicably, despite agreeing that the site should be valued as a development prospect, Mr Owens ignored development value altogether and adopted a speculative income based valuation for the existing buildings. He did not know when the last rent payable at the Cheshire Lounge was agreed, and he had no knowledge of how it had traded before it closed. The comparables on which he based his conclusion that the last passing rent was at a market level for the valuation date were not convincing. He provided no evidence of investment yields in his capitalisation of the rent.

In short, neither the approach of Mr Hunter nor that of Mr Owens seems to us to be a reliable guide to the “before” value of the Cheshire Lounge and we reject them both.

The material available to enable the Tribunal to carry out our own valuation is extremely limited.

Neither expert placed any weight on the claimant’s acquisition of the site despite the fact that the deal was under discussion prior to the service of the notice to treat and contracts were exchanged only five months after the valuation date. Mr Hunter’s valuation before rounding was £1,340,000 compared to the price of £1,332,500 originally agreed between the claimant and DT.

Mr Hunter’s unwillingness to place weight on the sale price appeared to be based on his understanding that the Cheshire Lounge had not been properly marketed and his assumption that a lack of exposure had negatively impacted the price achieved so that it did not represent market value. But we know that DT were receiving advice from an agent and during the course of the negotiations they claimed to be exploring options for the site with other interested parties. Such activity could not have come about without some kind of marketing, but the exact nature of that activity was not in evidence. Market value is defined in the International Valuation Standards as:

Different types of properties require marketing strategies appropriate to the market they wished to be exposed to. A hospitality development site in rural Cheshire may require a different style of marketing from an office tower in central Manchester. Not every property for sale is advertised in the property press or posted on-line. The Cheshire Lounge was no longer income producing, as the operating company was in liquidation, and the seller, DT, may not have had the resources for a high-profile campaign or it may have considered it unnecessary. It took advice and is unlikely to have adopted a marketing strategy which it considered would lead to the property being undersold. The claimant became aware of the opportunity by word of mouth and the seller may have targeted others in the Cheshire market and commercial agency community who were known to be active locally, whom they thought might be interested. Unless the claims made to the claimant that DT was in discussions with other potential buyers were simply untrue, the approach to marketing adopted by DT appears to have been successful as the property came to the attention of the claimant and others.

We are not prepared to assume that the Cheshire Lounge was not properly marketed or that the price agreed for it offers no guidance as to its market value. We accept Mr Owens’ evidence that the likely purchaser of the site would be a local operator and of course that turned out to be the case. In our judgment an appropriate level of marketing of the site is likely to have taken place. However, we have concluded that the sale price achieved cannot be a reliable guide to either the ‘before’ or the ‘after’ value of the site because it was agreed in anticipation of the new access arrangements and in return for the assignment of the right to receive the statutory compensation. In view of the limitations of the evidence provided by the valuation experts we considered whether it was possible to adjust this complicated piece of evidence so that it could be taken into account, but we have concluded that it cannot reliably be done.

Mr Owens argued that a potential purchaser looking to redevelop the site would merely need to outbid a purchaser seeking to reuse the existing building as a public house. This argument is flawed, since it assumes only one potential purchaser would view the site as a development prospect, which is contrary to the evidence about the general state of the market and what little we know about what actually happened.

Mr Hunter and Mr Owens both avoided a conventional residual valuation, despite having agreed that there were a number of pub companies and hospitality operators of different sizes in the market for development sites, and despite having agreed (according to Mr Owens) that “the approach to valuation is as a development site”. We agree with that proposition and would have been greatly assisted if the experts had adopted it. In the circumstances we consider it is necessary to explore the methodology explained by Mr Owens but not actually deployed in his valuation. It involved a substitution of the usual gross development value with a multiple of the FMOP, followed by the deduction of the build costs and a sum to represent risk and return. We noted that Mr Owens’ method appeared to have accounted for risk and return twice, firstly as part of the multiplier and secondly as a separate deduction.

Ironically, to undertake this assessment we need to return to figures provided by Mr Hunter. He thought that the proposed restaurant would generate a FMOP of £1,000,000 per annum. In his investigation of the viability of a food-led pub on the site he adopted a multiplier of eight times FMOP to arrive at a capital value, but this figure was based on a business operated by one of the market leaders such as Greene King or Marston’s. In our judgment it would be more appropriate to use a lower multiplier for a quirky site which seems more likely to appeal to a smaller local or regional operator and we have therefore adopted a factor of seven.

Mr Hunter identified a build cost of £5,380,000 in his report to the claimant in June 2021 and in the absence of any other evidence we will employ that figure. Deducting this from the £7 million taken to represent the value of the business, we are left with a residual sum of £1,620,000 covering site acquisition costs and an allowance for risk and return. Taking a rate of 7.5% for the return on capital and applying it to the build costs results in a site value of £1,216,500.

If we were to adopt Mr Hunter’s approach of valuing 1.5 acres of the site at £780,000 per acre but valuing the excess land at a nominal rate of £10,000 per acre, the result would be a figure of £1,191,300. Taking the excess land at £20,000 per acre produces a value of £1,233,900. In this regard we note that the Tribunal has recently valued greenbelt grazing land within 13 miles of the Cheshire Lounge at £20,000 per acre to reflect a slender possibility of development in the medium to long term (see Garner v Stockport MBC [2022] UKUT 28 (LC), at [79]).

A valuation based on Mr Owens’ residual methodology and individual components of Mr Hunter’s valuation appropriately adjusted suggests that the value of the Cheshire Lounge assuming no change to the original access (and including the land taken) lay a little over halfway between their respective valuations. We have concluded that the open market value of the site disregarding the Order was £1,225,000.

The value of the land taken is agreed to have been £25,000. This must be deducted from the open market value to arrive at the “before” value of the retained land which is subject to injurious affection. That “before” value is therefore £1,200,000.

In arriving at an “after” valuation the first factor which must be taken into consideration is the effect on the value of the Cheshire Lounge of exchanging a short access immediately adjacent to the dual carriageway for a much longer access in a less prominent location. We are not concerned at this stage with the separate issue of whether the specification of the new access was appropriate or whether money would have to be spent to make it safe to use. That issue was dealt with in the evidence by the highways experts and it is accounted for in the rule 6 claim for disturbance compensation. At this stage we assume that the new access is of an appropriate standard and focus instead on whether it has nevertheless caused the site to be less valuable.

Neither Mr Hunter nor Mr Cook made any adjustment for this factor, having concluded that the open market value with either the original or replacement access was the same, and Mr Cook being of the view that the uncertainty over the right to use the access and the cost of remedying suggested defects in it pushed the open market value into negative figures. But Mr Owens did make an adjustment of 10% and his figure was endorsed by Mr Kershaw.

The new access arrangements are longer, more convoluted, and less visible than before notwithstanding that the original approach from the north was less than optimal. Whether it was operated as a pub or a restaurant, a leisure or hospitality business on the site would be unlikely to generate as much passing trade as it would have done had the original access still been in use because visibility and convenience would both be reduced. When approached from the A55 Lymm Road the site will be at a considerable distance from the main carriageway and without an obvious connecting route. Even if a significant proportion of customers were drawn from the immediate locality and were familiar with the access, others would be likely to have difficulty in finding their way there. We have come to the conclusion that a 10% adjustment for this factor is reasonable.

We next take account of the fact that, although the Order requires the provision of a replacement access and empowers National Highways to take the land necessary to make it available, it was National Highways’ policy at the time to leave adjoining landowners to negotiate suitable private arrangements (at National Highways’ cost). Only if they were unable to do so would National Highways take possession of the required third party land, complete its acquisition, and then grant rights in replacement for those which had been lost. Both parties agreed that the uncertainty which resulted required to be compensated, with Mr Kershaw considering that an allowance of 10% of market value was appropriate and Mr Cook arguing for 90%.

Mr Cook’s assessment was based on what he considered a speculator would pay for a site with uncertainty over the time required to resolve any outstanding obstacles to development. The intention would be to sell the site on to a developer. Despite his diligence he was unable to find useful examples to support his view. None of the transactions and arrangements he referred to were directly comparable to the situation at the property, because none of them involved a statutory entitlement to a favourable outcome so that the only real uncertainty was over timing. Additionally, we are not convinced that a speculator would entertain a proposition involving a site for a restaurant. Mr Cook’s examples were all based on residential sites with greater or lesser uncertainty about the availability of planning permission. In this case initial uncertainty over the planning potential of the Cheshire Lounge was accounted for by the use of a conditional contract, and we do not think a purchaser would have entertained doubts that a right of access would eventually be obtained. That is a very different context to the examples of uncertainty Mr Cook was able to find, and we do not find them of assistance.

In rejecting Mr Cook’s allowance of as much as 90% of open market value we take account of the willingness of the claimant to complete the purchase of the Cheshire Lounge site, when it could have walked away. Completion of the purchase contract was conditional not only on planning permission but also on the claimant being satisfied that the new access arrangements would not materially affect its use and enjoyment of the site. It was aware before it completed its purchase that National Highways had agreed with the Tatton Estate that it would use its best endeavours not to acquire the Estate’s land. The claimant was therefore aware its negotiations would initially have to be with the Estate but it was reassured by National Highways’ policy not to allow such negotiations to become unreasonably prolonged. We appreciate that the claimant had also spent a considerable sum in securing planning permission, which is likely to have discouraged it from walking away. Nevertheless, the fact that the claimant was prepared to complete its acquisition suggests to us that the market for the site would not have been limited to speculators as Mr Cook contended.

The parties ultimately agreed that the assessment of the ‘after’ value should take account of what was known or anticipated at the valuation date, and not what might occur thereafter. The claimant’s acquisition was concluded on the basis that the uncertainty over the grant of easements would be resolved in a timeframe that would not interfere with the development and opening of the restaurant.

Mr Owens had been instructed to assume that the purchaser of the property would have the benefit of the easement later negotiated between National Highways and the Tatton Estate, so his original valuation did not consider the effect uncertainty might have on market value. In his second report he expressed the opinion that a purchaser would be satisfied with the existence of the replacement access and National Highways’ obligations under the Order and would not reduce their bid for the Cheshire Lounge at all. We acknowledge his many years of market experience but do not regard this conclusion as realistic, especially if it is assumed, as we do, that the most likely purchaser of the site would intend to redevelop it (Mr Owens’ valuation assumed that the existing building would be reopened and he made no allowance for significant expenditure before reletting).

Mr Kershaw did not share Mr Owens’ confidence that the market would be untroubled by the uncertainty over the access and he opted to make an allowance of 10%. He based this on two residential comparables which did not involve market transactions and had no development aspect. They were similar to the Cheshire Lounge in that in each case a new means of access over third party land had been created but no easement had been granted at the valuation date. Although other details were very different, we found Mr Kershaw’s comparables of assistance in providing a baseline from which to assess an appropriate allowance.

The Cheshire Lounge was a commercial development project which, it is agreed, could not sensibly be expected to proceed until terms for access had been finalised. The third party over whose land the new access would pass was also known to be commercially minded and perhaps even opportunistic. In this situation risk would be priced into the transaction. If the delay was prolonged for more than the period it would take to obtain planning permission building costs might need to be adjusted or a competitor might open nearby, affecting viability. These considerations justify a much greater allowance than Mr Kershaw allowed and, in our judgment, would result in the market value of the property being reduced by 20%.

Our assessment of the compensation required for injurious affection is therefore as follows:

The remaining heads of compensation are claimed under rule 6. Once professional fees were agreed three items remained in issue.