LANDS VALUATION APPEAL COURT
Lord President Lord Clarke Lord Hodge	[2012] CSIH 94 XA144/12 OPINION OF THE LORD PRESIDENT in the Appeal by Stated Case by ASSESSOR FOR SCOTTISH BORDERS COUNCIL Appellant: against STOBO CASTLE HEALTH SPA LTD Respondent: _______

For the appellant: Clarke QC; BTO

For the respondent: Haddow QC; Anderson Strathern

14 December 2012

Introduction

[1] This is an appeal by the assessor against a decision of the Scottish Borders Valuation Appeal Committee (the Committee) dated 20 June 2012 to allow the respondent's appeal against the entry made in the Valuation Roll at the 2010 Revaluation for the Stobo Castle Health Spa, Peebles. The assessor entered the subjects in the Roll at a net annual value (NAV) and rateable value (RV) of £540,000. The Committee substituted an NAV/RV of £470,000.

Preliminary question

[2] Counsel for the parties were dissatisfied with the stated case. They lodged a version of it with revisals to the findings in fact, the respondent's submissions and the Committee's reasons. They proposed that the appeal should be conducted on their revised version of the case.

[3] I agree with counsel that the stated case is unsatisfactory. The Committee has failed to state findings on facts, said by the parties to be material, that are not in dispute. I can understand why counsel should have asked us to decide the appeal on their revised version of the case. The question is whether that would be competent or appropriate.

[4] An appeal to this court is not an open appeal. Our function is to decide the questions of law that are set out in the case and to do so on the basis of the Committee's findings in fact. When the draft stated case is issued by the clerk to the Committee the parties have the opportunity to make representations for the deletion or alteration of any finding in fact or other statement, to propose that additional findings in fact or other statements should be included and to make observations on each other's representations (Act of Sederunt (Valuation Appeal Rules Amendment) 1982 (SI No 1506), para 6(1), (2)). The Committee may then revise the draft in the light of the representations and observations "or otherwise as they may think proper" (para 7(1)). Thereafter the Committee must state and sign the case and issue it to the parties (para 7(2), (3)). The procedure is straightforward. The draft case is not to be "bandied about between the parties inter se and between them and the clerk, as if it was intended to be a concerted statement" (Stein v Ass for Falkirk 1912 SC 853, Lord Johnston at p 856).

[5] Since our jurisdiction is limited to deciding the questions of law put to us, we cannot have our jurisdiction enlarged, even by consent of the parties, by the raising of new issues of law at the hearing of the appeal. Nevertheless, in relation to the facts we can, I think, take certain steps to supplement the findings in fact where they are deficient. The Committee's discretion as to its findings is not uncontrolled. Where there is uncontentious evidence on which either party founds, it is the duty of the Committee to make findings in fact in accordance with that evidence unless it is plainly irrelevant (Ass for Glasgow v Schuh Ltd 2012 SLT 904, at para [48]).

[6] A party who fails to make representations on the draft can have no complaint if material findings in fact are not stated or if the findings are not a true reflection of the evidence (Stirling Gaslight Co v Ass for Stirling (1899) 1 F 583); but if a party has made representations unsuccessfully for additional findings in fact on uncontentious evidence, it would be an injustice if this court were to insist that the appeal should be conducted on the basis of the case as stated.

[7] If the Committee fails to make a finding on a material factual issue on which there was conflicting evidence, or if the Committee wrongly declines to consider essential evidence, we cannot add a finding at our own hand. We are not a tribunal of fact. We must return the case to the Committee to make the finding (eg Magell v Dumfries and Galloway Ass 2005 SLT 453; Le Café Noir v Ass for Tayside Region 1991 SC 262). If the parties are agreed as to a finding that is missing from the case, we may in certain circumstances take the expeditious course of allowing them to set out the agreed finding in a joint minute with which we can supplement the signed case (Aberdeen District Lunacy Board v Ass for Aberdeenshire 1907 SC 737).

[8] Where the Committee's reasons are inadequate, we can return the case to it for elucidation (Whitwell v Ass for Strathclyde 1986 SC 37); but if the transcript makes clear to us what the parties' cases were, we may be able to decide the appeal without the need for a remit (Whitbread v Ass for Lothian Region 1996 SC 374). By these means we can avoid delay.

[9] In this case, I think that it is unnecessary for us to consider a remit to the Committee. Having read the transcript, I consider that the whole case for the ratepayer was misconceived. Even if the stated case were to be re-written as counsel propose, it would make no difference to the outcome of the appeal.

The proceedings before the Committee

The case for the ratepayer

[10] The parties agreed that the valuation should be based on turnover in the year 2007, that being the turnover evidence nearest in date to the valuation date, namely 1 April 2008. The evidence for the ratepayer from its managing director, Mr Winyard, and its valuer, Mr Peter Henry, was to the effect that the subjects were of an exceptional quality and amenity; that the buildings and furnishings were of the highest standard; that the ratepayer's business was without equal in terms of the service that guests received; and that the extraordinary commercial success of the subjects was attributable to the unique entrepreneurial and managerial skills of the managing director. There was evidence that Mr Winyard had built up a considerable following among the clientele by the force of his personality.

[11] Mr Henry started from a turnover figure for the year 2007 of £6,759,361. He rounded this down to £6,750,000. He discounted this figure by 15% to reflect what he called "perceived over-trading." That brought out a figure of £5,737,500. To this figure Mr Henry applied a factor of 7%. He adopted this figure instead of 7.5% to make an allowance of 0.5% for repairs and maintenance to that part of the subjects that was a grade A listed building. That brought out a figure of £401,625 which he rounded down to £401,600 NAV/RV.

[12] Mr Henry was asked by counsel for the ratepayer and by a member of the Committee to define what he meant by over-trading. He was unable to do so. In answer to both enquiries he simply added to his eulogistic description of the subjects and of Mr Winyard (Transcript, pp 46, 55). It is apparent that although Mr Henry thought that the subjects were over-trading, he had not considered what a normal turnover for the subjects would have been; nor had he taken account of the effect on turnover of other material factors; for example, the imposing buildings; the amenity of the rural setting, the accessibility on the subjects from the central belt and not least the fact that they are the only health spa of their kind in Scotland.

[13] I think that the burden of Mr Henry's evidence may fairly be summarised in his statement that he had been to properties of this kind throughout the world and had never experienced the quality that is presented to guests at Stobo (ibid, p 48). Mr Henry failed to mention section 6(8) of the Valuation and Rating (Scotland) Act 1956 (the 1956 Act) or to consider what implications it had for the agreed turnover performance of the subjects.

The case for the assessor

[14] The assessor submitted that the ratepayer's evidence proved only that the subjects were an outstanding commercial success. He arrived at the NAV/RV entered in the Roll by applying to a turnover of £6,750,000 a factor of 8%. At the hearing he produced a revised valuation. It was based on a figure for turnover for 2007 of £6,755,232. The assessor disaggregated from this figure the turnovers referable to the modern and the old parts of the subjects, to which he applied factors of 7.75% and 7.25% respectively. That brought out a figure of £508,173 NAV/RV. Alternatively, he took the same total turnover and applied to it a straight 7.5%. That brought out a figure of £506,462 NAV/RV. From these two valuations, the assessor contended for a value of £507,500 NAV/RV.

The issues before the Committee

[15] The three questions in dispute were therefore whether the agreed turnover should be discounted for over-trading; what percentage rate should be applied to whatever turnover figure was adopted; and whether there should be an end allowance in name of maintenance and repair.

The findings in fact

[16] The Committee's findings in fact, so far as relevant to this appeal, are as follows:

"1 Stobo Castle Health Spa is recognised as a top class destination health spa as is evidenced by the number of accolades bestowed on the health spa. It is unique in Scotland, although nowadays many top class hotels in Scotland have spas and provide treatments such as Stobo Castle does in competition with Stobo Castle, particularly in the case of the day visitors where the Sheraton Hotel in Edinburgh and the Blythswood Hotel in Glasgow are competitors for the same clients.

2 Stobo Castle could be classified as being in the top flight health farm as defined in the Valuation Office Agency (VOA) Practice Notes and Assessment of Health Farm.

3 The Appellants are a limited company in the family ownership of the Winyard Family. The Managing Director is Mr Stephen Winyard. The family started Stobo Castle, developing it from a vacant and near derelict building in 1978. Mr Winyard was the General Manager from the beginning and became Managing Director in February 1987. The Appellants and the Winyard Family before them spent considerable time and effort and made major investments of capital to convert the Grade A listed building into the first class facility that exists today.

4 There is an ongoing programme of reinvestment into the business such as the use of top quality interior decoration, creation of the Cashmere Suite costing £400,000 all to create an exceptionally high impression to the guests and visitors. Expenditure of this nature adds to the attraction of Stobo Castle but such investment, and the Cashmere Suite is only an example, is made with the aim of creating a 'wow' factor and not on the basis of a required rate of return.

5 The Appellants have worked to improve staff working conditions, introducing promotional opportunities and have used efforts to create a happy working environment, as is evidenced by their being awarded the silver award in the Investor in People Accreditation. They are also applying for the gold award this year ...

7 The revaluation net annual value depends on rental levels at the tone date of 1 April 2008 and on the physical circumstances of the subjects at 1 January 2012. Since the valuation method starts with gross turnover, it was agreed that for this revaluation the figure for the year ended 31 December 2007 was the appropriate starting place.

8 Although there are other hotels and spas in the area, Stobo is Scotland's only destination spa and is marketed as such.

9 As there are no local or Scottish comparisons available, the Respondent accepted that English comparisons should be looked at ... "

The Committee's decision and its reasons

[17] The Committee decided that the turnover should be discounted by 7.5% for over-trading; that the percentage rate to be applied to the discounted turnover should be 7.5%; and that no end allowance should be made for maintenance and repair. It based its valuation on a 2007 turnover of £6,759,361. It calculated the rateable value as follows:

"92.5% of turnover of £6,759,361 equalled £6,252,408. End allowance discount for over performance of 7.5% came to £468,930 rounded up to £470,000."

That is obviously inaccurate. What the Committee did was to apply a 7.5% discount to the 2007 turnover for over-performance and to the discounted turnover to apply a factor of 7.5% to convert it to NAV/RV. The result is the same either way.

[18] The Committee's reasons were as follows:

"The Committee felt that the subjects being a destination health spa was quite unique in Scotland and considered that the Assessor was correct in his approach of valuing the subjects by taking full turnover into account and applying a percentage to it ... The Committee considered that 7.5% was the appropriate percentage to apply.

However, the Committee, after hearing all evidence submitted by both sides and taking into account the cases cited dealt with licensed premises, not destination health spas, and that licensed premises were managed on a totally different basis to health spas, considered there was an element of over performance which should be taken into account. They concluded by a majority of 4:1 that an end allowance of 7.5% should be given to acknowledge the exceptional personal managerial skills of the owner and Managing Director, Mr Stephen Winyard."

The appeal

[19] The sole issue before us is whether the Committee was entitled to discount the turnover, to any extent, in name of over-performance.

Conclusions
Some general principles

[20] Since I consider that the Committee has seriously erred on the question of over-performance, I think that it is opportune to re-state the essential principles that this court has laid down.

The valuation hypothesis

[21] The starting point is that every method of valuation for rating is a means to a specific end, namely that of establishing what the annual rent of the subjects would be if they were to be let on the open market at the valuation date on the terms set out in section 6(8) of the 1956 Act. In applying the valuation hypothesis, the valuer must assume that the market is not only open, but open to all. In the case of commercial premises let in open market competition the valuer may reasonably suppose, in the absence of evidence to the contrary, that the lease would be secured by a tenant who could operate the subjects as successfully as the ratepayer.

Turnover-based valuations

[22] All turnover-based valuations rest on the assumption that the actual turnover of the premises would be the basis on which an open market offer of rent would be calculated (Haggart v Ass for Leith 1912 SC 784, Lord Salvesen at p 787).

[23] There may be reasons why the turnover of a business is an unreliable guide to the hypothetical transaction to which section 6(8) of the 1956 Act relates. If the turnover is significantly out of step with those of other apparently comparable businesses, it may be that the turnover is abnormal, although that conclusion is not inevitable (Ass for Lothian v Belhaven Brewery Co Ltd 2009 SC 120, at para [13]). A business may have adopted an untypical strategy of operating on high turnover with unusually low margins (eg J D Wetherspoon plc v Lothian Regional Ass 2003 SC 400). In such a case, the profit relative to turnover will be unusually low. The turnover may be abnormally high for some reason unique to the ratepayer, such as his personal connections (Sinclair v East Lothian Ass [2003] RA 202, at para [14]). Conversely, the turnover may be abnormally low because the premises are unappealing, or the ratepayer is lethargic or incompetent, or the premises are operated on restricted hours of trading (Belhaven Brewery Group plc v Glasgow City Ass 2003 SC 395). In all such cases, actual turnover may have to be adjusted in the assessment of net annual value if it appears not to be a reliable guide to the open market. In my view, such cases will be rare.

[24] It is therefore a serious error if a Committee should allow a discount for over-performance simply as an acknowledgment of the ratepayer's commercial success.

[25] This is the latest in a string of cases in which it has been argued that the turnover is abnormal for reasons special to the ratepayer. Cases of this kind are referred to, imprecisely, as cases of over-performance or over-trading. I have come to regret the use of these terms in the vocabulary of valuation for rating because, as in this case, they may concentrate the mind of the valuer on the performance of the ratepayer and distract him from the hypothetical transaction on which every valuation depends.

[26] In Sinclair v East Lothian Ass (supra) we set out the principles on which abnormal performance should be dealt with in the assessment of a turnover-based valuation. We emphasised the primacy of the hypothetical transaction (at para [14]). We said that the valuer must not overlook other favourable factors that might be affecting turnover, such as the location, layout, design and ambience of the subjects (para [13]), and that the enterprise, hard work and skill of the ratepayer were factors for which no discount should be made (para [15]). In Lothian Ass v BBW Leisure Ltd ([2008] RA 470) we held that the Committee had erred in deciding that the hard work, knowledge and skill of the persons who ran the premises justified the allowance of a discount from the turnover. We pointed out that the premises were a modern, up-market restaurant and bar in well-located, quality building, run in a highly professional way by skilled and committed operators who knew their market and who delivered a high quality service (at para [9]). On those findings the success of the premises was easily explained. In Ass for Lothian v Belhaven Brewery Co Ltd (supra) we restated these now familiar principles and held that the Committee had erred in deciding that the hypothetical tenant of a well-located and successful public house on the Royal Mile was likely to doubt whether he could match the performance of the then manageress (at paras [6], [14] and [15]).

Conclusions on this appeal

[27] Applying the principles that I have just set out, I conclude that the decision of the Committee in this case cannot be justified.

[28] I have quoted all of the relevant findings in fact. It is obvious that there is no finding in fact that could support the conclusion that the subjects are over-performing in the sense that I have described. The Committee has failed to consider the rating hypothesis at all. It does not even mention it in the stated case.

[29] In the findings in fact there is nothing to warrant the conclusion that in the hypothetical transaction the field of offerors would not include a party who would operate the subjects as efficiently and successfully as the ratepayer. On the contrary, finding 1 indicates that in the hypothetical competition there would be other competent operators.

[30] That is not surprising. The Committee's findings, in my opinion, fairly reflect the evidence for the ratepayer. That evidence proved nothing more than that the subjects were being managed with a high degree of professionalism, imagination and commitment.

[31] In his closing speech to the Committee, counsel for the ratepayer did not ask for a finding in fact in any specific terms that would support a case of over-performance properly understood. He told the Committee that the question was , in essence, whether the level of turnover was attributable solely to the "enterprise, hard work and skill" of the kind that might be found in any proprietor, or to "extraordinary personal goodwill" that would be characterised as over-trading. He submitted that this was a case of the latter kind because Mr Winyard's management style was "rather unique" (transcript, p 72). In my view, that is nowhere near the sort of case that could warrant a valuation based on a discounted turnover.

[32] In discounting the turnover "to acknowledge the exceptional personal managerial skills" of Mr Winyard, the Committee seems to have regarded the use of such skills as proof per se of over-performance. That is an obvious error.

[33] In my opinion, this was just another speculative appeal taken to a local committee in the face of our decisions on the point.

[34] It should have been obvious to the Committee that the point in this case was settled by Lothian Ass v BBW Leisure Ltd (supra) and Ass for Lothian v Belhaven Brewery Co Ltd (supra). The Committee distinguished the latter case on the basis that it related to a public house. That is a meaningless distinction. The principles that I have set out apply to any turnover-based valuation, no matter what the nature of the business may be.

The percentage discount

[35] If the question had arisen, the Committee's decision on the amount of the discount would have been insupportable. As this court has said repeatedly, the amount of an allowance, where it is justified, is generally one for the discretion of the Committee (eg Sinclair v East Lothian Ass, supra; J D Wetherspoon plc v Lothian Regional Ass, supra). But there has to be some evidential basis for the amount of the allowance, otherwise the assessment of it is just a shot in the dark. In Lothian Ass v BBW Leisure Ltd (supra) the Committee held, wrongly as we thought, that there should be a discount for over-performance. Although its decision was overturned on that point, the Committee at least made the effort to justify its discount rate by reference to the evidence.

[36] In this case the Committee heard no evidence of what the allegedly normal turnover of the subjects would have been. Mr Henry hit on a figure of 15% because, according to some meagre hearsay, an agreed valuation of Ragdale Hall, Melton Mowbray, a similar health spa, had been based on turnover discounted by 15% for over-performance. If it had been the case that the appeal subjects were over-performing, in the sense in which I have used that expression, there would have been no reason why a valuer should assume that they were over-performing to the same extent as Ragdale Hall. The Committee allowed for over-performance at half of Mr Henry's proposed rate, but it had no evidence to support even that. It gave no reasons for applying that percentage and in my view it had none.

[37] Counsel for the respondent reminded us that in Lothian Regional Ass v British Airports Authority (1981 SC 141) this court held that the Committee had been entitled in a contractor's principle valuation of Edinburgh Airport to make an end allowance of 50%. He suggested that the assessment of the percentage discount in that case had been "a matter of impression." In my view, it was certainly not. The Committee in that case grasped the essential point that the relevant facts had to be examined in the context of the hypothetical transaction. It found that the subjects were bound to be run at a substantial loss throughout the quinquennium. The Committee identified seven factors constituting cogent reasons why the rent offered by the hypothetical tenant would be "very much lower" than the figure brought out by a contractor's principle valuation. While accepting that a precise assessment of the effect of those factors was impossible, the Committee endeavoured to avoid any duplication of allowances or modifications to the valuation. It concluded that a rent of approximately half of that which was appropriate to buildings of a public character was on all the evidence a realistic figure for the rent that the hypothetical tenant might reasonably be expected to pay. The Committee's decision therefore was amply justified by the evidence. That highlights the Committee's error in this case.

Disposal

[38] I propose to your Lordships that we should allow the appeal; recall the decision of the Committee; substitute a valuation based on 7.5% of the turnover of £6,759, 361 that was determined by the Committee, namely £506,952; and direct that that should be the NAV/RV that is entered in the Roll.

LANDS VALUATION APPEAL COURT
Lord President Lord Clarke Lord Hodge	[2012] CSIH 94 XA144/12 OPINION OF LORD CLARKE in the Appeal by Stated Case by ASSESSOR FOR SCOTTISH BORDERS COUNCIL Appellant: against STOBO CASTLE HEALTH SPA LTD Respondent: _______

Act: Clarke QC; BTO

Alt: Haddow QC; Anderson Strathern

14 December 2012

[39] For the reasons given by your Lordship in the chair, to which there is nothing which I can usefully add, I agree that the appeal should be allowed in the manner proposed by your Lordship.

LANDS VALUATION APPEAL COURT
Lord President Lord Clarke Lord Hodge	[2012] CSIH 94 XA144/12 OPINION OF LORD HODGE in the Appeal by Stated Case by ASSESSOR FOR SCOTTISH BORDERS COUNCIL Appellant: against STOBO CASTLE HEALTH SPA LTD Respondent: _______

Act: Clarke QC; BTO

Alt: Haddow QC; Anderson Strathern

14 December 2012

[40] For the reasons given by your Lordship in the chair, I agree that this appeal should be allowed and the orders made that you propose.