UPPER TRIBUNAL (LANDS CHAMBER)	
	
UT Neutral citation number: [2010] UKUT 333 (LC)
LT Case Number: ACQ/168/2009

	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

COMPULSORY PURCHASE – disused public house in poor condition – value as public house/restaurant – comparables – value for residential development – residual valuation – whether developer demand still buoyant at valuation date – whether allowance to be made for interest – architect’s fees – developer’s profit

	IN THE MATTER OF A NOTICE OF REFERENCE

BETWEEN	SANDRA TEW	Claimant

	and

	SOUTH NORTHAMPTONSHIRE	Acquiring
	COUNCIL	Authority

	Re: The Sun, Moon and Stars
	64 High Street
	Blisworth
	Northants
	NN7 3BJ

	Before: N J Rose FRICS

	Sitting at Birmingham Civil Justice Centre, Priory Courts, 
	33 Bull Street, Birmingham, B4 6DS
	on 17 August 2010

Adam Rosenthal, instructed by D F A Law LLP, solicitors of Northampton for the Claimant
Robin Green, instructed by Mrs C Nathasingh, Manager, Legal Services, South Northamptonshire Council, for the Acquiring Authority

The following case is mentioned in this decision:

Transport for London v Spirerose Ltd (in Administration) [2009] 1 WLR 1797

The following cases were referred to in argument:

Hepworth v Pickles [1900] 1 Ch 108
Kelsey v Dodd (1881) 52 LJ Ch 34
Melwood Units Pty Limited v Commissioner of Main Roads [1979] 1 AC 426
Preferred Mortgages v Countrywide Surveyors Limited [2006] PNLR 9

	DECISION
Introduction
1.	This is a reference to determine the compensation payable by South Northamptonshire Council (the acquiring authority) to Mrs Sandra Tew (the claimant).  The claim relates to the freehold interest in a disused public house known as The Sun, Moon and Stars, 64 High Street, Blisworth, Northants, NN7 3BJ (the subject property).  That property was acquired, pursuant to section 47 of the Planning (Listed Buildings and Conservation Areas) Act 1990 (the 1990 Act) and the Acquisition of Land Act 1981, under the South Northamptonshire Council (The Sun, Moon and Stars, 64 High Street, Blisworth) Compulsory Purchase Order 2005.  The CPO was made on 30 June 2005 and confirmed by the Secretary of State for Culture, Media and Sport on 2 November 2006.  A general vesting declaration was made on 13 April 2007, and the subject property vested in the acquiring authority on 6 June 2007, which is the valuation date.  
2.	The claimant’s case is that the market value of the subject property on the valuation date was £900,000 or, alternatively, £800,000.  The acquiring authority contend for a figure of £340,000 or, alternatively, £300,000.  
3.	Mr Adam Rosenthal of counsel appeared for the claimant and called expert evidence from Mr Matthew Coombs BSc, MRICS, a partner in Coombs & Co of Irchester and in Davies King of Letchworth Garden City.  The expert witness called by Mr Robin Green, counsel for the acquiring authority, was Mr Simon Harris FRICS, FAAV, a partner in Berry Morris of Banbury. 
4.	On the morning following the hearing I inspected the subject property, together with another public house which had been cited as a comparable, namely The Old Red Lion at Litchborough.
Facts 
5.	In the light of the evidence I find the following facts.  The subject property lies approximately 6 miles south of Northampton.  It occupies a site of 0.118 ha at the southern end of the village of Blisworth, fronting the north west side of the High Street, formerly the A43 trunk road.  The village has now been bypassed by the new A43 between Northampton and Oxford.  The Grand Union Canal runs to the west of the site.  Although a small strip of land between the site and the canal is excluded from the claimant’s freehold title, that land is used as a culvert and does not prevent enjoyment of the canal side location by occupiers of the subject property.  
6.	The subject property comprises an end of terrace building, constructed about 300 years ago of stone and brick under a slate roof.  It was last used as a public house/restaurant, but has not been occupied since the mid 1980s.  The building is listed grade II.  There is a car park on the north east and south west sections of the site, bisected by a right of way in favour of an adjoining property, Canal Cottage.  The building is arranged in an L-shaped block.  The section fronting the High Street, at the northern end of the site, is on three storeys over a cellar, with the ground floor accessible from the front door to the High Street and by a side door to the car park.  The second part of the L-shape runs from the northern end of the frontage in a north westerly direction to the adjoining building, 66 High Street.  This section includes a basement to the rear at a similar level to the other cellar and linked to it by a passage.  Although there were originally three storeys above the cellar, much of the timber ground floor has been removed.  The gross internal floor area of the building is 3,739 sq ft, excluding the two cellars totalling approximately 950 sq ft.  The property is wind and water tight, but requires major refurbishment internally.  
7.	The CPO was made following the claimant’s failure to carry out certain of the works specified in a Repairs Notice issued under section 48 of the 1990 Act. 
8.	The site has a “nil” planning use because of the long period of vacancy.  In June 2004 the acquiring authority, as local planning authority, prepared a planning brief for the site as Supplementary Planning Guidance.  This indicated that the site was suitable for a restaurant and public house, a single occupancy dwelling, multiple occupancy residential use, offices and an arts and crafts retail centre.  The planning brief sought a use that would be compatible with the character of the building and its setting and which would support its restoration and future maintenance.  
9.	By a conveyance dated 10 April 1961 of land which included the subject property, a restrictive covenant was imposed which, among other things, prohibited any part of the property to be used as a “club inn beerhouse warehouse or as a victualling or refreshment house where intoxicating liquors mineral waters or cordials are sold stored or consumed.”  
The parties’ valuations
10.	In his initial valuation report Mr Coombs valued the subject property on four different bases.  In the course of his oral evidence, however, he accepted that the only relevant values were £900,000 as a restaurant/pub and £800,000 as a residential refurbishment and development site.  Mr Harris considered that the most valuable use of the property was for residential conversion and development.  In its final form his valuation was £340,000, assuming the conversion of the existing building into four flats and the construction of two new units; this would be reduced to £300,000 if only one new unit were permitted.  Both these values, said Mr Harris, were substantially in excess of the value of the property as a pub/restaurant, to which I now turn.  
Value as a pub/restaurant
11.	Mr Coombs’s valuation for restaurant/public house use of £900,000 was based on interest shown in the subject property at that figure in May 2007 by a potential purchaser who was interested in restoring the building to its former use, and supported by an offer of £758,000 made in March 2005.
12.	In oral evidence in chief Mr Coombs said that the appeal property was in a highly desirable location, with a frontage to the canal and conveniently sited in relation to Silverstone, Towcester races and the heritage centre at Stoke Bruerne.  In response Mr Harris did not think that there was any significant tourist trade in Blisworth.  He said that Towcester had a number of pubs and restaurants.  There had until very recently been two pubs at Silverstone, but one had since been demolished.  Most overnight visitors to Silverstone stayed at a large hotel on a nearby golf course.  In cross-examination Mr Harris agreed that some people would stop at Blisworth on their way to Silverstone and that, assuming the site had a direct frontage to the canal, this would be an attraction. 
13.	Mr Harris produced details of the sales of two public houses.  The first, The Old Red Lion at Litchborough, Northants, approximately nine miles west of Blisworth, sold for £265,000 in July 2009.  This property required a degree of refurbishment, but it was in much better condition than the subject property.  It extended to some 3,306 sq ft, plus outbuildings of 1,623 sq ft.  Mr Harris’s second pub comparable, The Red Lion, High Street, Culworth, is situated approximately 18 miles west of Blisworth.  This property sold for £265,000 in March 2009.  It, too, required a certain amount of internal refurbishment.  The floor area was 3,775 sq ft, plus outbuildings of 812 sq ft.  
14.	In Mr Harris’s opinion, the sale of The Old Red Lion was the best available evidence.  Like the subject property, it was not trading at the date of sale.  It had a similar floor area, in a village of similar size close to Northampton.  After adjusting for the decline in values between June 2007 and July 2009, this sale suggested that the subject property was worth between £355,000 and £360,000 as a public house at the valuation date.  Any purchaser, however, would have had to spend a minimum of £300,000 to refurbish the subject property before it would be capable of trading.  The value in its existing condition, therefore, would probably be nil, and certainly less than its value for residential development.  
15.	Mr Coombs’s valuation was based on a letter written to the claimant on 16 June 2009 by a Mr Brody of Messrs Lords, estate agents of Towcester and elsewhere in Northamptonshire and in Buckingham.  It read as follows:
“I write to confirm after having visited The Sun, Moon and Stars back on 18 May 2007 to carry out a market valuation.  I can recall speaking to one of my applicants within a couple of weeks of my visit.  The gentleman was familiar with the site and had indicated that he would be potentially interested in purchasing the property at £900,000.  As we didn’t fully market the property we cannot be sure if this would have reached a successful completion but I can confirm having spoken again recently to the applicant he would still be interested in purchasing the site subject to an adjustment in price to reflect current market conditions.”
16.	Neither Mr Brody nor his unnamed applicant gave evidence and Mr Coombs did not attempt to contact the person who had allegedly been interested.  In cross-examination he accepted that he was not suggesting that the offer of £900,000 was necessarily an expression of interest in the property as a pub/restaurant rather than for residential development.  He also accepted that, in a letter dated 18 May 2007, Messrs Lords had indicated that it might be possible to obtain planning permission for 12 to 14 residential units on the site, which was far in excess of the density suggested in the local planning authority’s supplementary planning guidance.  There is no indication in the letter from Lords that their applicant had been aware of the contents of that guidance, or of the extent of the disrepair to the subject property.  In my judgment the letter is of no assistance in determining the value of the subject property. 
17.	Mr Coombs also relied upon a letter to the claimant written on 30 June 2006 by a Mr Marar, managing director of Wynard Estates of Taunton, Somerset.  It said this:
“We write to confirm that we did make an offer subject to contract in March 2005 for the above property for the sum of £758,000.”
18.	Again, Mr Marar did not give evidence.  It is not clear on what basis the offer was made, nor with what information.  Neither is it clear whether the offer was genuine, or made by a special purchaser or a connected party.  It is therefore of no serious evidential weight. 
19.	Mr Coombs said that he had not been able to find details of any comparable properties in the area which had sold as pubs/restaurants.  In the absence of any better evidence, I find that the sale of The Old Red Lion at Litchborough provides the best guide to the value of the subject property for that purpose.  In the light of my inspection I find that both it and the subject property are attractively located in small villages fairly close to Northampton.  In my judgment the subject property would have been worth approximately £360,000 at the valuation date if it had been in a similar physical condition to The Old Red Lion.  Mr Harris adjusted for the poor condition of the subject property by deducting £300,000 for repairs and improvements.  This was based on an estimated refurbishment cost of £80 per sq ft; the rate which he had agreed with Mr Coombs as being the cost of converting the existing building to residential use.  It is clear from the evidence, including photographs, however, that The Old Red Lion was itself in need of a significant amount of refurbishment, albeit much less than the subject property.  In my view, the difference between the cost of the necessary works to the two buildings was £185,000, or approximately £50 per sq ft, giving a value for the subject property in the region of £175,000 (assuming in the claimant’s favour that the covenantee has waived the right to enforce the restrictive covenant).  Since this figure is well below both experts’ valuation ranges for residential development, it is the latter which must form the basis of valuing the subject property. 
Valuation for residential refurbishment/development
20.	Both valuers agreed that the site value of the subject property for residential refurbishment/redevelopment purposes could only be assessed by the residual method of valuation.  For this purpose they divided the site into two parts; the conversion of the ground, first and second floors of the existing building to form four flats and the construction of one or two new single storey units on land abutting the southern wall of the existing building.  In addition, Mr Coombs assumed that the existing basement could be converted to form additional residential accommodation, whereas Mr Harris did not believe that this would be feasible.  
21.	As far as the conversion of the existing structure is concerned, Mr Coombs assumed that the four units would be sold for a total of £880,000, or £260 per sq ft.  He said that at the valuation date the flats would have been worth £185,000 each, but that in a rapidly rising market developers would have assumed that a price of £220,000 would be obtainable by the time the development was completed.  Mr Harris, on the other hand, felt that there was no justification for building an uplift into the residual calculation in anticipation of future increases in value.  He said that the market was overheated in mid 2007 and developers were being cautious in their predictions.  He therefore assumed that the four units would be sold for £185,000 each.  
22.	The experts adopted the same estimated sale prices when valuing the site adjoining the existing building.  Mr Coombs assumed that two units would be permitted.  Mr Harris prepared two valuations, on the basis that the purchaser would assume that he would obtain consent for either one or two new units.
23.	When valuing the basement, Mr Coombs considered that a sale price of £166 per sq ft would be obtained.  He adopted the same conversion cost – £80 per sq ft – as had been agreed by the experts for converting the four upper flats in the existing building.  Mr Harris assessed the development value of the basement at nil, on the basis that the only possible use was as ancillary storage, the value of which would not exceed the cost of the necessary repairs.
24.	The respective approaches of the experts to the other development costs were as follows:
	Mr Coombs	Mr Harris	
Refurbishment 	  £300,000 (£80 per sq ft)	£300,000 (£80 per sq ft)	
Legal fees on purchase		£    1,500		£    3,000	
Stamp duty		£  32,000		£  10,000	
Selling agent’s fees 		£  23,550		£  18,500	
Legal fees on sales		£    4,300		£  4,500	
Architect’s, etc fees		£  29,500		£  50,000 (£40,000 if only one new unit)	
Interest 	No allowance 	6% (site 12 months, construction 6 months).	
Profit		£  90,000		£138,500	
25.	I start by considering whether a developer would have assumed that permission would be granted for one or two units on the site of the former single storey building which extended from the southern gable end towards the car park entrance.  It was demolished some years ago but its footprint remains.  The planning brief prepared by the local authority in June 2004 provided the following guidance on the residential development of the site:
“3.5	Residential use could be either as a single house or as several flats.  Development of multiple residential units would be restricted to approximately no more than 6 units, including one unit in a reconstructed single storey extension to the south of the existing building, if rebuilt.  The number will be influenced by the need to observe the constraints imposed by the listed status of the building.  The existing fabric should be protected and elsewhere reconstruction should reflect the original layout.  Because of the need to protect the fabric of the building and reproduce the original internal layout a single residential use would be preferred over multiple occupancy.”
26.	Although the wording of this paragraph is perhaps slightly ambiguous, I consider that it is consistent with the creation of six flats on the site, including two in a reconstructed single storey extension to the existing building.  Such development forms the basis of Mr Coombs’s valuation and Mr Harris’s higher valuation. 
27.	I now turn to the question of whether a prospective purchaser would have based his appraisal on prices being achieved for flats at the valuation date, or whether he would have incorporated an uplift to reflect the rising market.  In answer to a question from me Mr Harris agreed with Mr Coombs that, when the market is very strong, developers must project values forward if they are to have a chance of securing a site in a strongly competitive market.  He did not consider, however, that those conditions applied at the valuation date when, he said, the market was overheated.  
28.	In principle, I prefer Mr Coombs’s evidence on this issue.  Mr Harris agreed that residential values were rising in June 2007.  But, he said, the market peaked in September 2007, coinciding with the difficulties encountered by Northern Rock Building Society.  By June 2007 developers were becoming cautious and this was reflected in the prices they were bidding.  Mr Harris said that his firm had offered some development properties for sale by auction in September 2007, but had failed to secure a bid.  That is no doubt true.  It does not follow, however, that the results of an auction sale conducted under the shadow of the Northern Rock collapse provide a reliable indication of the development market some three months earlier.  I think that Mr Harris’s approach has been influenced to some extent by hindsight.  On the other hand, I think it unlikely that, even in a rising market, developers would have based their bids, as Mr Coombs suggested, on the assumption that values would increase by nearly 20% over the next twelve months.  I find that the market would have assumed that the six residential units would have been sold at £200,000 each. 
Basement
29.	Mr Coombs assumed that it would be economically viable to convert the basement into acceptable residential accommodation.  He said that both the floor area and headroom of the basement were adequate and that it would possible to create a satisfactory light well from the car park.  He assumed that it would cost £80 per sq ft to carry out all necessary repairs, provide access points and light wells and fully fit out the residential accommodation.  
30.	Mr Harris did not consider that the basement had a positive value for potential residential use.  The principal reason was that he did not think it would be possible to provide sufficient natural light to this area.  In the light of my inspection I am satisfied that Mr Harris is right and that the residential conversion of the basement – which would take the total number of residential units above the 6 suggested in the planning brief – would not be feasible.
Interest
31.	Mr Coombs did not include any allowance for interest in his residual calculation.  Mr Harris took interest on the site cost for 12 months and on construction costs for six months, both calculated at 6%.  Mr Coombs said that there were two possible approaches to interest and he had chosen to adopt the approach which made no allowance.  A developer who wanted to purchase a development site at the valuation date would have failed to do so if his calculation used assumptions that were too pessimistic.  
32.	Justifying his approach, Mr Harris said that developers rarely invested a large amount of their own money in such projects.  Banks were always involved and the amount of interest to be paid played an important part in the developer’s appraisal.  He had never known a developer who ignored interest when deciding how much he could afford to pay for a site.  
33.	I have no doubt that Mr Harris’s evidence on this issue is to be preferred.  I accept his approach to the calculation of interest.
Legal fees on purchase
34.	There is not much between the experts on the question of acquisition legal costs.  Mr Coombs’s figure was £1,500, and that of Mr Harris was £3,000.  In the course of cross-examination Mr Harris conceded that a figure of £2,000 might be sufficient.  I accept Mr Harris’s revised figure.
Stamp duty
35.	It is agreed that an allowance should be made for stamp duty on the purchase price of the site at the appropriate rate applicable at the valuation date.
Selling agent’s fees
36.	Mr Coombs assumed agency fees on the sale of the flats would be 1.5% of the total price achieved.  Mr Harris adopted the same approach to the two new units, but he allowed 1.75% of the value of the four refurbished units.  I do not consider there is any justification for the distinction and find that selling fees would be based on 1.5% of all sales revenue. 
Legal fees on sales
37.	The experts were almost agreed on the level of legal fees on sales.  Mr Coombs’s figure was £4,300 and Mr Harris’s £200 higher.  I find that legal fees of £4,400 would be payable.  
Architect’s fees
38.	Mr Harris allowed £50,000 for architect’s and associated professional fees.  This was nearly 70% more than Mr Coombs’s figure, which was based on 5% of the building costs in the light of a conversation Mr Coombs had had with an architect with whom he had worked in the past.  Mr Harris considered that that assessment was wholly inadequate to persuade an architect with the appropriate level of expertise to do all the work necessary to obtain the required planning and listed building consents for substantial works to a listed building and to supervise all the construction.  I prefer Mr Harris’s evidence on this issue.  
Profit 
39.	Mr Coombs’s calculation included £90,000 for developers’ profit, based on 10% of his site value, before deduction of profit, of £891,150.  Mr Harris’s total profit allowance was £138,500, or 12.5% of the estimated sales revenue.  Mr Harris said that his figure was based on his experience in the sale of sites to developers.  In his experience developers always required a profit based on a percentage of the sale proceeds, not on a percentage of the site value as Mr Coombs had done.  Mr Harris’s evidence was more persuasive on this issue and I accept his general approach to the assessment of profit.  I have found, however, that he has overestimated the degree of caution in the market at the valuation date.  In the buoyant market conditions that then existed I find that a developer would have been satisfied with a profit based on 10% of the gross proceeds of sale. 
Conclusions
40.	In opening, Mr Green referred to the judgment of the Court of Appeal in Transport for London v Spirerose Limited (in administration) [2009] 1 WLR 1797 as being authority for the proposition that compensation should be assessed on the basis of hope value and not an assumed planning permission.  He made it clear, however, that the acquiring authority was not seeking a reduction in the compensation to reflect the absence of listed or planning consent and Mr Harris did not suggest that any such reduction was justified. 
41.	The experts have agreed that the valuation should be prepared on the residual basis.  I have concluded that the components of such valuation should be as follows: 
Estimated sales revenue – six units at £200,000 		£1,200,000	
Legal fees on site purchase		£       2,000	
Stamp duty at appropriate rate on site value		
Agency fees on sales – 1.5% of £1,200,000		£     18,000	
Legal fees on sales		£       4,400	
Refurbishment and construction costs – agreed		£   300,000	
Architect’s fees		£     50,000	
Interest at 6% on site for 12 months and on construction for six months		
Developer’s profit at 10% of sale proceeds 		£   120,000	

42.	I trust that the experts will be able to agree the value of the subject property on the basis of these conclusions.  If so, they should inform the Tribunal of the agreed figure and I will issue a determination accordingly.  If the experts are unable to reach agreement they should each prepare a statement explaining the point or points of difference, and the justification for their own calculation.  Such statements should be exchanged and filed with the Tribunal within 21 days of the date of this decision.  Any comments on these statements should be exchanged and filed within seven days thereafter.  
Dated 20 September 2010

N J Rose FRICS