UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2014] UKUT 0458 (LC)
UTLC Case Number: RA/46/2011
	
	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

RATING – hereditament - whether food processing centre operated from two buildings separated  by public highway one hereditament or two – rateable as one hereditament – appeal dismissed - valuation – basic rate – relative value of first floor production and storage space – fragmentation allowance - assessment reduced

IN THE MATTER OF AN APPEAL FROM A DECISION OF THE VALUATION TRIBUNAL FOR ENGLAND 

BETWEEN	                       NICOLA JANE JOHNSON (VO)                Appellant

	and

	                                               H & B FOODS LTD                            Respondent
			
Re: 32 & 44-54 Stewarts Road, 
London SW8 4DR

	Before: Martin Rodger QC, Deputy President and A J Trott FRICS

	Sitting at: The Royal Courts of Justice, Strand, London WC2A 2LL
on  
6-7 October 2014

Sarabjit Singh, instructed by the solicitor to HMRC, for the appellant
Richard Glover QC, instructed by the Jones Granville, for the respondent 

© CROWN COPYRIGHT 2014

The following cases are referred to in this decision:
Vtesse Networks Limited v Bradford (VO) [2006] EWCA Civ 1339
Gilbert v Hickinbottom & Sons Limited [1955] DRA 49 (LT)
Gilbert v Hickinbottom & Sons Limited [1956] 2 QB 40 (CA)
Re the Appeal of Woolway (VO) [2012] UKUT (LC) 165
Woolway (VO) v Mazars [2013] EWCA Civ 368
Rennick (VO) v Weathershields Limited (1957) 1 RRC 185
Rank Xerox (UK) v Johnson (VO) [1987] RA 139
The following further cases were referred to in argument:
Newbold (VO) v Bibby & Baron Ltd (1959) 4 RRC 345
Burn Stewart Distillers plc v Lanarkshire Valuation Joint Board [2001] RA 110
Catton & Co Ltd v Burge (VO) (1957) 1 RRC 343
City of Leicester v Burkitt (VO) (1958) 3 RRC 45
Rennick (VO) v Weathershields Ltd (1957) 1 RRC 185
Hughes (VO) v ICI Ltd (1959) 30 DRA 132
Pritchard (VO) v William Crawford & Sons Ltd (1959) 4 RRC 351
Wilkins (VO) v Matineaus Ltd (1959) 5 RRC 1
Butterley Co Ltd v Tasker (VO) (1961) 32 DRA 337
Redcar Welding Co v Mark (VO) (1961) 8 RRC 115
Scaife (VO) v Birds Eye Foods Ltd [1962] RA 47
Edwards (VO) v BP Refinery (Llandarcy) Ltd [1974] RA 1
Harris Graphics v Williams (VO) [1989] RA 211
Coventry and Solihull Waste Disposal Co Ltd v Russell (VO) [1998] RA 427
Re the Appeal of Evans (VO) [2003] RA 173
Trunkfield (VO) v Camden London Borough Council [2011] RA 1
Davidson Brothers (Shotts) Ltd v Lanarkshire Valuation Joint Board Assessor [2011] RA 360
Shearson Lehman Brothers Ltd v Humphrys (VO) [1991] RA 125

DECISION
Introduction
1.	H & B Foods Limited processes and distributes cheese from two buildings in Stewart’s Road, London SW8.  The first issue in this appeal is whether the two buildings constitute a single hereditament for the purpose of rating, as the respondent contends, or whether they are two separate hereditaments, as the appellant valuation officer (“VO”) contends.  If we find that the buildings are a single hereditament a second issue arises, namely, the rateable value of that single hereditament. 
2.	The decision of the Valuation Tribunal for England dated 15 August 2011 was that the appeal premises at 44-54 and 60-62 Stewart’s Road, London SW8 4DF (“Number 44”) and at 32 Stewart’s Road (“Number 32”) should be merged and shown in the 2005 Rating List as a factory and premises with a rateable value of £290,000 effective from 1 April 2005.
3.	This appeal from the VTE’s decision has already been the subject of a decision by the Tribunal on a preliminary issue (see [2013] UKUT 0539 (LC)).  By that decision the Tribunal (Sir Keith Lindblom, President and Mr A J Trott FRICS) determined that the appeal was to proceed as a de novo hearing.  The Tribunal also permitted the parties to resile from a compromise which they had reached before the VTE hearing and by which they agreed that the rateable value of the appeal premises, assuming them to be a single hereditament, was £290,000. 
4.	At the substantive hearing of the appeal the VO, Ms Nicola Jane Johnson BSc MRICS, was represented by Mr Sarabjit Singh of counsel and gave expert evidence in her own right.  The respondent was represented by Mr Richard Glover QC who called Mr Gareth W Jones FRICS to give expert valuation evidence and Mr Nick Martin, the Managing Director of the respondent, and Mr Carlos Herrera, its chief engineer, to give evidence regarding the operation of the respondent’s business from the appeal premises.
The proceedings
5.	The premises occupied by the respondent, and which are the subject of the appeal, comprise two buildings, 32 Stewarts Road and 44-54 (including 60-62) Stewarts Road, London SW8.  
6.	The respondent trades from the appeal premises as “The Cheese Cellar” and describes itself as a national wholesaler, processor and distributor of cheese, dairy products and speciality foods to the UK food service sector.  It has occupied Number 44 since 1985 and acquired the site of Number 32 in 1995 before erecting the present building to suit the purposes of its own business.  Both buildings were in the respondent’s freehold ownership until 2007 when they were the subject of a sale and leaseback arrangement.
7.	When compiling the 2005 Rating List the VO entered the appeal premises as two separate hereditaments.  Number 44 was entered as “factory office and premises” with an initial rateable value of £270,000 with effect from 1 April 2005.  Following an earlier appeal, this rateable value was subsequently settled by agreement with a reduction to £248,000 with effect from the same date.  This settlement was agreed between Mr Jones and the VO then acting, and was analysed by the VO at a basic rate of £102.78 per m2.
8.	Number 32 was entered into the 2005 Rating List as “warehouse and premises” with an initial rateable value of £132,000.
9.	By a proposal dated 15 April 2008 the respondent proposed that the two hereditaments be merged with effect from 1 April 2005.  The VO did not agree and the matter was referred to the VTE as an appeal against the refusal to amend the list.  Before the appeal was heard by the VTE the parties agreed rateable values on alternative assumptions.  On the basis that the premises were to remain in the list as two separate hereditaments they agreed rateable values of £248,000 and £132,000 for Numbers 44 and 32 respectively.  In the event that the premises were to be merged as a single hereditament the parties agreed that a rateable value of £290,000 was appropriate.  
10.	The VTE found that the two entries should be merged into a single assessment at the agreed rateable value of £290,000.  The VO then amended the 2005 List with effect from 1 April 2005 to show the combined hereditament as a “Factory and Premises” at the agreed figure.  
Issue 1:  one hereditament or two?
Relevant legal principles
11.	It is the duty of the VO, imposed by section 41 of the Local Government Finance Act 1988 (“the 1988 Act”), to compile and maintain a local non-domestic rating list for each billing authority’s area every 5 years.  Section 42 of the 1988 Act requires that each local non-domestic rating list must show all non-domestic hereditaments.
12.	In some of its most fundamental aspects, the law of rating is obscure and inaccessible.  One such aspect arises from the omission of Parliament to provide a clear definition of the basic unit of assessment, the hereditament.  Section 64(1) of the 1988 Act defines a hereditament as follows:
	“A hereditament is anything which, by virtue of the definition of hereditament in section 115(1) of the 1967 Act [the General Rate Act 1967], would have been a hereditament for the purposes of that Act had this Act not been passed.”
13.	It is therefore necessary to look to section 115(1) of the General Rate Act 1967 for the appropriate definition.  Unfortunately, that definition sheds little light on the problem, as it provides only that:
“‘Hereditament’ means property which is or may become liable to a rate, being a unit of such property which is, or would fall to be, shown as a separate item in the valuation list.”
As Sedley LJ pointed out in Vtesse Networks Limited v Bradford (VO) [2006] EWCA Civ 1339 “the key to the apparently circular definition…. is that it assumes and relies on an existing fund of knowledge of what is and is not capable of being shown as a separate item in the valuation list.”
14.	In this appeal both parties agree that the most relevant guidance on the identification of a hereditament is the decision of the Court of Appeal in Gilbert v Hickinbottom & Sons Limited [1956] 2 QB 40.  In Gilbert the ratepayer occupied a bakery on one side of a public highway from which it operated for 16 hours each day using a continuous belt system of production.  On the opposite side of the public highway the ratepayer occupied a repair depot, the main purpose of which was the maintenance and repair of the company’s delivery vehicles.  Subsidiary to that use, the depot was also used by the ratepayer to carry out repairs to the plant and machinery at the bakery.  The ratepayer’s evidence, which was accepted by the Lands Tribunal (Erskine Simes QC), was that the continuous belt system of production, which meant that a breakdown in one part of the system would bring all production to a halt, made it “essential that facilities should be available either on the bakery premises or immediately adjacent thereto to enable such repairs to be carried out without delay.”  The Lands Tribunal had concluded, at [1955] DRA 49, 53, that the use of the repair depot in connection with the repairs of the bakery plant was “so essential to the efficient working of the bakery itself” that, despite the separation of the two buildings by a public highway, they should be treated as one hereditament.
15.	The question of whether premises form one hereditament is a question of fact, but the issue for the Court of Appeal in Gilbert was one of law, namely, whether it was permissible to apply a functional test when deciding whether two buildings in common operation but separated by a highway were comprised in a single hereditament.  The VO argued that in such a case the appropriate test was purely a geographical one and that where premises were structurally and geographically separate and capable of being separately let, they were separate hereditaments irrespective of their functional use.
16.	Each member of the Court of Appeal explained how he considered a hereditament should be identified and each agreed that the decision of the Lands Tribunal disclosed no error of law and must therefore remain undisturbed.  Denning LJ identified three “general rules” derived from the practice which had prevailed for many years (at pp. 48-49):
“First, take the case where two or more properties are within the same curtilage or contiguous to one another, and are in the same occupation. In that case they are, as a general rule, to be treated for rating purposes as if they formed parts of a single hereditament. There are, however, exceptional cases where for some special reason they may be treated as two or more hereditaments. That may happen, for instance, when they are situate in different rating areas, or because they were valued at different times … : or because they were at one time in different occupations …; or because one part is used for an entirely different purpose ….

Secondly, take the case where the two properties are in the same occupation but are not within the same curtilage nor contiguous to one another. In that case each of the properties must, as a general rule, be treated as a separate hereditament for rating purposes: and this is the case even though they are used by the occupier for the purposes of his one whole business. …

Thirdly, take the case where two properties are separated by a public highway, the surface of which is vested in the highway authority and the soil is vested in the occupier of the two properties. In that case the position in general seems to me to be the same as if the two properties were separated by a canal, a railway or a dwelling-house occupied by somebody else. They are normally to be treated as two separate hereditaments for rating purposes. … 

… But this third rule is not inflexible. There are exceptional cases where two properties, separated by a road, may be treated as one single hereditament for rating purposes. That may happen when a nobleman’s park, or a farm (when agricultural land was rated), or a golf course, is bisected by a public road. In such cases the two properties on either side of the road are so essentially one whole – by which I mean, so essential in use the one to another – that they should be regarded as one single hereditament.” 
17.	Morris L.J. said (at p.52) that it was “undesirable to prescribe some formula in words or to seek to define certain circumstances as being relevant and to stipulate that others must be excluded”. Parliament had not prescribed a definition of a hereditament, and “difficulties might result if a rigid judicial definition were formulated”. He continued:
“In the great majority of cases there will be no difficulty, after assessing all the considerations which apply according to the weight they command, in deciding whether premises comprise a hereditament. In the borderline cases where difficulty arises it is better to employ a common-sense assessment of the features of the case than to seek to have recourse to some standard formula. …”.
18.	All three members of the Court emphasised that the identification of the hereditament was a question of fact.  The use to which separate parts of premises in single occupation were put was not irrelevant to that identification, but the weight to be attached to it was a question for the Tribunal.  The geographical assessment, whether the premises comprised a single geographical unit or not, was the starting point of the inquiry and would often be decisive.  Thus, where premises were geographically and structurally separate, little weight would ordinarily be given to any functional connection, but each case must be considered on its own facts giving due weight to the degree and nature of the separation on the one hand and the importance of the functional connection on the other.
19.	We were also referred to the decision of the Tribunal (George Bartlett QC, President) in Woolway (VO) [2012] UKUT 165  (LC) concerning the significance of the mode of occupation of premises by the particular occupier.  At paragraph 17 the Tribunal said:
	“The hereditament is a unit of occupation…  What constitutes a separate hereditament is a question of fact and degree.  Rating is intended to achieve the payment of rates on a basis that fairly reflects the value of the ratepayer’s occupation (or such value as the property would have if it was occupied) and the relative worth of all rateable property….  The identification of the hereditament, as the unit of assessment, is part of the process by which this objective is achieved, and the aim must be to identify what on the facts can fairly be said to constitute the physical unit that the ratepayer occupies…  It is right to bear in mind that a failure to identify what on the facts can fairly be said to constitute the physical unit that the ratepayer occupies may result in a rateable value or rateable values that does or do not properly reflect the value of the occupier’s occupation and such value relative to the property of other ratepayers.”
It should be noted that when the Lands Tribunal’s decision in that case was considered by the Court of Appeal, Woolway (VO) v Mazars [2013] EWCA Civ 368, Pill LJ did not find the reference to a “unit of such property” in section 115 of the 1967 Act to be of assistance in defining what the separate item of rateable property to be shown in the rating list ought to comprise. 
20.	We were referred by counsel to a significant number of decisions of the Lands Tribunal, the Court of Appeal and the Lands Tribunal of Scotland showing how the concept of a hereditament had been applied on each side of the border to different factual situations in which buildings were separated by highways.  As the issue for us is a question of fact and degree, and as both counsel submitted that the proper approach was as explained by the Court of Appeal in Gilbert, we do not think it productive to discuss those decisions in reaching our own conclusion.  We have, however, considered all of the material to which we were referred by counsel.
The facts
21.	The parties agreed the basic facts relevant to the appeal and we heard oral evidence and undertook a guided inspection of the appeal premises.  From that material we find the following facts.
22.	Number 44 is a two-storey building with a net internal area of 2,576m2, having brick walls with plastic coated metal panels on the upper elevations, all under a sheet metal roof.  Its current configuration dates substantially from a redevelopment undertaken in 2001-2.  The building is situated on the west side of Stewarts Road, and is bounded on three sides by public highways: on the east side by Stewarts Road itself; on the north side by Corunna Terrace and on the west side by Linford Street.  The area is a mixed commercial and residential neighbourhood, with relatively narrow and congested streets.  
23.	At the material day for the purpose of the 2005 valuation list, Number 44 adjoined a public house at 58 Stewarts Road immediately to the south.  Beyond the public house, on what had formerly been 62 Stewarts Road, vehicular access was available to the site from Stewarts Road along a private yard or roadway.  The yard is within the ownership and occupation of the respondent and, by our estimation from photographic evidence was about 10m wide for most of its length, sufficient to accommodate three small delivery vehicles.  It ran from Stewarts Road to Linford Street along the southern side of the site and was gated at both ends.  A little over half-way along the southern flank wall of Number 44 a loading bay opened on to the yard and was used by the respondent for the receipt of goods into the building.  At the rear of the site, adjacent to the Linford Street end of the roadway, the yard widened at the south western corner of the building where a further loading bay was used for despatching goods from the building.
24.	By the time of our inspection the public house at 58 Stewarts Road had been demolished.  Its site had been acquired by the respondents, who have constructed a new much larger covered loading bay in its place.  
25.	Number 32 is a three-storey building with a total net internal floor area of 1,527m2.  It was constructed by the respondent in 1995 and has brick walls and a profile metal sheet roof.  Access to a small and rather cramped yard at the rear of the building, occupying about half of the site, is obtained from Corunna Terrace.  Number 32 stands on the corner of Stewarts Road and Corunna Terrace and is separated from Number 44 by the width of Corunna Terrace itself, a distance of approximately 10.7m.  
26.	At the north end of the yard at Number 32 a roller-shutter door gives access to a forklift charging area through which forklift trucks are able to pass to a large goods-in fridge.  At the entrance to the yard forklift trucks have access to a goods-out fridge by means of a second shutter door.  This goods-out door faces into the yard rather than onto Corunna Terrace so that a vehicle wishing to gain access to it must proceed into the yard before reversing up to the shutter door.  The shutter door is designed for use by forklift trucks and is approached by a ramp.  Number 32 has no conventional loading bay suited to the loading and unloading of goods by larger vehicles.
27.	The main business activities of the respondent are the purchasing of cheese in bulk from suppliers across the world, and its wholesaling, processing and distribution in the United Kingdom.  Mr Martin explained that wholesaling accounts for approximately 70% of the company’s turnover while processing or “production” represents 30% of turnover but a higher proportion of its profit margin.  In London (where the appeal premises are the respondent’s main centre of business) processing represent about half of turnover at a margin which is about 50% higher than that achieved on wholesaling.  The processing involves grating, slicing or cutting cheese into various shapes and sizes and packaging it in trays or boxes to meet the specific requirements of different customers.  On our inspection of the premises we were able to obtain a good understanding of these activities.
28.	The respondent’s business model depends on its ability rapidly to dispatch different combinations of cheese and other speciality products to a diverse customer list including restaurants, sandwich chains, retailers and airline and contract caterers.  All orders received by the company are on a next day delivery basis.  Depending on the nature of the order, orders are accepted for next day delivery up to midnight on the day before.  More complex orders are accepted up to 4pm on the day before delivery.  Some customers are exacting in their delivery requirements (one sandwich chain places large daily orders of varying size and composition by 5.00pm for delivery by 8.00am on the following day).
29.	The temperature at which cheese is received, produced, packaged and dispatched is carefully controlled.  Customers require that goods are always kept within a verified temperature range, referred to by the respondents as the “chill chain”.  The respondent is required to demonstrate to the satisfaction of its customers that the “chill chain” has remained intact from receipt of goods-in to the premises until their delivery to the customer’s own premises.  For this reason it is considered imperative by the respondent that transfers of cheese outside the premises is minimised.
30.	We received detailed evidence concerning the manner in which the buildings were used at the material date.  Mr Martin was acknowledged by the appellant to be the witness best placed to describe the operation of the respondent’s business. Ms Johnson also gave evidence that her observations of movements between the two buildings on 19 occasions when she had observed the site from the road caused her to think that the number of movements between the two buildings was somewhat less than Mr Martin described.  She accepted without hesitation, however, that Mr Martin was in a better position than she to describe the operation of the respondent’s business.  It was not suggested to Mr Martin in cross-examination that he had exaggerated his evidence and he struck us as an honest and straightforward witness whose account we accept.
31.	Number 44 houses the respondent’s main offices, its refrigerated warehouse, the packing room in which orders are assembled, its main production room and the loading bays for goods-in and goods-out.  Approximately 24 staff are employed in the production room at Number 44, which operates five and a half days a week.  A second production room is located at Number 32, where 23 staff are employed.  All goods are received through the goods-in bay at Number 44 which is the only bay capable of handling articulated lorries.  On receipt cheese is checked for temperature, weight and condition.  Stock which is not for processing in Number 32, but is either to be processed in number 44 or stored there for wholesaling, is taken from the loading bay into Number 44.  Cheese which is required to be processed at Number 32 is taken there directly from the goods-in bay either by hand or by forklift truck.  The normal route for forklifts is along Linford Street, turning into Corunna Terrace and entering the yard at the rear of Number 32, a journey of approximately 80m.  
32.	The capacity of the refrigerated areas at Number 32 is limited and typically 30% of the stock delivered to Number 44 remains there until space becomes available.  Goods which have been processed at Number 32 are either transferred back to Number 44 or retained at Number 32 before being collected by the team of pickers whose job is to assemble individual orders for customers.  All orders are dispatched from Number 44.  Where the goods required by the pickers are at Number 32 they are transferred to Number 44 either by hand or by forklift depending on volume.  A team of approximately 50 warehouse staff is employed throughout the day and night in the task of assembling orders for dispatch to customers at a rate of about 3,500 to 4,500 orders per week.  A typical order will include items located at Number 44 and other items held at Number 32 and Mr Martin estimated that, for the purpose of assembling orders, over 200 round trips were undertaken each day between the two buildings by staff on foot or driving forklift trucks.  
33.	Dispatch from Number 44 begins at about 4.30am with approximately 25 vans and lorries being dispatched on a daily basis.  
34.	Mr Martin explained, and we accept, that, but for the close proximity of Numbers 32 and 44, it would be necessary for goods to be transferred between the two buildings using chilled vans.  He foresaw two specific difficulties with such a method of operation.  First, although the use of chilled vans would ensure that the “chill chain” was not disrupted, the verification procedures which would need to be adopted in transferring cheese between remote sites would significantly delay the processing of orders.  The complexity of individual orders and the frequency of journeys between the two buildings would make it impossible for the respondent to maintain the speed of turnaround of orders which its customers demanded and which gave it its commercial edge over competitors.  Secondly, the goods-in yard at Number 44 was, as we observed, extremely narrow and accommodated a single loading bay.  That loading bay could accommodate deliveries by suppliers (which generally arrived by articulated lorry) but transfers between Numbers 44 and 32 and vice-versa were effected either by hand or by forklift truck.  If goods had to be received from a distant site by chilled vans it would be impossible for deliveries from suppliers to be received at the same time.  When it was suggested to Mr Martin that the respondent’s mode of operation could be adapted to accommodate transfers of goods from a remote site, he was clear and convincing in his evidence that the constraints of the building would make that impossible.  
35.	A certain amount of evidence was also given concerning the role of the respondent’s team of engineers who maintain its refrigeration plant and processing equipment.  On our inspection we were shown the relevant equipment and Mr Herrera, the respondent’s chief engineer, explained its operation in his written and oral evidence.  A team of five engineers is on site between 6.00am and 10.00pm in two shifts.  At the weekend planned maintenance is undertaken but otherwise only an emergency response service is provided.  The engineering team is based at Number 32 on the first and second floors.  The engineers are responsible for maintaining and, where necessary, repairing the plant and equipment in the buildings, including the disassembly and reassembly of all of the production lines for cleaning on a daily basis, although specialist contractors are sometimes called in to assist. Separate refrigeration systems operate in the two buildings with Number 32 relying on refrigerated rooms and portable fridges while Number 44 has a single large ammonia refrigeration system supplying cooled air to the production and warehousing areas.  The system is complex and specialist but, we suspect, not atypical of cooling systems used in food processing centres.
36.	The engineers are available to respond rapidly to any interruption of production.  Interruptions may be caused either by a failure of machinery due to a specific malfunction or by preventative maintenance intended to avoid such incidents.  Mr Herrera explained that there were typically between five and seven of such incidents per day although it was difficult to generalise.  The ammonia refrigeration plant is monitored by a sophisticated computerised system which generates an alarm if any malfunction or other unusual incident is experienced in the course of operation.  Mr Herrera had received 350 alarm calls in the previous seven months, including calls out of hours.  If an alarm was triggered out of normal hours he would respond to it and would, if necessary, drive to the premises from his home.  There had only been two occasions when the refrigeration system at Number 44 had completely failed.  There had never been a complete failure of all of the refrigerated space at Number 32, but individual refrigerators there had been shut down from time to time.  Mr Herrera explained that the object of the planned preventative maintenance programme which he supervised was to prevent such incidents occurring.
Submissions
37.	For the appellant Mr Singh submitted that the starting point for considering whether Numbers 32 and 44 comprise one hereditament or two is the Court of Appeal’s decision in Gilbert.  As a general rule, where two buildings are physically separate (i.e. not within the same curtilage), they are two hereditaments.  Only in exceptional cases where an essential functional connection exists between separate buildings can they be regarded as a single hereditament.  
38.	Mr Singh drew our attention to decisions in other cases (including in particular Rennick (VO) v Weathershields Limited (1957) 1 RRC 185 and Rank Xerox (UK) v Johnson (VO) [1987] RA 139) in support of his proposition, which we accept, that for this purpose it is not enough that proximity between separate buildings is convenient for their joint operation, nor that the separation of the same buildings by a greater distance would involve expense and have an adverse impact on profitability; what was necessary before two separate buildings could exceptionally be regarded as a single hereditament was that they were “functionally essential, the one to the other”.  
39.	Applying the established legal principles to the facts of the case Mr Singh submitted that there was no essential functional connection between Numbers 32 and 44.  He disputed that the transportation of cheese between the two buildings was, as he put it, “time critical” because with the use of chilled vans there was no risk to its quality or condition.  It was, Mr Singh suggested, fatal to the respondent’s case that around half of the produce delivered to Number 44 was never transferred to Number 32 but remained throughout at Number 44.  Half of the respondent’s activities consisted of wholesaling, which did not involve any process undertaken at Number 32.  It therefore could not be said that Number 32 was indispensible to Number 44 (or vice-versa).
40.	Using additional chilled transport to transfer cheese between two sites would undoubtedly cause additional expense to the respondent and, for that reason, Mr Singh acknowledged that it was both desirable and convenient for the respondent’s business to be conducted from adjoining buildings.  However, the availability of an alternative mode of operation, namely the use of refrigerated vans, meant that the proximity of the buildings could not be regarded as any more than a convenience to the business.  The suggestion by Mr Martin that the use of additional chilled vehicles was impossible due to the constraints of the loading facilities at Number 44 was dismissed by Mr Singh as speculation.
41.	For the respondent Mr Glover QC emphasised the judgment of Morris LJ in Gilbert and in particular his suggestion that it was undesirable to prescribe some formula in words or seek to define certain considerations as being relevant and to stipulate that others must be excluded as irrelevant when considering the identity of a hereditament.  What was required, Mr Glover suggested, was exactly the common sense assessment of the features of this case which Morris LJ had endorsed.  In particular it was not right to suggest, as Ms Johnson had done in her commentary on the law, that where there was a clear geographical separation between two buildings, divided by a public highway, it was impermissible to have regard to their functional connections.  
42.	As far as the application of the facts of the case to the relevant legal criteria was concerned Mr Glover submitted that there was a wholesale absence of common sense in the appellant’s suggestion that the premises could operate effectively even though separated by a considerable distance if chilled vans were employed to transport cheese between two sites.  The respondent would be unable to meet the demands of its customers within the time constraints which they set; if it was necessary to transport cheese over greater distances, the additional quality control and traceability procedures which would have to be implemented would fatally undermine the operation.  In particular, the constraints of the layout of the yard at Number 44 and the absence of proper goods handling facilities at Number 32, meant that the VO’s suggested mode of operation was impossible.  In addition, it was essential for the engineering team to be close to both production areas in order to minimise the occasions on which production was interrupted.  
Discussion and conclusion on issue 1
43.	We begin by considering the geographical or locational factors relevant to the assessment of whether Numbers 44 and 32 are a single hereditament or two separate hereditaments.
44.	The two buildings are separated from each other by a distance of approximately 10.7m spanning a public highway.   The area around Corunna Terrace is heavily congested and lacks sufficient parking for the use of the light industrial buildings adjacent to the subject premises.  During normal business hours vehicles are parked on both sides of Corunna Terrace between Stewarts Road and the gate entering the yard at Number 32.  These vehicles make the manoeuvring of goods vehicles difficult on Corunna Terrace, as it is for the same reason on Linford Street.  While the distance between the two buildings is very short, the presence of parked vehicles emphasises their separation.
45.	Additionally while the distance between the two buildings across Corunna Terrace is less than 11m, the yards at the rear of the two buildings are separated by a rather greater distance of perhaps 80m.  Forklift trucks making the journey between Numbers 44 to Number 32 must therefore traverse the public highway for some distance.  Products transferred by hand appear to make a more direct journey directly across Corunna Terrace using a door at the side of Number 44.
46.	The geographical separation of the two buildings is not ameliorated by their appearance.  They are of different age and design and no architectural feature unites them.  No observer of the two buildings from the road would assume that they were in the same occupation unless some of the quite limited signage was visible from his vantage point.
47.	Taking these matters into account we agree with Mr Singh that the two buildings clearly fail any exclusively geographical test and may only properly be regarded as a single hereditament if, functionally, they can properly be regarded as “essential in use the one to another” to adopt Denning LJ’s phrase in Gilbert.
48.	In considering the functional connection between the two buildings we note first that Number 32 was designed with the needs of the occupier of Number 44 specifically in mind, and that after its completion Number 44 was itself modified.  Number 32 is a rather unusual building: essentially a warehouse on 3 floors, it nonetheless lacks facilities which one would expect to find in a warehouse.  The yard at Number 32 is incapable of accommodating articulated delivery vehicles.  It lacks any proper facility for loading and unloading smaller vehicles.  We therefore consider that it can fairly be said to be essential to the efficient use of Number 32 that goods to be stored or processed there are received elsewhere in close proximity so that they can be transported, as they now are from Number 44, by forklift truck or hand.  
49.	We are additionally satisfied on the basis of our own observations and the evidence of Mr Martin that it is essential to the use of Number 44 for the business of the respondent that the additional production capacity which it requires should be located in such proximity that individual bespoke orders can be assembled within a very short space of time.  In disagreement with Mr Singh we consider that the respondent’s business can well be described as “time critical” not because of the risk of its products spoiling, but rather because of the variety of orders which must be assembled from two different production sources to meet very tight ordering and delivery deadlines.  
50.	We are also persuaded that it would not be possible for the respondent’s business to operate successfully from Number 44 if its additional processing facilities were at a greater distance,  because Number 44 is wholly unsuited to handling a large number of small deliveries employing the suggested fleet of chilled vans.  The time available for deliveries is too short because of the capacity of the yard to accommodate vans at the same time as receiving deliveries from suppliers.  The current system works satisfactorily because deliveries arrive during the day whereas orders are dispatched to customers during the night.  Those orders have been processed and assembled ready for dispatch in the course of the day.  The additional record keeping and quality assurance procedures which would have to be implemented in conjunction with the receipt of deliveries from a distant site, and the practical impossibility of accommodating the necessary vehicles, render the use of the two buildings as a single unit indispensible to the conduct of the respondent’s business from them.
51.	We note in particular that these buildings have been designed (in the case of Number 32) and adapted (Number 44) with a view to their complementary use.  Their essential functional relationship is therefore not solely attributable to the way in which the respondent chooses to operate its particular business.  Rather their functional dependence, the one on the other, is the result of the limitations of the buildings themselves.  We are satisfied that, in these exceptional circumstances, the geographical separation of the two buildings is not fatal to their treatment as a single hereditament.  On the contrary their functional relationship is sufficient in our judgment, to require that they be entered in the rating list as a single hereditament.  
52.	Accordingly we dismiss the VO’s appeal from the decision of the VTE on the first issue.
Issue 2:  the rateable value of the merged hereditament
53.	The parties agreed before the VTE that the rateable value of the merged hereditament was £290,000.  There is no such agreement before us.  Ms Johnson says that the rateable value of the merged hereditament is £325,000 while Mr Jones says it is £270,000 (having increased his figure from £265,000 shortly before the hearing).
54.	The valuers agreed most of the relativities to be used to adjust the basic rate per square metre and thereby narrowed their differences to three issues:
1.	The figure for the basic rate.  Ms Johnson took £97.88 per m2 and Mr Jones £90 per m2 (which he reduced from £95 per m2).  Both figures reflect an allowance for the increased size of the merged hereditament compared with that of Numbers 32 and 44 when assessed separately.
2.	The discount to be applied to the basic rate for first floor production and plant room space.  Ms Johnson took 65% of the basic rate and Mr Jones took 55%.
3.	The end allowance for fragmentation of the use between Numbers 32 and 44.  Ms Johnson took 7.5% and Mr Jones took 15% (which he increased from 14%).
The basic rate
55.	Ms Johnson supported her figure of £97.88 per m2 by reference to eight comparable settlements.  The comparables were valued in accordance with the Valuation Office Agency’s valuation scheme reference 6693 which applies to the separate assessments of Numbers 32 and 44.  All of the comparables were smaller than the area of the merged hereditament (4,103m2), ranging from 210m2 to 2,544m2.  The largest comparable was Number 44 itself, valued as a separate hereditament.  The adopted prices ranged from £102.78 (Number 44) to £128.25 per m2 (the smallest comparable).  The basic rate for Number 44 was 5% above Ms Johnson’s adopted rate of £97.88 per m2 for the merged hereditament.
56.	Mr Jones relied on six comparable assessments and settlements.  These comparables ranged in size from 2,812m2 to 5,458m2.  The adopted prices ranged from £50 to £101.50 per m2.  Only two of the comparables formed part of valuation scheme reference 6693.  Mr Jones divided his comparables into two groups, based on location.  He said that there was price sensitivity depending on whether a property was located north or south of the main Clapham Junction to Waterloo railway line.  Mr Jones said that it was a major advantage to be north of the line since road communications to central London were much easier.  This was reflected in the adopted values of the four comparables that were located north of the line (one at £94.25 per m2, two at £101.25 per m2 and one at £101.50 per m2) and those to the south (£50 per m2 and £65 per m2).  The appeal premises are south of the railway line.  Mr Jones adopted a basic rate of £90 per m2, 14.2% less than the basic rate of £102.78 applicable to Number 44 when valued as a separate hereditament.
57.	We think the starting point for the valuation should be the basic rate of £102.78 per m2 that was adopted in the settlement of the previous appeal at Number 44 assessed separately (see paragraph 7 above).  We acknowledge that Mr Jones agreed to the final figure of rateable value rather than its component parts but he did not provide an alternative analysis and did not demur in terms from the analysis adduced as appendix 7 to Ms Johnson’s rebuttal report and which states in a footnote:
	“Appeal discussed and agreed with Gareth Jones of Jones Granville.” 
That appendix gives details of the VO’s adjustments to the basic rate, all but one of which Mr Jones accepts in the present appeal.  The exception is the relativity for first floor production space which Mr Jones says should be 55% and not 65%.  Given that Mr Jones agreed the separate rateable value of Number 44 at £248,000 and given that the adoption of 55% means a larger discount for the basic rate than that adopted by the VO, the implication is that the basic rate adopted by Mr Jones, would have been greater than £102.78 per m2.
58.	Ms Johnson’s comparables support our starting figure being settlements in the same valuation scheme and showing a range of values varying directly in proportion to the size of the hereditaments.  The smallest comparable hereditament has the highest adopted price (basic rate) and the largest hereditament (Number 44) has the lowest adopted price.
59.	Ms Johnson said that her eight comparables were 2005 list settlements on the “£135 psm size matrix” but she gave no details of this matrix in her evidence and did not explain how it was implemented.  All of Ms Johnson’s comparables are smaller than the merged hereditament (4,103m2) with which we are concerned.  It is possible to discern from Ms Johnson’s evidence that “the matrix”  shows stepped value changes depending on the size of the hereditament, i.e. £1.85, £3.37 and £6.75 per m2, suggesting the adoption of value bands.  But there is no indication of why she adopted a basic rate of £97.88 per m2 for the merged hereditament compared with £102.78 per m2 for Number 44 as a single hereditament.  The lack of any evidence of a similar sized hereditament to that under appeal is an important omission in our view. 
60.	Mr Jones relies upon comparables which are larger than those adopted by Ms Johnson and which are more similar in size to the merged hereditament.  Two of them, 78 Silverthorne Road and 41-49 Battersea Park Road, are in the same valuation scheme as the appeal hereditament.  They measure 2,812m2 and 3,108.76m2 respectively and are valued at a basic rate of £101.25 per m2.
61.	In his original expert report dated 25 May 2012 Mr Jones, using the same comparables, said that the appropriate basic rate was £95 per m2.  On 3 October 2014 the Tribunal received an amended expert report from Mr Jones in which he revised the basic rate to £90 per m2.  The amended report did not explain why the rate had been reduced.  Mr Jones explained his position in examination in chief and said that originally he had adopted a different valuation approach to the VO regarding the relativities to be used to adjust the basic rate.  He said it was clear that if he adopted the VO’s relativities then it would narrow the differences between them.  But that meant he would have to use a lower basic rate to maintain the appropriate end value, albeit slightly higher (£270,000) than that in his first report (£265,000).
62.	We are not persuaded by this explanation.  So far as we are aware the only contentious relativity was, and remains, the appropriate discount to apply in respect of first floor production and storage space.  Mr Jones’s original valuation made no adjustment for air conditioning, an omission that he could not explain when asked about it by the Tribunal.  Also he made no adjustment for chilled space and took canteen space at 30% above the basic rate, rather than 20%.  It seems to us that Mr Jones’s amended valuation was submitted, at least in part, to correct errors and omissions in the original valuation.
63.	The result of Mr Jones’s late amendments is to change his basic rate from £95 per m2 to £90 per m2 which he sought to justify by reference to his comparables, particularly the two comparables which are located south of the main railway line, i.e 55-77 South Lambeth Road and Timbermill Way, Gauden Road.  Their respective basic rates are £65 per m2 and £50 per m2.  We are at a loss to understand, and Mr Jones did not explain, how comparables at this level support a basic rate for the merged hereditament of £90 per m2.  Mr Jones said that these comparables were not “out of kilter” with the other evidence when considered as a whole, but we do not accept that a comparable worth £50 per m2 can sensibly be used to support an adopted value which is 80% higher, even though Ms Johnson considered the assessment of both these comparables to be “far too low”.  In any event having visited all of Mr Jones’s comparables we do not find 55-77 South Lambeth Road, a builders yard and timber store, to be comparable to the appeal hereditament.
64.	In our opinion the evidence as a whole supports a basic rate of £95 per m2 for the merged hereditament of Numbers 32 and 44, allowing a discount for size of 7.5% against the basic rate of the two hereditaments when assessed separately.
Discount for first floor production/storage space
65.	Ms Johnson said that a relativity of 65% for first floor production/storage space was consistent with the allowance made for properties in valuation scheme reference 6693 and was the figure that had been used when agreeing the separate assessment of Number 44 with Mr Jones.  An allowance of 5% had already been made for the layout at Number 44 and there was no justification, in her view, to reduce the relativity.  
66.	Mr Jones said that it was necessary to consider the proportion of production/storage space that was above ground floor level and he analysed each of his comparables accordingly.  The results varied from 0% (i.e. no production/storage space above ground floor level) to 27% with an average of approximately 10%.  Mr Jones compared this with the equivalent figure for the merged hereditament at Numbers 32 and 44 of 43.8%.  He said that having such a high proportion of production space above the ground floor made operating from the appeal premises considerably more difficult.  He reflected this disadvantage by reducing the relativity of first floor production/storage space from 65% to 55%.
67.	Ms Johnson accepted in cross-examination that first floor production and storage space was less desirable and less valuable than ground floor space, but she said that the extent of such upper floor space at Number 44 was already reflected in the allowance of 5% for layout.  She conceded that there was no such layout allowance for Number 32 although it too had a substantial proportion of upper floor production/storage space.  Mr Jones accepted that this type of accommodation at second floor level should be valued at a relativity of 40%; his view being that a relativity of 65% for first floor floorspace was too high by comparison.  Mr Jones produced no evidence to support his assertion that the relativity should be 55% and his comparables all appear to have been valued by using a figure of 65%, even the comparable at 88 Kirtling Street which had the highest proportion of first floor production/storage space (27%).
68.	Following our site inspection we accept that a relativity of 55% for the first floor is appropriate to reflect the disadvantage of such a high proportion of upper floor production/storage space, particularly since no layout allowance has been made in respect of Number 32.  We agree with Mr Jones that the production/storage space is a core element of the accommodation requiring constant movement of goods between floors.  Despite the presence of a goods lift in both buildings we consider this to be a disadvantage that is not adequately reflected in Ms Johnson’s relativity of 65% and a 5% layout allowance for Number 44 only.
Fragmentation allowance
69.	Ms Johnson produced a schedule of agreed assessments where a fragmentation (split site) allowance had been made.  She divided the assessments into three groups:
(i)	contiguous properties separated by a dividing wall (where the allowance varied from 2.5% to 5%);
(ii)	non-contiguous properties separated by an estate road or yard area (5% to 7.5%);
(iii)	properties separated by a public highway or right of way (7.5%).
Ms Johnson said that Numbers 32 and 44 were separated by a public highway and therefore fell into the third category for which a 7.5% allowance was appropriate.
70.	Mr Jones considered that only Ms Johnson’s third category was of any assistance and he distinguished the two comparables in that category as being concerned with the separation of two distinct types of use, e.g. at Cox Lane, Chessington an office block was separated from a warehouse.  At Numbers 32 and 44 the separation of the two buildings disrupted the cheese processing function and did not create a discrete partition between operational and administrative floorspace.  The effect on value was therefore greater at the appeal property. 
71.	At Cox Lane Ms Johnson’s schedule recorded that agreement had been reached with the ratepayer’s finance director which Mr Jones said suggested that the ratepayer was not professionally represented.  In the premises occupied by the respondent at Broomhall Farm, Worcester the VO had agreed to merge two hereditaments, an office and a production facility, which were 4 metres apart and within the same yard.  They were not separated by a road.  A fragmentation allowance of 7.5% had been agreed.  Mr Jones said that the effect of separation of Numbers 32 and 44 was greater than at Broomhall.  Mr Jones also referred to Mr Martin’s estimate of the additional annual cost of £55,000 caused by the separation of the two buildings at Stewarts Road which he said emphasised the significance of the division of the buildings by a public highway.  Mr Jones said that Ms Johnson’s other third category comparable at Deer Park Road, London SW19 involved buildings separated by a road which seemed to be very rarely used in contrast to the busy and congested Corunna Terrace which separated Numbers 32 and 44.
72.	Mr Jones also referred to an appeal at 120-170 Stewarts Road in which the VTE held that there should be an allowance of 10% to reflect the lack of access between adjoining buildings which were on the same side of the road and within a single curtilage.  He said that the effect of fragmentation was greater at the appeal hereditament where the production facility was divided by a public highway.
73.	Before the VTE in the present appeal the parties had agreed a rateable value for the merged hereditament of £290,000 which reflected a fragmentation allowance of 17.5% (as recorded at paragraph 10 of the VTE’s decision in the 120-170 Stewarts Road appeal).
74.	In our opinion the material facts concerning the fragmentation allowance are:
(i)	the physical separation of Numbers 32 and 44 by a congested public highway which is in constant use; 
(ii)	both buildings are used as part of a single functional process and do not serve separate functions such as administration and production; and
(iii)	the need to ferry products by forklift truck and/or by hand would be common to any hypothetical tenant of both sites operating together and would inevitably result in increased costs.
75.	We agree with Mr Jones that the appeal hereditament can be distinguished from Ms Johnson’s comparables and that an allowance of 15% is appropriate; this being 2.5% less than the allowance agreed by the VO before the VTE.
Conclusions on valuation
76.	We determine the three valuation issues as follows:
(i)	The basic rate is £95 per m2.
(ii)	The relativity of first floor production and storage space is 55%.
(iii)	The fragmentation allowance is 15%.
Determination 
77.	We determine that the rateable value of the merged hereditament at 32 and 44 Stewarts Road, which we consider should be described as a food processing centre, should be £282,500 with effect from 1 April 2005 in accordance with the valuation set out in the Appendix to our decision.
78.	This decision is final on all matters other than costs.  The parties may now make submissions on costs and a letter giving directions for the exchange of submissions accompanies this decision.

									Dated: 10 November 2014

									Martin Rodger QC
									Deputy President

									A J Trott FRICS

APPENDIX 
LANDS CHAMBER VALUATION OF 32 AND 44 
(INCLUDING 60-62) STEWARTS ROAD, LONDON SW8 4DF

BASIC RATE: £95/m2
RELATIVITIES AS AGREED OR DETERMINED
BASIS OF MEASUREMENT: NIA

Ref	Floor		Description		Area (m2)		£/m2		Value
44 (including 60-62) Stewarts Road
 1	Ground		Office			149.65			135.85		 20,330
 2	Ground		Internal storage	  13.51			  92.62		   1,251
 3	Ground		Chill Store		545.70			109.25		 59,618
 4	Ground		Production		342.20			109.25		 37,385
 5	First		Office			147.37			135.85		 20,020
 6	First		Office			235.80			135.85		 32.033
 7	First		Cloakroom		  10.42			  50.94		      531
 8	First		Production		  22.31			  50.94		   1,136
 9	First		Production		  23.67			  50.94		   1,206
10	First		Drivers’ rest room	  17.10			123.50		   2,112
11	First		Production		239.63			  50.94		 12,207
12	First		Canteen		113.99			114.00		 12,995
13	First		Store			 86.08			  50.94 		   4,385
14	Ground		Production		  52.12			103.79		   5,410
15	Ground		Dry store		  22.68			  90.25		   2,047
16	Ground		Dry goods store	  70.38			  90.25		   6,352
17	Ground		Palet invertor		113.25			  90.25		 10,221
18	Ground		Production		157.04			103.79		 16,229
19	First		Plant room		181.90			  52.25		   9,483
20	First		Plant room		  31.20			    0.00		       0     
						          2,576.00				            255,021

ALLOWANCES
(iv)	Layout (5%)					0.95
(v)	No car parking (7.5%)				0.925
Compound factor							0.87875
										224,100

Ref	Floor		Description		Area (m2)		£/m2		Value
32 Stewarts Road
1	Ground		Warehouse		306.37			104.50		  32,016
2	Ground		Warehouse		  45.44			  92.62		    4,209
3	Ground		Chill store		  82.96			103.50		    8,586
4	Ground		Loading bay		118.28			  92.62		  10,955
5	Ground		Passage		  32.37			  95.00		    3,075
6	First		Warehouse		345.81			  57.47		  19,874
7	First		Locker room		  19.52			114.00		    2,225
8	First		Kitchen		  13.74			123.50		    1,697
9	Second		Warehouse		391.61			  37.05		  14,509
10	Second		Office			  33.12			123.50		    4,090
11	Second		Office			    7.65			123.50		       945
12	Second		Plant room		130.39			  0.00		         0
						         1,527.26					 102,181

Total area/value:			         4,103.26					 326,281

Additional items
44 (including 60-62) 	Hard surfaced,
				fenced land:		  87.00			  15.00		      1,305

32	                               Hard surfaced,
				fenced land:		469.50			  15.00		      7,042

Total before adjustments:								  334,628

End allowance for fragmentation (15%)						    50,194

Total value										  284,434
Rateable value										£282,500