DECISION

Introduction

1. This is a reference to determine the compensation payable to Paul & Christopher James (the claimants) arising from the compulsory acquisition by the Welsh Assembly Government (the acquiring authority or WAG) of the freehold interest in 221 High Street, Swansea SA1 1NW (the subject premises). It was acquired pursuant to the Welsh Ministers (High Street, Swansea) Compulsory Purchase Order 2009 (the CPO) which was confirmed on 3 July 2009 following a public inquiry, in connection with a proposed mixed use redevelopment of a small part of the High Street to comprise retail, residential, leisure and office use together with ancillary parking and public realm improvements. A General Vesting declaration was made on 17 August 2009, and came into effect on 16 September 2009 which is the date the keys were handed to the acquiring authority and thus the agreed valuation date for the purposes of this reference.

2. Mr James Pereira of counsel appeared for the claimants and called Mr Paul James together Mr Vivian James Halloran, a local building contractor, who both gave evidence of fact. Also called were Mr Paul Bastian BSc MRICS, principal of Paul Bastian Associates, Chartered Building Surveyors of Gorseinon, who gave expert building surveying evidence and Mr Henry Church MRICS, a director in the Compulsory Purchase Team of CBRE Ltd of London who gave expert valuation evidence.

3. Mr Rhodri Williams QC of counsel appeared for the acquiring authority and called Mr Graham Dickenson BSc (Est Man) FRICS who had provided expert evidence in respect of issues of disturbance, Mr Andrew Watson B Eng (Hons) C Eng MICE, a Chartered Engineer with Atkins who had prepared reports on condition and, in association with Faithful & Gould, an associated company of Atkins, provided a schedule of condition, repair cost estimates and reports on tenders received. Mr Gareth Harries BSc FRICS MCI Arb, a director of Rowland Jones, Chartered Surveyors of Swansea, gave expert valuation evidence.

4. The claimants’ compensation claim (prepared and submitted by Mr Church) originally assessed the value of the freehold at £480,000 (£500,000 less £20,000 for essential repairs). In Mr Church’s expert witness and rebuttal reports, the cost of repairs had been increased to £50,000 leaving a net claim for the freehold of £450,000, assessed under section 5, rule (2) of the Land Compensation Act 1961. Disbursements were also claimed under section 5, rule (6). The acquiring authority argued for compensation amounting to £130,000 under rule (2), being £225,000 for the freehold less £95,000 for repairs, together with disbursements. Shortly prior to the commencement of the hearing, the parties agreed disturbance compensation in the sum of £15,000 relating to all heads of claim together with an occupier’s loss payment of £25,000. It was also agreed that a Basic Loss Payment shall be paid at 7.5% of the freehold value as determined by the Tribunal and that the claimants’ professional fees, reasonably incurred, shall be compensated for. The issue of pre-reference costs remained live as at the start of the hearing although no evidence was adduced, and it was agreed that if the parties were unable to settle these, they should be subject to determination by the Tribunal at a later date, such determination to be based upon written representations. Confirmation was subsequently received to the effect that this issue had also been resolved.

5. Although a statement of agreed facts and issues had been prepared and produced by the valuation experts, it was clear that they had been unable to come to an accommodation in terms of floor areas. During the course of the hearing, I invited the experts to re-visit the issue, and they were able to agree figures. This had the effect of reducing Mr Church’s valuation of the freehold before deductions for repairs by £60,000, leaving a net claim under this head of £390,000. Mr Harries’ valuation pre-repairs increased by £2,000 to £227,000 resulting in a net figure of £132,000.

Facts

6. From the agreed facts (as amended) together with the evidence and counsel’s helpful closing submissions dated 21 June 2013 I find the following facts. The subject premises comprised a mid to late 19^th Century mid-terraced commercial property located on the east side of the southern end of Swansea High Street just to the north of the junction with Kings Lane. Part of the High Street (including the location of the subject premises) was a thoroughfare between the railway station and the principal city centre shopping area. The frontage part of the building had accommodation on ground, first and second floors with further attic rooms above and a basement together with, at the rear, a more recent (c. 1930) three storey addition. The whole property was of traditional rendered masonry construction, with timber framed, slate covered roofs finishing to a parapet to the front, with part slate and part corrugated asbestos to the rear slopes. There was a small enclosed rear yard, accessible only from within the building.

7. The ground and first floor were used for retail sales together with the basement which was used for both retail and storage purposes. The upper floors were available for office/storage use. The floor areas (as agreed during the hearing) were as follows:

Ground floor 4,266 sq ft (396.32 sq m)

First floor 4,355 sq ft (404.59 sq m)

Second floor 1,949 sq ft (181.06 sq m)

Third floor 625 sq ft (58.06 sq m)

Basement 1,041 sq ft (96.71 sq m)

Total 12,236 sq ft (1,136.76 sq m)

The ground floor area, if adopting the zoning basis for valuation purposes, was agreed as:

Zone A 604.72 sq ft (56.18 sq m)

Zone B 591.91 sq ft (54.99 sq m)

Zone C 567.91 sq ft (52.76 sq m)

Zone D 533.36 sq ft (49.55 sq m)

Remainder 1,968.13 sq ft (182.84 sq m)

8. The claimants, who are property investors, developers and commercial landlords, acquired No 221 High Street in October 1998 in a dilapidated state and immediately commenced a programme of refurbishment which included replastering to the basement, ground and first floors, rewiring, suspended ceilings to the principal trading area, repairs to the front part of the roof, new uPVC windows and rooflights to upper floors, concreting to the rear yard and complete internal and external redecoration. On completion of the work which took about 6 months, the premises were let to a furniture retailer who remained in occupation until October 2006 at which time the passing rent was £18,200 pa.

9. During 2004, the claimants applied for and secured planning permission for the conversion of part of the ground floor and the upper floors into five residential flats, but that permission was not implemented and it was agreed by the valuation experts that no value was to be ascribed to the development potential over and above the premises’ existing use value.

10. After the first tenant vacated, the subject premises were subsequently re-let to another furniture retailer and thence to a second hand furniture dealer (at £26,000 pa) who abandoned the building owing rent. From about November 2008 the claimants occupied and traded from the subject premises, storing and selling bankrupt and liquidated stock up until shortly before the valuation date.

11. In July 2009, following the intervention of a surveyor appointed by the City and County of Swansea, the council approached the claimants and threatened to serve a Building Notice under section 78 of the Building Act 1984 due to concerns about the structural integrity of the upper part of the facade and the front part of the roof. The claimants had to arrange for the erection of scaffolding (which projected out into the street) and the affected areas including the whole of the front wall at second floor level were removed, leaving the upper floors open to the elements. The erection of the scaffolding and partial demolition works served to forestall any further action under the Building Act but prevented the subject premises from being utilised for trading, and the claimants’ business thus closed in July 2009, some two months before the vesting date.

Issues

12. The issues to be determined can be summarised as:

1. The extent and cost of works required to bring the subject premises back into a safe and lettable state of repair as at the valuation date.

2. The appropriate valuation methodology to be utilised: capital value per square foot as argued for by the claimants, or an investment basis (capitalisation of estimated rental value using an appropriate yield) as adopted by the acquiring authority.

3. The freehold value calculated in accordance with my conclusions as to methodology, taking into account the condition and level/cost of repairs required.

I deal firstly with Messrs James and Halloran’s evidence of fact before summarising the respective parties’ evidence, argument and submissions relating to the first issue. After setting out my conclusions on that, I turn to the question of valuation methodology and thence to the valuation.

Mr James’ evidence

13. Mr James set out the history of his and his brother’s acquisition of the subject premises and the background to the dispute from their perspectives in a comprehensive witness statement, and a second statement rebutting the acquiring authority’s experts’ proofs of evidence. He said that P & C James Properties was in the business of property investment, acquiring and letting premises that were suitable to their portfolio. They also deal with bankrupt, liquidated and salvage stock, catering equipment and antiques and art which they acquire and dispose of both privately and in auctions which they run. The company has, over almost 30 years, acquired properties of varying types including theatres, listed buildings, commercial and residential units, HMOs, public houses and land. They normally buy run down and dilapidated properties which they refurbish and then let.

14. The subject premises, Mr James said, were considered to be an ideal addition to the portfolio when they came onto the market in 1998 as opportunities to acquire large vacant freeholds in the city centre were extremely rare. They were advised by the selling agents that there were several other interested parties, but they were successful and exchanged contracts in October 1998. Mr James said that they subsequently discovered that the other interested parties had been Swansea Arts Forum and Swansea Housing Association (SHA) which is now known as Coastal Housing Group (CHG). Within 24 hours of exchanging contracts, they were approached by a Mr Tristham of SHA who offered to buy the subject premises at a price of £115,000 which would have produced an immediate profit of £30,000. This was refused, but it was suggested that if an improved offer was made very soon, prior to the imminent commencement of the proposed refurbishment works, it would be considered. However, an improved offer of £135,000 was only made some three months later, by which time the subject premises had been refurbished at a cost of some £50,000. Mr James said that Mr Tristham expressed disappointment at the claimants’ refusal to sell and made an intimidating statement to the effect that SHA would acquire the subject premises eventually, it being a case of “not if, but when.” During 2000, SHA submitted a planning application for the development that included the subject premises and which was to become the CPO scheme following a revised, extended, application made in 2004.

15. It was during 2004 that the claimants obtained planning consent for the provision of 5 flats within the building, and Mr James said they had every intention of implementing it; however with the rumours abounding in respect of the proposed CPO, they decided to wait and see before embarking upon the project. In November 2004, the claimants received the first approach from a Mr Tim Raine of the Welsh Development Agency (WDA) (now subsumed into the WAG). Mr Raine had already approached the tenants of the shop and premises advising them that they should consider relocating. Following discussions with Messrs James, Mr Raine made an offer for the freehold of £250,000 during 2005. This was refused.

16. With the rumour mill in full swing, and the publication of the draft CPO in 2007, Mr James said that it became impossible to find replacement tenants for the subject premises once the former tenants had vacated, and the whole of the southern end of the High Street was becoming run down with many empty and dilapidated premises in the vicinity. It was then that Mr Church of CBRE was appointed to act as the claimants’ agent in negotiations with SHA in respect of the impending compulsory acquisition.

17. Following the letting difficulties, the brothers decided to open and trade from the subject premises themselves, which they did in November 2008. By this time Mr Raine had increased his offer (through CBRE) to £400,000 inclusive of disturbance costs. This was again refused. A revised, final offer was made in December 2008 at £500,000 but there were conditions attached including the need for a survey and any necessary repair costs to be deducted, and also a cap on disbursements at £5,000. Mr James said these offers were confusing and appeared to be “a smoke and mirrors type of business” from which it was impossible to define precisely what they would be receiving. Mr James said that he had formally objected to the CPO at the public inquiry that was held during 2008, and during cross examination of Mr Raine it had been admitted that Mr Raine had not been transparent in respect of his negotiations to acquire the property, and that those negotiations had not been in line with the requirements set out in Circular NAfW 14/2004.

18. Mr James then proceeded in his witness statement to set out paragraph 9.5 of the Inspector’s report following the inquiry which summarised the allegations of lack of negotiation and underhandedness on the acquiring authority’s part. In cross examination, he admitted that that paragraph was not the Inspectors conclusions, but his summary of the proceedings as they related to pre-CPO negotiations. Paragraph 12.20 of the Inspector’s report set out his conclusions on this aspect. It read:

“12.20 As to [the James’] case against the CPO, it is clear that there has been much contact between them and, initially, Swansea Housing and, more recently, the [Acquiring Authority]. Offers have been made to secure the objectors’ interests in the plots. Whether those offers were reasonable or not is not a matter on which I could or need to form a view but it is clear to me that while the Objectors have firm opinions about the merits or otherwise of the project, the gap between the parties is essentially financial. To my mind the dialogue which has taken place between them could not be viewed as other than amounting to negotiations and accusations of under handedness do not change that conclusion. Circular NAfW 14/2004 exhorts acquiring authorities to acquire land be negotiation wherever practicable and I believe that the [Acquiring Authority] has endeavoured to do so on this occasion.”

19. It was a fact, Mr James said, that Mr Raine had revealed at the public inquiry that the District Valuer had attributed a value of £400,000 to the subject premises, and £300,000 to No. 222 High Street. However, despite the council’s currently stated case that £95,000 was required to repair the building, the valuation prepared by Mr Harries was for only £130,000. That was ludicrously low, would be nothing like sufficient to acquire a like replacement and indeed was barely enough to buy a small house. It seemed to the claimants that they were being singled out unfairly and their suspicions were supported by the fact that they were refused access to inspect the other properties that the council purchased in connection with the scheme, and despite repeated requests, the council had resolutely refused to disclose the prices paid or the bases of their settlements.

20. Turning to the approach from the council regarding the alleged structural instability of the front façade, Mr James said they took immediate steps to arrange scaffolding and to carefully take down the affected parts of the structure as they were able to do this at reasonable cost. If they had ignored the notice, the council would have carried out the work and they would have carried out an extremely expensive belt and braces exercise for which they would have had to pay a much higher sum than they could get it done for themselves.

21. In respect of the council’s schedule of repairs and cost estimates, Mr James said it appeared that Faithful and Gould had adopted a “text book” approach to the physical condition of the subject premises and the work that they alleged to be necessary to put it back into sound, weathertight and lettable condition was seriously overstated. Their recommendations, Mr James said, were far removed from the practicalities of what works were actually needed to continue with the reasonable use of the building especially as their report seemed to ignore the substantial refurbishments that had been undertaken. It was particularly galling that it was being suggested the property needed a complete rewire when, in fact, that had only recently been carried out. The electricity was connected and working when the subject premises were handed over to the council – as the photographic schedule produced at the time proved, and as Mr Bastian had confirmed, and there was no logical explanation for the council’s suggestion that the swithchgear had been “ripped out”. The situation and works required were as set out in Mr Halloran’s witness statement, and Mr Bastian’s expert witness report. They would have been organised by the claimants, who would have arranged for an estimate, and supervised the works themselves. There was no need for the appointment of professional over-seers, and the list of allegedly required preliminaries set out in the council’s report was simply ludicrous. Mr James said that he and his brother adopted a hands-on approach and were perfectly capable of organising and overseeing the works themselves, as this was part of what they regularly undertook in respect of their property portfolio.

22. Although he admitted he was not a valuation expert, Mr James said that he found Mr Harries’ zoning approach to be confusing and inconsistent, and there were errors such as the fact that the basement had always been used for retailing, but he attributed no value to it. Mr Harries had also not made any allowance for the premium value of being able to obtain a vacant city centre freehold. Mr James said that in assessing whether a prospective investment property “stacked up” in terms of the price being quoted, he always analysed the price on a capital value per square metre (as Mr Church had done) after taking into account all relevant factors such as condition, development prospects and location. Mr Harries’ valuation appeared to have been coloured to a large extent by Faithful and Gould’s report, and produced in a fashion that did not reflect the reality of the situation, or the type of purchaser who would be interested.

Mr Halloran’s evidence

23. Mr Halloran is a self-employed general builder with over 30 years experience in the industry. He said that he had been approached by the claimants in July 2009 to quote for the rebuilding of the upper section of the front wall of the subject premises and to install new glazing. It was intended that the new façade should be built off two substantial oak beams crossing the frontage at first floor level which, although showing some signs of the effects of damp ingress were, in his view, with some minor repair, perfectly satisfactory and not in need of replacement. He said he had carefully inspected the beams, and had “tested” their strength and condition with hammers and crowbars. He did not agree with the acquiring authority’s expert’s suggestion that those beams needed to be replaced with steel lintels - indeed, the council’s building surveyor, Mr Brian Perman, had stated at a site meeting on 13 July 2009 that he was happy that the beams could be built off, but requested that “Acrow” adjustable props should be inserted to the upper floors to support the floors above whilst the rebuilding works were being effected. The intention was that these should rest upon the aforementioned oak beams and, Mr Halloran said, it would have been foolhardy to suggest that if the beams had been suspect. Further props would be placed below the beams, down to basement level, just during the reconstruction works.

24. In the light of the fact that by the time of his visit the scaffolding that the council had demanded was already in place, Mr Halloran said that this would make his job much easier and quicker, and he calculated that all the necessary works could be completed within one week. He quoted £10,196 which was simply for replacing and re-glazing the façade and repairing and connecting in the front section of the original roof. It did not allow for demolition of the existing damaged façade which had already been done.

25. In connection with the scaffolding, Mr Halloran said that although the way it had been constructed gave the impression that it was propping up the building, that was not, in fact, the case. Its construction had been at the council’s insistence, and its intrusion into the main High Street roadway seemed to be unnecessary. It merely gave access for the required demolition and reconstruction works to the upper part of the front façade.

26. In cross-examination, Mr Halloran accepted that he had no specific engineering qualifications, but said the job for which he quoted was relatively simple and straightforward. If the oak supporting beam did have to be replaced, as per the council’s expert report, then he accepted it would become a much larger and more expensive job.

Issue 1: The extent and cost of works

27. The parties had gone to considerable lengths (and cost) in terms of the evidence produced to support their respective positions on this issue. At the commencement of the hearing, the claimants’ argued for a reduction from the freehold value assuming the subject premises to be in sound and lettable condition of £50,000. This was based upon the schedule of condition prepared by Mr Bastian within days of the valuation date, whereby he had estimated the cost of repairing the front wall at about £18,000 + VAT and the other required internal works at about £10,000 + VAT, together with some additional costs which Mr Bastian had not factored in. The acquiring authority, through the evidence of Mr Andrew Watson, supported by actual tender figures that had been provided by Contract Services Ltd, said the total cost of works should be allowed in the sum of £95,000.

28. During the course of the hearing, the parties’ experts agreed costs for the essential repair works to the front façade at £35,464 as per Contract Services’ tender figure. In addition, the £10,000 that Mr Bastian had allowed for a number of other works (as itemised in a table at paragraph 2.2.1 of Mr Watson’s rebuttal report) was agreed. This brought the agreed items to a total of £45,464 – which, according to the claimants, left approximately £4,500 “headroom” towards other costs (based upon Mr Church’s adopted overall £50,000 deduction for repairs). However, excluding the now agreed sum, the remaining required works amounted, according to the acquiring authority to some £48,600. Thus, by the end of the hearing, the sum remaining in issue was just short of £50,000. The acquiring authority, in an attempt to resolve the matter, had made an open offer to compromise the whole cost of works issue at £72,500 – which it transpired was approximately midway between the £95,000 sought by them and the £50,000 adopted by Mr Church. However this was rejected by the claimants and the offer was thus withdrawn.

29. The partial agreement on costs of works means that a detailed summary and analysis of the building surveying experts’ reports and evidence is unnecessary, and I just concentrate therefore on the remaining matters in dispute under this head. Firstly, Preliminaries. The claimants assess this at £1,450 to cover the mandatory “Construction Phase Health and Safety Plan” at £200, security (50% of Contract services’ estimate of £1,800 and waste collection at 5 % of £700). As Mr James had said, purchasers of this type of property do not normally undertake all the preliminary works that had been set out in the acquiring authority’s evidence and anything that needed doing, they would undertake themselves or delegate at little cost.

30. The acquiring authority’s figure was £15,050 to include the above items together with contractors’ accommodation, health safety and welfare provisions and other safety related aspects. These were the standard building contract preliminaries which, Mr Watson said, any contractor would build into his project costs. However, he acknowledged that some minor savings could inevitably be made although he had little experience of working with purchasers of the type described by Mr James, and could not therefore comment upon the specific items that the claimants might undertake themselves. As to project management, which Mr James had said he would undertake himself, Mr Watson said this was a cost that did not form part of the preliminaries and would have been separately identified. Thus, there was little room for manoeuvre on this issue.

31. During the course of exchanges on this issue, I indicated that my preliminary view was that a realistic figure for preliminaries was likely to be “somewhere in the middle” of the figures the parties were arguing for. I fully accept Mr James’ evidence that some savings could be made by undertaking certain matters themselves. However, there is no evidence that all, or a majority of, purchasers of this type of property would be in a position to make such savings or to undertake certain preliminary aspects themselves. The fact is that preliminaries are nowadays a not insignificant part of any building project, particularly in respect of health and safety issues to which all contractors have to adhere. Doing the best that I can on the evidence, I conclude that a reasonable sum for preliminaries on this project, which is in a high profile position on the High Street, and thus where there are considerations as to public safety, traffic management and the like, would be £10,000.

32. The next disputed issue related to scaffolding. Mr Bastian said that he had allowed £2,000 for this in his £10,000 rounded estimate of costs (referred to above). The acquiring authority had estimated this item at £4,080. It was submitted that as there was some £4,500 of “headroom” built into Mr Church’s £50,000 figure, it was not necessary to make any addition to the claimant’s figure to allow for scaffolding. I accept this and therefore make no additional allowance under this head.

33. Mr Bastian had allowed £1,500 for electrical works on the basis that there was little that needed to be done, particularly as the subject premises had been completely rewired when the claimants acquired the building. Mr Watson argued for £15,068 based upon the bill of quantities prepared by Faithfull and Gould following the survey and report that had been obtained from Jadon Electrical which recommended a complete rewire. The state and condition of the electrical wiring on the valuation date remains a mystery due to the conflicting evidence of those who carried out inspections on, or immediately after that date. It is clear from Mr Bastian’s evidence, and the photographs accompanying his report that the supply was connected and working on 14 September 2009, and Mr James was adamant that the electricity was still switched on and working when the keys of the subject premises were handed over on 16 September 2009. Faithful and Gould’s report indicates that the system was intact, and their inspection took place on the valuation date. It is only the Jadon Electrical report that suggests the distribution boards had been removed, and that the supply had been cut. Their inspection was on 24 September, just over a week after the vesting date.

34. I am satisfied that the system was operational on the vesting date, accept Mr James’ evidence that the wiring had been extensively renewed not many years previously, and Mr Bastian’s opinion that £1,500 would suffice as a sum for any necessary repairs and upgrading.

35. Finally, on this issue, is the question of replacement glazing. Mr Bastian allowed £1,000 based upon Mr Halloran’s estimate for the replacement of six upper floor windows. The acquiring authority bases its figure of £14,404 on the specification produced by Faithful & Gould which included replacement of the shop front window – but this was not specifically costed by Contract Services. Although Mr Watson had not been specifically involved in this aspect, he said that single glazing would not have complied with building regulations, and double glazed units would have been required. I can see no reason why the shop window should form part of the cost of repair, and accept the claimants’ argument that it was perfectly adequate for its purpose. Accepting that double glazed units or secondary glazing would be needed to those upper floor windows that had to be replaced, I think Mr Bastian’s figure was somewhat light, and assess this element at £3,000.

36. The figure that should be deducted from the valuation of the subject premises to reflect the essential and necessary repairs becomes:

Agreed items £45,464

Preliminaries £10,000

Electrical works £ 1,500

Glazing £ 3,000

£59,964 - say £60,000.

Issue 2 - Valuation methodology

37. Mr Church said that he dealt with commercial property throughout England and Wales, and whilst he did not have an intimate knowledge of the Swansea market or particular retail experience, he said the subject premises were a typical tertiary property investment, with a retail element - this description together with comparables relied upon in analysis having been agreed with Mr Harries. His assessment of value was based upon a capital value per sq ft adjusted to reflect the costs and risks associated with the requisite essential repairs and generally putting the building into lettable condition. He said that bearing in mind the type of property and the type of purchaser in the market place (of whom the claimants were typical), this method was far more appropriate than the investment method that had been adopted by Mr Harries. That, he said, would be used for sound retail investments such as city centre premises that were fully or partially let and that would be of interest to property companies, pension funds and other long-term investors who seek stable, long-term investments at low yields.

38. Mr Church said that using a zoning approach, especially where the retail area was limited as a proportion of the overall floorspace, and multiplying the rent by an appropriate number of years purchase, ignores many fundamental attributes or detractions to the property’s value. Those include the rarity of freehold properties like the subject premises, the volatility within the rental market for this type of property, the rent potentially achievable and the chances of future development or of acquiring neighbouring property. His preference for capital value per sq ft was based upon the admittedly limited number of no-scheme freehold transactions which reflected the prices actually achieved for this type of property in open market transactions. If the investment method was applied to these sales (using the VOA’s floorspace information and Mr Harries’ £15 psf ITZA rental level) and his yield of 9.5%, these transactions devalue to give yields of 2.5% to 6.0% which are out of step with the market and prove freehold properties have a premium value over investments. However, in undertaking an alternative valuation based upon Mr Harries’ preferred methodology, it was his view that the rental value ITZA was £17.50 psf and the appropriate multiplier would be 8.5%. I consider his valuations in detail further below.

39. In his evidence, Mr Harries maintained a consistent and unbending argument that the valuation of commercial retail premises was traditionally undertaken by preparing an estimate of rental value, based upon open market lettings and from rent reviews on comparable properties within the locality, applying any relevant adjustments (such as quantity allowance) and then capitalising the product by using an appropriate yield. He said that whilst he had considered adopting a rental value per sq ft based upon the overall floor area, as used in valuing department stores and very large retail units, he had concluded that the zoning basis was the most appropriate in situations such as this – that also being consistent with the method used by the Valuation Officer in non-domestic rating assessments. On the basis of rental evidence that he had been able to obtain he concluded in his expert report dated 30 May 2012 that the subject premises had a rental value of £15 psf ITZA and an appropriate yield to apply was 9.5%.

40. As to Mr Church’s approach, Mr Harries said that this was not used by valuers in the market place, especially where, as the agreed comparables relating to open market transactions showed, there was considerable inconsistency in sale prices. He said that in his 26 years experience of valuing retail properties he, and other valuers, always use the investment basis whatever the circumstances. Indeed, in this matter, the original valuation carried out for the claimants by their previous valuers, Dawsons, on 20 April 2005, was calculated precisely on this basis. If there was no tenant in place, Mr Harries said, it had to be assumed, from comparable rental evidence, what a new tenant would pay. Any allowance for voids would be taken into account in the yield.

41. Mr Harries said that Mr Church, in his report, tended to largely ignore the limited number of transactions of which there was evidence at the valuation date, relying principally upon his analysis of the sale of 25 High Street. This was wholly inappropriate particularly as the properties were of markedly different sizes and layouts. A straight comparison on this basis was, he said, totally meaningless whereas use of the zoning/rental value method would iron out such differences.

42. Mr Church had also referred to the fact that, although sold with vacant possession, no. 25 had been the subject of a lease commencing in 1999 at a rental, reviewed to £11,500 pa in 2004, that equated to £15 psf ITZA – that being the figure that Mr Harries had used in his valuation of the subject premises. Whilst it was acknowledged that there had been little movement in the market between the review date and the valuation date, Mr Harries pointed out that in applying that figure without adjustment to the subject premises produced a rental value of £25,000 pa, which at Mr Church’s 8.5% yield gave, on the investment basis, a value of £295,000 – very different from the amount being claimed (Mr Church’s main report para 51). However, no quantum allowance had been made by Mr Church, whereas Mr Harries said he had allowed 20%, which would reduce the rental value, and thus the capital value still further.

43. Mr Harries went on to say that he failed to understand Mr Church’s analysis of 32-36 High Street, which had also produced a figure for the subject premises of £295,000 on the investment basis because in that instance he had chosen to make adjustments from the agreed £10.25 psf zone A figure, and had made a 30% quantum allowance which he had not used on No. 25. This, therefore, indicated the lack of consistency to which he had referred.

44. Mr Harries vehemently disagreed with Mr Church’s assertion that there was a premium for owner occupation. He said it was impossible to quantify depriving oneself of rental income whilst gaining the opportunity to trade from the premises. Indeed, he said that in a poor market, as an investment, it might be considered more valuable to have a secure income stream from a tenant rather than the ability to trade. There was certainly no evidence to support the implied difference (between the £526,000 valuation figure claimed [adjusted to £440,000 during the hearing] under the capital value per sq ft basis and the £295,000 that he had said was indicated by the investment basis analysis of Nos. 25 and 36-39 High Street).

Submissions

45. For the acquiring authority, Mr Williams submitted that Mr Church’s chosen methodology failed to reflect any inconsistencies such as the comparable properties’ size, configuration, condition and location, whereas Mr Harries’ zoning approach eliminated them. This was well illustrated by the changes to the valuation brought about by the valuers’ late agreement on floor areas. The principal change in the agreed areas was, it was submitted, in relation to the “remainder zone” which gave rise to a negligible increase in Mr Harries’ valuation (less than £2,000 or 0.85%) whereas the adjustments created a reduction in Mr Church’s valuation (pre-repair costs) from c. £525,000 to £440,000 – some 16%. It was also suggested that Mr Church had set too much store by the scheme related comparable capital value transactions and had failed to take proper account of no-scheme world transactions. Thus he had not acted correctly within the compensation code.

46. In submissions for the claimants, Mr Pereira pointed out that Mr Harries methodology seemed to disavow an important part of the acquiring authority’s pleaded case in that, in its statement of case at paragraph 15, the first sentence read:

“It is accepted that adjoining properties were generally occupied by speculators and developers and that this type of property is rarely traded on an investment basis, since what tenants there are do not offer sufficient covenant strength to make investment viable.”

He said that although Mr Harries had admitted that he had been involved in the original drafting of the acquiring authority’s statement of case, he had clearly stated in cross-examination that he disagreed with the above statement. He said that Mr Harries had accepted that the type of purchaser for the subject premises would be a speculator or developer, that there was no great choice of tenants in the market place and that those that were would have insufficient covenant strength to warrant the investment method being the sole basis upon which to make a purchase decision. It was submitted that Mr Harries’ dogmatic adherence to the investment method, which he had said needed to be used for consistency and to accord with the RICS codes of practice, failed to reflect any premium or additional value which the potential for redevelopment or owner occupation would provide.

Conclusions – valuation methodology

47. Firstly, In respect of Mr Pereira’s reference to Mr Harries’ alleged concession, I have carefully checked my note of Mr Harries’ replies in cross examination. He said that he disagreed with the statement that the properties were “occupied” by speculators and developers – the word should have been “owned”. The concession was not, as I understand it, that the investment method of valuation was inappropriate in these circumstances. Indeed, he went on to say that valuers always use the investment basis on retail properties even where premises are not let. The assumption would be made that a tenant would be found and the valuation would be based upon the rent that a tenant would be expected to pay. The fact that it was not let would be reflected in the yield. So, whilst it was acknowledged that this type of property would not be attractive to pension funds and the like, the investment method of valuation would still be used. When pressed on the question, he gave the example of a valuer for a bank or finance company who might be looking at a prospective purchaser’s application for funding. He would use the investment method rather than Mr Church’s preferred route, and would make the necessary adjustments. Valuation methodology, Mr Harries said, had to be consistent. If there was any material development value (which in this case it had been agreed there was not), he said that a residual valuation would be adopted to establish whether the development potential exceeded that investment value. Mr Harries was also adamant that there was no value premium for the ability of the purchaser to occupy and trade from the premises himself.

48. I am persuaded by the arguments that, under normal circumstances, the investment method is the orthodox approach, and is the one to which valuers normally adhere – that principle being, as pointed out by the acquiring authority in closing, set out clearly in the relevant valuation textbooks. For example, in Valuation: Principles into Practice (6^th Ed) Chapter 7, Mr J C Hill FRICS (a former Member of the Lands Tribunal) said:

“With few exceptions, retail outlets, whether freehold or leasehold, owner occupied or held as an investment, are normally valued on an investment basis, i.e. by the capitalisation of rents and rental values, and it is the assessment of rental value to which the valuer has initially to apply his mind.” [my emphasis].

The acquiring authority then went on to quote from Modern Methods of Valuation (11^th Ed;2011) (Eric Shapiro, David Mackmin and Gary Sams) regarding the adoption of zoning and the need for adjustments such as quantity allowance – which had been used by both Mr Harries and the Valuation officer when carrying out the non-domestic rating assessment on the subject premises.

49. On the question of zoning, in my view Mr Church’s assertion, set out at paragraph 4.3(b) and (c) of his rebuttal report, was not relevant. He said that the zoning approach is not one that the claimants (as confirmed by Mr James), or others looking to purchase property of this type would be aware of and that this supported his arguments as to the inappropriateness of the investment method. Knowledge of the precise workings and methodology adopted by a purchaser’s professional adviser is not something that is necessarily required by the client – it is the result that matters, and it is only right that in achieving a correct result, valuers adopt the same basic and approved platform for so reaching it. Further, a valuation under Rule (2) of section 5 of the Land Compensation Act 1961, is not to be made by reference to the subjective value to the owner, but rather, objectively, by reference to the amount which the land might be expected to realise if sold in the open market by a willing seller. (See The Law of Compulsory Purchase (2^nd Ed; 2011) (Barry Denyer-Green)).

50. Nevertheless, in spite of what I have said above regarding the traditional and accepted approach, I see no reason at all why in respect of vacant freeholds like the subject premises, an analysis on the basis of Mr Church’s approach should not be used in limited and appropriate circumstances. Indeed, it could reasonably be argued that a straightforward analysis based upon a capital value psf might be more reliable as there are fewer imponderables - especially for instance where yield rate evidence is particularly volatile or limited. If there was actual evidence that a similar vacant freehold property, in a similar location, in similar condition with no development potential and untainted by any scheme influence had been sold (and the type of typical purchaser really does not matter) then of course that evidence can, and should, be taken into account. If, on an analysis of what the rental value would be and adopting an appropriate yield, the price achieved was higher than that which would result from the traditional investment valuation, then a premium for vacant possession is proved. If there is no such premium, then the two methods should produce the same result, provided the correct variables are used.

51. As will be seen under “Valuation” below, for the reasons set out, I am not persuaded that Mr Church’s evidence and arguments prove that the subject premises enjoy a premium over and above the value established by adopting the investment method. The difference between his valuations carried out on the capital value psf basis, and those he undertook on the investment basis imply a vacant possession premium of some 67% more than the investment value.

52. In my judgment there would be little point in a purchaser paying anything more than a most limited premium for the right to occupy and trade from his own premises when he could simply go and rent premises elsewhere, at the appropriate market rate. In other words, he would be paying more for no return where, as has been agreed in this case, there is no additional value attaching to the development potential for the upper floors. Any additional value that might be perceived such as the hope of being able to incorporate an adjoining or neighbouring property, as argued by Mr Church could, as Mr Harries said, be reflected by an adjustment to the yield.

53. I really am not convinced that those in the market for this type of property – the type of buyer who, as Mr Church said, would be looking for a longer term investment with opportunities for development and enhancement – would be prepared to speculate over 60% more than its value as an investment where there is certainly no immediate prospect of said enhancement. The returns on that basis would not make economic sense. There is also no evidence that the purchase price paid by the claimants when they acquired the subject premises was significantly above its investment value.

54. Finally, in deciding that Mr Church’s approach is inappropriate in this case, I find the huge effect that the adjustment to floor areas had on the resultant value (see paragraph 45 above) proves the point beyond doubt.

Valuation

55. Having concluded that it is not possible to say that, in every single case, one method of valuation must be adopted to the total exclusion of the other, in this case the evidence clearly suggests the investment approach to be the most reliable.

56. Mr Church, in his initial valuation based upon capital value psf , relied upon Nos. 25 and 212-214 High Street as his principal evidence to support his capital value psf based upon the overall area of the subject premises at £36 psf giving £526,320 which he rounded to £500,000 in lettable condition. He acknowledged that caution needed to be exercised in respect of No. 25 as it was very much smaller than the subject premises, was differently configured and likely to appeal to a different type of user. As to Nos. 212-214, they were sold to Swansea Housing Association (predecessor to the eventual scheme developer, Coastal Housing) some 5 years prior to the valuation date. Allowing for a 20% adjustment in value to reflect the fall in the market between the sale date and the valuation date, and a further 20% adjustment for quantum, Mr Church analysed that transaction also at the equivalent of £36 psf.

57. Consideration was also given to the purchase by Coastal Housing of Nos. 218 and 219 High Street in December 2008 at £400,000. He said that making the required allowances, this produced a figure for the subject premises of over £1 million and he acknowledged therefore that, having been acquired directly in relation to the scheme, it should be accorded little if any weight. However, he did say that it had been valued by the District Valuer as being at open market value, and in accordance with the RICS Valuation Standards Practice Statement. There was, he said, no suggestion in the DV’s valuation that the property was being acquired by a special purchaser (as part of the wider regeneration scheme) whereas that had been specifically mentioned in his valuation of the adjacent No. 222 High Street which was acknowledged to have been acquired at a price significantly out of step with the market.

58. It was pointed out in submissions for the acquiring authority that Mr Church had sent an email to Tim Raine of WAG on 14 October 2008 where he said “in any event, this comp [218-219] is scheme related – the [Lands Tribunal] has shown, on many occasions, a preference for market transactions.” It was submitted that whilst the DV’s report on 222 High Street may have needed an express reference to the evident fact that Coastal Housing Group was a special purchaser (as 222 High Street was technically just outside the specific CPO area) it did not need to be expressly stated in relation to 218-219 for it to be equally true. Indeed, Mr Church had said in his rebuttal report that the price paid for 218-219 and 222 High Street were out of step with each other, and there is a general lack of consistency between these transactions, the suggested investment values and the transactions of other properties purchased by Coastal Housing Group and validated by independent valuers.

59. I agree that the limited amount of transactional evidence that Mr Church has identified, and the fact that all but No. 25 High Street were scheme related in that they were purchased by agreement by the council’s development partner suggests that little weight should be given to them. I also note that Mr Church conceded in cross-examination that the actual valuation placed upon 218-219 High Street supported neither methodology. It was submitted for the claimants that the purchase price of 218-219 High Street at £485,000 for properties that were smaller and in worse condition proved that the acquiring authority’s valuation of £225,000 for the subject premises was far too low. Whilst that would on the face of it appear to be a reasonable argument, I am mindful of the negotiations that took place between Mr James, Mr Church and Mr Raine in the early stages of this saga whereby the offers that were made were very significantly higher than the value which is now being argued for. That, along with the fact that the acquiring authority has refused to reveal details of the methodology it used in valuing those other properties that it purchased prior to the CPO, reinforces my conclusion that no weight should be given to the comparables upon which Mr Church relied.

60. Turning then to the evidence relating to the investment method, during the course of the hearing the floor areas were eventually agreed, as were the rental values to be attributed to the upper floors. The principal issues between them were the rental value of the retail ground floor in terms of zone A and whether or not any value should be attributed to the basement. Mr Church said that if the investment approach was to be the preferred valuation methodology, his analysis of the comparables suggested a figure of £17.50 psf ITZA and £1.00 psf should be applied to the basement area giving a rental value for the subject premises of £23,856 pa. At his chosen yield of 8.5% the valuation became £281,000 from which the cost of repairs should be deducted. Mr Harries’ view was £15 psf ITZA with nil for the basement giving a rental value of £21,588 pa and at 9.5% yield, the resultant value before repair costs became £227,235.

61. The valuers agreed the analysis of 7 comparables: Nos. 25, 32-36, 71, 212-214, 218-219, 222 and 227 High Street, Swansea.

62. Mr Harries firstly considered three properties on which rental evidence was available. On Nos. 25 and 32-36 he had personally negotiated the rent reviews. No. 25 had originally been let on an internal repairing lease, and the review rent from February 2004 equated to a rental value of £15 ITZA for the retail area, with £3 psf applied to ancillary first floor areas and £1.50 psf to the basement. He said that that property was in similar condition to the subject premises, but smaller and better located. There had been little movement in values between 2004 and the valuation date, and taking all factors into account, including allowing for the internal repairing only basis of the lease, thought the evidence supported a £15 ITZA rental value for the subject premises. He said that a useful check was the fact that the property had sold at auction in May 2009 for £90,000 – that supporting his estimate of freehold value of c. £130,000 for No. 221.

63. No. 32-36, a ground floor retail unit within a modern five-storey residential courtyard development on the opposite side of the High Street was let in 1999 on effectively full repairing and insuring terms. The rent was reviewed in March 2005 to £25,000 pa which equated to £10.25 psf ITZA. The premises were in a slightly inferior position to the subject premises, did not have a conventional shop-front and were a little further (north) along the street and on the quieter side in terms of trading potential.

64. No. 227 was on the same side of the street as the subject premises but in a slightly better trading position, being south of the Kings Lane junction which, Mr Harries said, forms a natural pedestrian barrier to the pedestrian flow from the busier southern end of the High Street. This was another ground floor retail unit in an otherwise residentially occupied property. It was let on a new 20 year lease on standard terms at £17,000 pa from July 2010, just 10 months after the valuation date. The figure equated to £17.94 psf ITZA with £2 psf applied to ancillary accommodation and it was Mr Harries’ view that there was no movement in rental values in the intervening period.

65. Mr Harries said (and Mr Church agreed) that No. 227 was a particularly good comparable in that there was clear evidence of an open market letting less than a year after the valuation date at a time when values were not moving, and the property was relatively close by. However, Mr Harries considered that a discount from the £17.94 psf ITZA would need to be made to the subject premises to reflect No. 227’s superior trading position, whereas Mr Church said there was no evidence to support that adjustment.

66. Summarising his thoughts on the above comparables, Mr Harries said that taking into account the more favourable lease terms (to the tenant) on No. 25, and matters such as trading location, an appropriate rental value could be anywhere within the range of £11 to £15 psf for the subject premises and he had applied the highest figure. However, he went on to say that the size of the unit had to be considered against the size of the comparables and, being much larger, the subject premises should be subject to a 20% discount for quantum. He said he noted that the VO had applied a 30% reduction for size in his assessment of the premises for the 2005 rating list. The resulting rental valuation (revised during the hearing from the £21,406 he adopted in his original report following the late agreement on floor areas) became £21,588.

67. Mr Harries said he had based his opinion of value upon those properties upon which rental evidence was available and, apart from the auction sale price of No. 25 as referred to above which, he said, supported his freehold value opinion, did not utilise the information from the other freehold sales not only because there was no rental value evidence within them, but several were acquired by Coastal Housing Group and were, at least in some cases, clearly scheme related. Indeed, as was submitted by the acquiring authority, Mr Church had expressly acknowledged that the acquisition of Nos. 218-219 were clearly scheme related. Further, whilst No. 222 was technically just outside the CPO area, it was immediately adjacent and the acquisition price by Coastal Housing appeared well above the market rate.

68. As set out in paragraphs 43 and 44 above, Mr Church’s analyses of Nos. 25 and 32-36 High Street produced figures of just short of £300,000 for the subject premises based upon his alternative rental value opinion and his adopted yield (to which I turn below). He acknowledged that if Nos. 25 (which he agreed was a good comparable) and 32-36 (which, “on reflection”, he concluded should have less weight attached), produced figures when valued on the investment basis markedly below the results achieved by his valuation methodology. He also accepted that he had not applied a quantum allowance to the subject premises, but had done so on the comparables that he had analysed. As to his conclusion that the rental value in terms of zone A was £17.50 psf at the valuation date, he said this was particularly supported by No.227 High Street (£17.94). There had been movement in the market since 2004, and therefore Mr Harries’ £15 psf was too low.

69. On the final day of the hearing, Mr Church produced a revised investment based valuation following the late agreement on floor areas, and this included a quantum allowance. The valuation was set out thus:

Area Sq ft psf £ total £

Zone A 605 17.50 10,587.50

Zone B 592 8.75 5,180.00

Zone C 568 4.38 2,485.00

Zone D 533 2.19 1,165.94

Remainder 1,968 1.00 1,968.00

4,266

Basement 1041 1.00 1,041.00

1^st floor 4,355 1.25 5,443.75

2^nd floor 1,949 1.00 1,949.00

3^rd floor 625 Nil Nil

29,820.19

Less 20% quantum allowance 5,964.04

Rental value 23,856.15

YP in perpetuity @ 8.5% 11.77 280,660.59

From this, it is then necessary to deduct the cost of repairs.

70. In terms of yields, Mr Harries said that his experience of the local market place at the relevant time suggested a wide range of between 10% and 15%, but his adoption of 9.5% for the subject premises had erred in favour of the claimants in order to promote a settlement. He accepted that, especially with the scheme transactions, it was difficult to establish an accurate yield rate from the comparable evidence. Mr Church, who had used 9% for his alternative valuation on the alternative investment basis in his original report (paragraph 3.12), but subsequently argued for 8.5% based upon the valuation undertaken by Mr Raine of the acquiring authority in respect of the adjoining premises, No. 222 High Street, admitted that there was, in reality, no conclusive yield evidence within the immediate vicinity.

Conclusions

71. Although in written closing the claimants sought compensation in the revised (from the original claim) sum of £390,000 in accordance with Mr Church’s preferred methodology, it was submitted that if the Tribunal were to find that the investment basis was the correct method, then Mr Church’s revised value of £281,000 less his suggested £50,000 for repairs, leaving £231,000 should be preferred to Mr Harries’ £132,000.

72. As I have found the evidence on the investment method to be the most reliable, the only remaining valuation issues are the rental value ITZA, whether or not anything should be applied to the basement, and the yield. I concentrate upon the evidence and argument on Nos. 25, 32-36 and 227 High Street as those were the principal comparables relied upon for the investment based valuation. As to rental value, I agree with Mr Church that the analysis of No. 227 High Street provides support for a rental value closer to the £17.94 than the £15 applicable to No. 25 and the £10.25 psf for Nos. 32-36. I also agree that there must be a rental value for the basement, and conclude that Mr Church’s assessment at £1 psf for that area is appropriate. However, from my inspection of the subject premises’ location, I do not agree with Mr Church’s suggestion that there is no difference in terms of trading location and do concur with Mr Harries’ view that there should be a deduction to reflect the subject property’s lightly inferior position. A reduction of between 5 and 10% from the No. 227 figure would, I think, be appropriate and I therefore determine the rental value at £17 psf ITZA.

73. On the question of yields, doing the best that I can in the light of the acknowledged paucity of evidence, I conclude that the fairest result in respect of this element is to “split the difference” at 9% - that in fact being the figure that Mr Church had initially opted for.

74. The valuation becomes:

Area Sq ft psf £ total £

Zone A 605 17.00 10,285

Zone B 592 8.50 5,032

Zone C 568 4.25 2,414

Zone D 533 2.12 1,130

Remainder 1,968 1.00 1,968

4,266

Basement 1041 1.00 1,041

1^st floor 4,355 1.25 5,444

2^nd floor 1,949 1.00 1,949

3^rd floor 625 Nil Nil

29,263

Less 20% quantum allowance 5,853

Rental value 23,410

YP in perpetuity @ 9% 11.11 260,085

Less essential repairs 60,000

Valuation 200,085

Say £200,000

75. I therefore determine compensation for the subject premises as at 16 September 2009 at £200,000, to which shall be added disturbance (£15,000), occupier’s loss (£25,000) and basic loss at 7.5% of the freehold value (£15,000) making a total of £255,000.

76. This decision will become final when the question of costs is determined, and not before. A letter setting out the procedure for making written submissions on costs is enclosed.

Dated 5 September 2013

P R Francis FRICS

United Kingdom Upper Tribunal (Lands Chamber)

BETWEEN PAUL & CHRISTOPHER JAMES

t/a P & C JAMES PROPERTIES Claimants