Fryer and another v Cox (VO)

Rating – Valuation – Receipts and expenditure method – Appellants operating seasonal farm attraction in part-exempt hereditament – Attraction entered in rating list with rateable value of £35,000 – Valuation tribunal dismissing appellants’ appeal against valuation – Appellants appealing – Whether appellants entitled to reduction in valuation figure – Appeal allowed in part The appellants owned a farm in Stretton, Warrington comprising approximately 300 acres. The majority of the hereditament was exempt from rates, as agricultural premises, but about 30 acres in the middle of the farm were used for a seasonal attraction known as Apple Jacks Adventure Park, with a car park. The attraction had no mains services and electricity was generated on site and some appliances were run off propane gas. Water was brought onto the site in tankers and stored in a 60,000-litre underground tank, from where it was treated with ultra-violet light and pumped to the toilets and washing up areas. Cooking water was supplied separately and only bottled water was supplied for drinking. Dirty water from the toilets and kitchen was taken by tanker to a licensed dirty water lagoon 20 miles away. The attraction was open from Easter to September at weekends and during school holidays. It reopened as Spooky World for two weeks around Halloween. A rateable value of £35,000 was entered in the 2017 rating list for the attraction. The parties agreed that the attraction was in the same physical state on the material day of 1 April 2017 as at the antecedent valuation date (AVD) of 1 April 2015. They also agreed that the primary method of valuation was the receipts and expenditure (R&E) method. The Valuation Tribunal for England (VTE) dismissed the appellants’ appeal against that rateable value but the appellants appealed seeking a nominal rateable value of £1. Held: The appeal was allowed in part. (1) Rateable value was defined in paragraph 2(1) of schedule 6 to the Local Government Finance Act 1988 (as amended) as an amount equal to the rent at which it was estimated the hereditament might reasonably be expected to let from year to year on three assumptions: (i) the tenancy began on the day by reference to which the determination was to be made; (i) immediately before the tenancy began the hereditament was in a state of reasonable repair, but excluding any repairs which a reasonable landlord would consider uneconomic; and (iii) the tenant undertook to pay all the usual tenant’s rates and taxes and bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state fit to command the stated rent. The basis of the valuation was the assumption of a letting to a reasonably competent or efficient operator who would expect to achieve a level of income, or turnover, and to incur a level of expenditure, which were broadly representative of an average level of performance. In the present case, it was agreed by the parties that the hypothetical tenant would be an agricultural tenant, and the rateable value was the additional rent that the tenant would have been prepared to pay at the AVD to have the benefit of running the attraction as a diversification activity on the farm: Wishart v Hulse (VO) [2018] UKUT 224 (LC); [2018] PLSCS 153 (2) The receipts and expenditure method of valuation sought to arrive at the annual rental value of premises by assessing the gross receipts which a prospective tenant would expect to achieve from a business carried on at those premises, and by deducting operating expenses, including the cost of repairs, and a sum to reflect the return on capital and profit the tenant would require, to determine the surplus which it was assumed the tenant would be prepared to pay to the landlord in rent in return for the annual tenancy The first stage was the ascertainment of a net profit (divisible balance) which might then be apportioned between the tenant, to provide a return on capital and a profit (in aggregate, the tenant’s share) and the landlord, as the rent in return for the annual tenancy (the landlord’s share): Hughes (VO) v York Museums and Gallery Trust [2017] UKUT 20 (LC) considered. (3) The attraction here was an unusual property. It was a component in a much larger entity which, with the exception of the attraction, was exempt from rating. It was also a seasonal operation and subject to planning constraints. It suffered from a lack of mains services, difficult ground conditions and was located in a part of the country that was notable for the amount of precipitation it received. The operation was at the mercy of the weather as so much of the activity took place outdoors. The appellants had managed to generate significant business at the site. They exemplified the reasonably efficient operator and the experts were agreed that the R&E valuation should be informed to a large extent by the figures generated in the business. To a significant degree, this case came down to a judgment about the percentage to be adopted for the tenant’s share. According to the rating forum guidance, the tenant’s share had to properly reflect the strengths and weaknesses of the hypothetical landlord and tenant, and it should look reasonable, having regard to the motives for occupation, compared with the amount of tenant’s capital, the turnover and the divisible balance. (4) In that context, the tribunal did not accept the proposition that the rent could be no more than £1. The hypothetical farm tenant would offer a rent to reflect the opportunity that the attraction provided to make profit from an additional enterprise at the farm, and the accounts showed that profit was made by running the attraction, even in the difficult wet year of 2012. The divisible balance would be assessed at £47,138 and it not appropriate to deduct from that figure a first charge for return on tenant’s capital before assessing the tenant’s share. The tenant’s share had to cover profit, together with an allowance for various risks and also a return on tenant’s capital. Striking a balance between landlord and tenant that acknowledged the risks involved in running this particular enterprise led to the conclusion that the tenant’s share should be 75% of the divisible balance (£35,354), leaving £11,784 for rent. That valuation would be rounded to rateable value £11,750. Accordingly, the appeal succeeded, although not to the full extent sought by the appellants.  Richard Glover QC (instructed by Eversheds Sutherland) appeared for the appellants; Hugh Flanagan (instructed by HMRC) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Fryer and another v Cox (VO)