UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2011] UKUT 214 (LC)
UTLC Case Number: ACQ/591/2010

	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

COMPENSATION – compulsory purchase of shops and upper parts – valuation – comparables – investment yield – costs of conversion/refurbishment – compensation £147,125

	IN THE MATTER OF A NOTICE OF REFERENCE

BETWEEN	HARINDER KAUR PARBAKHER	Claimant

	and

	MANCHESTER CITY COUNCIL	Acquiring
		Authority

Re: 1221–1225 Ashton Old Road, Openshaw, 	
Manchester M11 1DA

	Before: P R Francis FRICS

	Sitting at: Manchester Civil Justice Centre, 1 Bridge Street West,
	Manchester M60 9DJ
	on 
31 May 2010

Samuel Keeling-Roberts, instructed by HSK solicitors of Manchester, for the claimant
Anthony Gill, instructed by the City Solicitor, Manchester City Council, for the acquiring authority 

	DECISION
Introduction
1.	This is a decision, following a hearing under the simplified procedure, to determine the amount of compensation payable to Mrs Harinder Kaur Parbakher (the claimant) following the compulsory acquisition 1221-1225 Ashton Old Road, Openshaw, Manchester (the subject premises) by Manchester City Council (the acquiring authority or council) pursuant to the Manchester City Council (Edison Street, Openshaw) Compulsory Purchase Order 2008 (the CPO).
2.	The claimant asserts that the value of the freehold interest in the premises at the valuation date was £190,000 to which should be added a Basic Loss Payment pursuant to section 33A of the Land Compensation Act 1973 at 7.5% of that value and re-investment costs of £2,000 pursuant to section 10A of the Land Compensation Act 1961 (the 1961 Act).  The acquiring authority values the freehold at £125,000, agrees the principal of a Basic Loss Payment of 7.5% of the valuation as determined by the Tribunal, and agrees the re-investment costs as claimed.
3.	Mr Samuel Keeling-Roberts of counsel appeared for the claimant and called Mr Andrew Prowse BSc (Hons) MRICS of Bruton Knowles, Chartered Surveyors of Nottingham, who gave valuation evidence.   Mr Anthony Gill of counsel appeared for the acquiring authority and valuation evidence was given by Mr Stephen John Lashmar BA (Hons) MRICS of Keppie Massie, Chartered Surveyors and Property Consultants of Manchester.
Facts           
4.	The parties produced a brief statement of agreed facts from which, together with the evidence and my site inspection undertaken on the afternoon of the hearing, I find the following facts.   The subject premises comprised a two-storey commercial building, constructed around 1900 of brick under shallow pitched and hipped slated roofs that had, in part, been overlain with weatherproofing mineral felt.  Single storey brick and flat roofed extensions had subsequently been added to the rear.    Originally configured as three shops, at the relevant date 1221-1223 Ashton New Road comprised a double retail trading unit, and 1225 consisted of a single shop.  The first floor accommodation, which had historically been used for storage with self-contained access, had planning consent, granted under permitted development rights in December 2006, which would allow conversion to a single residential flat.  The net internal floor areas were agreed to be 156.1 sq m (1,680 sq ft) to the ground floor retail, and 119.1 sq m (1,282 sq ft) to the first floor.    
5.	The premises had a frontage to the A635 Ashton Old Road, a main arterial route into Manchester, about 3 miles east of the City centre.   They occupied a corner position at the junction of Turton Street and were on the western edge of the area known as Openshaw District Centre (a linear development that straddles each side of the main road), and about 250m from the hub.   The area generally consisted of a mix of commercial, retail and residential uses with, immediately to the rear of the subject premises, a number of small, poor quality workshops.  On the opposite side of the road there was a small Lidl supermarket and car park, and a vacant former HSS hire shop.    To the west, beyond nearby Turton Street, was a large open landscaped area maintained by the City Council, and to the east uses were predominantly residential in nature.
6.	1221–1223 Ashton Old Road were occupied by Surinder Asija and Manjeet Singh under the terms of an internal and external repairing lease for 5 years from 25 April 2008, at an annual rental of £7,800 (subject to review in the third year).   The tenants undertook the sale of second-hand furniture.   The remainder of the building was vacant at the valuation date.           
7.	The Openshaw District Centre had, along with other district and local centres, been in decline for a number of years due to structural and economic changes, reducing population and competition from main centres and modern retail parks.  Many of the buildings in the area were vacant and in poor order, and as part of its regeneration strategy, on 11 March 2008, the council made the Manchester City Council (Edison Street, Openshaw) Compulsory Purchase Order 2008 in order to achieve the policy objectives set out in the 2008-2018 East Manchester Strategic Regeneration Framework.  That was, with a nominated development partner, to facilitate widespread urban renewal and to increase the population of the area in general, and the CPO lands were to be redeveloped with new retail, leisure and commercial space with associated car parking, landscaping and public realm.   The CPO was confirmed, following a public inquiry, on 18 December 2008.  The area covered by the CPO amounted to some 4.82 hectares (11.91 acres) and comprised 61 different plots, of which the subject premises were plot 32.         
8.	  Notice of the making of a General Vesting Declaration was served on the claimant on 31 July 2009, and the land vested in the council on 4 September 2009 which is the agreed valuation date for the purposes of this reference.  The site upon which the premises stood, together with the wider area around it, has now been redeveloped as a Morrisons supermarket. As the parties have been unable to agree the open market value of the premises, a notice of reference was submitted to the Tribunal on 14 October 2010.
Issue
9.	The only issue remaining in dispute is the open market value of the subject premises at the valuation date, to be determined in accordance with section 5, rule (2) of the Land Compensation Act 1961.  The parties were agreed that the premises fell to be valued for compensation purposes on the basis of their existing use.   No planning permission is therefore to be assumed under section 15 of the Act that would give a higher value after taking into account section 6 and Schedule 1.   The differences between the parties related to: (1) the rental values of the retail and residential elements, (2) the investment yield to be applied, and (3) the cost of converting the first floor to residential accommodation. 
Claimant’s evidence
10.	Mr Prowse is a chartered surveyor, has been with Bruton Knowles since 2008, and advises on retail commercial property throughout the north of England and the midlands.  He said that the commercial property market in September 2009 was just beginning to recover from severe economic downturn that had seen values move down markedly from the peak of the market in 2007.   According to the national RICS Commercial Market Survey for the third quarter of 2009, demand for smaller retail space like the subject premises had stabilised and with some confidence returning, a pick up in lettings was anticipated.  Indeed, he said, that prophecy was fulfilled.   However, he accepted in cross-examination that this was a national summary, and it did not specifically reflect the North West or the Openshaw market.  
11.	 The District Centre, on the edge of which the subject premises were located, was, he said, typical of a tertiary shopping parade and as such there tended to be a prevalence of off market transactions between related parties.   It was thus difficult to establish a clear tone of values, and in forming his opinion he said he had attached the most weight to openly marketed property and auction results.  Mr Prowse said that in his view, the council’s regeneration proposals for the area, which was common knowledge following public consultations that took place prior to the making of the CPO, had had a significant detrimental impact on values and activity.   He allowed for this by adding 10% to the tone of rental values that he said his research had established to reflect the true ‘no-scheme world’ rental value of the subject premises – in accordance, it was submitted, with section 9 of the Act.
12.	Mr Prowse produced evidence of one nearby capital value comparator: 1323 Ashton Old Road.   This was a two storey corner unit with a retail shop at ground floor and two self-contained residential units at first floor and to the rear and was located right in the heart of the district centre.  It was sold by auction in June 2005, at £150,000 and again in February 2007 at £175,000.   The later sale reflected a net initial yield of 6.88% based upon a rental of the shop at £6,000 pa (£8.79 per sq ft) and £3,120 pa for each of the flats.   Adjustments had been made to reflect the fact that it was within the centre, and that the retail element was much smaller.   He acknowledged that the later sale was still over two and a half years before the valuation date and that he had no documentary evidence to support his analysis.   Mr Prowse went on to refer to the apparent acquisitions of 1365 and 1361 Ashton Old Road by the city council for £80,000 each in November 2008 that reflected yields of 10.9% and 11.7% respectively.  Although he accepted that the parties had been professionally represented in the negotiations, he said he attached little weight to this evidence as he felt the returns on rent were not representative of the Manchester tertiary investment market at the valuation date.   That was, he acknowledged, a personal view and was not intended to be a criticism of the surveyors who represented the vendors.
13.	1292 Ashton Old Road, a vacant former public house, was sold by auction to Cheshire Homes for £325,000 in June 2008.   The purchaser subsequently let 2,000 sq ft on the ground floor at £19,200 pa on a full repairing lease.   He acknowledged that it was a former licensed premises in the middle of the district centre, but believed the letting was on an A1-A2 basis.   As to sales that occurred within the wider Manchester area, reference was made to 135/135A Park Road, Stretford that was sold in July 2008 for £148,000.  This reflected a gross initial yield of 8.92% and a net yield of 8.76%.   He accepted in cross-examination that he had not reflected the fact that the tenant of the residential element had been holding over under the terms of an AST for over 12 months at the date of the sale.   Similarly, in respect of the sale of 159 Fog Lane, Burnage which he analysed at 9.75% gross and 9.69% net, the tenant was also holding over but Mr Prowse said that would have little effect.
14.	Regarding the sale of 654-656 Oldham Road, Failsworth, which had been analysed at an equivalent yield of about 6.9%, Mr Prowse accepted that that analysis did not take a account of a number of rental voids within the property (which he acknowledged were evident from the auction particulars) and that that would serve to lead to a lower yield.   The yield of 8.33% gross and 8.19% that was achieved in the sale of 181 Victoria Avenue, Manchester, in December 2009 for £138,000 on a passing rent of £11,500 pa might, it was agreed, have reflected the fact that the tenant was a subsidiary of the Co-op and that there were 18 years left on the lease.   This was, therefore, a strong covenant and a secure long-term investment.   Similar circumstances applied in respect of the sale of 119 Chorley Road, Swinton, which was let on a 25 year lease to Domino’s Pizza and the yield was about 6%.
15.	Mr Prowse also referred to sales of 504-506 Gorton Road, Reddish, Stockport at a yield of 10%, where he said the rent was “full”, and 478 Great Cheetham Street, Salford, sold for £75,000 in May 2010 reflecting a yield of 8.8% gross and 8.65% net on a passing rent of £6,600 pa.  However, on this property, he again accepted that no allowance had been made for the fact that there were significant voids.  He said that he had not visited any of the comparables that he referred to outside the district centre and had relied upon information provided by agents and published auction results.   
16.	Mr Prowse also analysed a number of lettings, including a large single-storey shop premises at 520 Audenshaw Road, Manchester, about 1 mile to the east of the subject property.   That was let in September 2009 on a month to month basis (which he accepted was less secure than a traditional lease and that the rent may have been higher as a result) on full repairing and insuring terms at £6.75 per sq ft.   He said that the fact it was significantly larger than the subject premises at 4,095 sq ft plus 1,000 sq ft storage, was balanced by the fact it was in an inferior trading position.   1319 Ashton Old Road, former banking premises in a prominent corner position within the heart of the district centre, was let for A2 uses for £10,000 pa in May 2010 which, assuming 50p per sq ft for the basement equated to £7.23 per sq ft.                    
17.	The rent passing on 1221-1223 Ashton Old Road equated to £6.92 per sq ft on the basis of the agreed retail area, and with the additional 10% he allowed for the blighting effect of the scheme, Mr Prowse said the rental value was £7.62 per sq ft.   The premises at 520 Audenshaw Road compared favourably.   He said that in order to compare like for like, he had deducted the ancillary stores at £2 per sq ft to give a value of £8.30 psf for the showroom.   This showed the disparity between the two properties was caused by the scheme blight.   Taking his figure of £7.62 for the subject, the overall rental value of the whole of the ground floor of the subject premises became £12,804 pa.
18.	As to the residential rental value, he undertook an analysis of lettings of above-shop flats in the area and concluded that once converted to residential accommodation, it would be worth £6,600 pa.  The overall annual rental value of the premises was therefore £19,404 – say £19,500 pa.   In the light of the analyses he had undertaken (which, due to the overall paucity of available evidence, had included some post valuation date transactions), Mr Prowse concluded that an appropriate yield was 9%.   This produced a capital value of £216,667 from which the cost of converting the first floor into residential accommodation should be deducted.   He produced a copy of a quote that had been given to the claimant by Chris Holebrook Building and Maintenance for converting the property into four bedsits in the sum of £25,000.   The resultant figure was, therefore, £191,667 – say £190,000.
19.	In cross-examination regarding his choice of yield, Mr Prowse accepted that he had not taken into account the fact that there was no mechanism within lease of 1221-1223 Ashton Old Road setting out the procedure for concluding rent reviews, and that he had not factored in that there was a clause allowing the tenant to break at any time after 3 years since the commencement of the lease on giving one month’s notice.   As to the cost of converting the first floor he also acknowledged that the quote did not appear to account for some of the works that would be required and that it was for a project that did not accord with the planning consent, which was for a single residential unit.       
Acquiring Authority’s evidence
20.	Mr Lashmar is a chartered surveyor, and is responsible for the Manchester office of Keppie Massie.   He has over 15 years experience in relation to the acquisition and valuation of commercial and residential property, particularly in respect of compulsory purchase matters, and has acted for the council since 2004 on the Openshaw and Toxteth Street CPOs and various housing market renewal initiatives.   He acknowledged that the valuation was to be undertaken in the no-scheme world, and said that his description of the property, Openshaw district centre and the area in general were predicated on the basis that any activities of the acquiring authority are excluded.   He said that the most appropriate method of valuation was on the comparables and investment basis, particularly as at the valuation date the claimant was holding the property as a part let investment.
21.	It was Mr Lashmar’s view that there was only one capital value transaction that could be considered within the vicinity of the subject premises.   1298-1300 Ashton Old Road was sold to PCT Healthcare (Properties) Ltd in April 2008 for £225,000.   The deal was agreed in December 2007, some 22 months prior to the valuation date, and was part of a property and business acquisition programme by PCT as they own and operate a group of independent pharmacies with 50 branches in Yorkshire, Derbyshire and Greater Manchester.   The premises are located close to a community health centre, a number of doctors’ surgeries and other medical facilities.  The circumstances of the purchase, including the fact that it also incorporated a business acquisition, led Mr Lashmar to conclude that PCT was a “special purchaser” and the evidence was therefore not capable of meaningful analysis.
22.	Thus, he said, it was necessary to consider retail (and residential) letting comparables and he undertook to analyse local open market transactions, and those over a wider area.   He then applied a yield based upon evidence and acquisitions as part of the land assembly required for the scheme (all vendors having been advised by local surveyors who, he said, were fully aware of and acted within the compensation code), and property transactions that had occurred over the Greater Manchester area.   As to the rental value of the subject property, he said the letting of 1221-1223 Ashton Old Road at £7,800 pa in May 2008 and the previous letting in June 2007 of 1225 at £3,840 pa (the tenant of that unit having defaulted and vacated by the valuation date) equated to £6.92 per sq ft. on the basis of the agreed net internal overall floor area of 1,680 sq ft. 
23.	Mr Lashmar said that 1294 Ashton Old Road was let in March 2008 for £10,000 pa which, on the basis of the subject property’s floor area, equated to £5.46 psf.  He then referred to a number of other properties he had acquired within the vicinity, and calculated the known rental values “in terms of Zone A” on the basis of the known passing rents and concluded that the passing rent on 1221-1225 was a fair reflection of the rental value at the valuation date.  He thus adopted £6.92 psf for the retail element which produced a rental value of £11,640 pa.   There was nothing, he said, in the claimant’s valuer’s argument that a 10% addition should be made to offset the effect of the scheme.  Notwithstanding the requirements of the 1961 Act in determining compensation, he said that if anything, the prospect of overall improvements to the area and the plans to construct a large supermarket in the vicinity would boost the market rather than depress it.   His evidence of rental values entirely supported his conclusion that the letting the previous year to Messrs Asija and Singh was reflective of the market rent at the time.   This was further supported by the fact that the existing tenants had been in occupation the previous year, on a 1 year contract, at £6,000 pa.   The agreed £7,800 was some 30% higher than that and indicated this was a realistic arms length transaction undertaken at a time when the proposed scheme was public knowledge.
24.	As to the residential rental value, Mr Lashmar researched a large number of transactions within the vicinity and the wider area and concluded that, once refurbished as a two or three bedroom single flat it would achieve a rental of £6,300 pa.   The total rental value of the premises was therefore £17,940 pa.                
25.	In respect of the evidence as to yields, Mr Lashmar said that within the Edison Street CPO area he had acquired 1257 Ashton Old Road  which was let to a Mr Ahmed on a 21 year lease from 2002 at a passing rent of £7,800 pa but there was an outstanding rent review.   It was agreed with the vendor’s valuer that the open market rental value at the date of the acquisition was £8,800 pa which, at the purchase price of £85,000 represented an investment yield net of purchaser’s costs of 10.35%.   He said he did not allow for purchasers’ costs in such analyses as, with transactions of this nature they were very often low and would make no significant difference.   In the wider locality, 1361 Ashton Old Road (which was in another CPO area) was acquired in November 2009 for £80,000.  The passing rent, which had just been reviewed (since the CPO was announced), was £9,355 pa and the initial yield therefore became 11.69%.   The adjacent property, acquired as part of the Toxteth Street CPO in April 2009 showed, on the basis that it was slightly under-rented, an initial yield of 9.82% and a reversionary yield of 10.69% giving an equivalent yield of 10.51%.     
26.	Farther afield, 6-8 Broadway, New Moston, Manchester was sold by auction in July 2009 for £144,500.  The retail element and part of the first floor was let to a subsidiary of Tesco Stores Ltd and there was a first floor flat let on an AST.   The yield equated to 9%.   In April 2009, 33-33a Church Street, Eccles was sold after auction for £130,000 which analysed to a yield of 11.54%.     
27.	Mr Lashmar said that 55-63 Lomond Street, Wythenshawe was an excellent comparable.  It comprised a parade of 4 retail units (three let and one vacant) with residential units at first floor that had been sold on long leases at nominal ground rents.   The passing rent was £18,850 pa but he said that he had calculated the yield on the basis that if fully let the ERV would be £23,050 pa.   The freehold sold on 3 September 2009 (the day before the valuation date for the subject premises) at £170,000 which produced an initial yield of 10.79%, a reversionary yield of 13.55% and an equivalent yield of 13%.    
28.	In adopting his preferred yield of 10.5% Mr Lashmar said this was “robust and generous” and had been applied in an effort to achieve a settlement with the claimant.  As could be seen, his comparables showed a range of yields of between 10.5% and 13%.   It was fact that a prospective investment purchaser would be mindful of the poorly drafted rent review clause and the break clause as well as the voids and the need to undertake refurbishment and conversion works to the first floor before it could be let and start producing income.   He said that Mr Prowse’s figure failed to build those matters into the equation.   Based on a rental value of £17,940 pa, a yield of 10.5% produced a value of £175,000.  
29.	From this it was necessary to deduct conversion and refurbishment costs for the residential part of the subject premises. Mr Lashmar said that he consulted his building surveyor who calculated the sum of £46,000 in accordance with the RICS/BCIS building costs index for the relevant date to carry out a “good quality” two bedroom conversion.  To this should be added a contingency of 5% and fees of 12.5% giving a total of £54,050.   This produced a net figure of £120,950 which Mr Lashmar said he rounded up to £125,000.     
Conclusions
30.	As to the rental value of the residential part, Mr Prowse and Mr Lashmar were only £300 apart, and as this was well within a 5% tolerance, I indicated at the hearing that I felt this was not a matter which should be debated.   The experts agreed and I therefore determine that element at the midway point of £6,450 pa. 
31.	The experts, through their analysis of all the evidence, had concluded that the open market rental value of the subject premises was in the region of £6.92 psf, but the sole difference was Mr Prowse’s suggestion that it was necessary to add 10% to that to reflect lower rental values pertaining due to the scheme.   In this regard, I find Mr Lashmar’s evidence compelling, and conclude that the letting transactions that took place both within the subject premises (where a 30% increase in rent was achieved with the existing tenant after only one year), and the rent review at 1361 Ashton Old Road undertaken after the CPO that affected that property was announced, indicate that there was no downward trend in values caused by the scheme(s).    
32.	Mr Lashmar is a local surveyor with an intimate knowledge of the marketplace, whereas Mr Prowse acknowledged (as did his counsel) that his analyses and conclusions were much more general. I therefore accept Mr Lashmar’s rental value evidence for the commercial element and determine that it was £11,640 pa at the valuation date.   The same comments apply to the yield.  I found Mr Lashmar’s evidence thorough and well researched, and the adjustments he made to produce an equivalent yield where properties appeared under-rented, or where there were voids, appeared to be sensible and fair.   Conversely, Mr Prowse’s yield evidence was, by his own admission, very generalised and in a number of areas failed to reflect the full details of the transaction he was analysing.  He also, in my view, failed to reflect the fact that the premises were only part let and that extensive works were required to the first floor in adopting his yield of 9%.   I therefore adopt Mr Lashmar’s opinion of an appropriate yield at 10.5%.
33.	Finally, the residential conversion costs.   I indicated at the hearing that I found Mr Prowse’s reliance upon what appeared to be an informal, and apparently incomplete, quote for a different project to that for which planning permission had been obtained to be misplaced.  However, I also expressed the view that I thought, bearing in mind the location and type of property, that a full “belt and braces” costing approach would probably not be undertaken by a prospective purchaser, and that the likely cost would probably be somewhere in the middle.   On reflection, I think that bearing in mind the fact that the first floor was nothing more than a shell, and quite extensive reconfiguration was needed, together with the provision of new windows, a full kitchen and bathroom and totally new services, the figure would be slightly nearer to that estimated by Mr Lashmar.   Doing the best that I can on the evidence, I conclude that an allowance of £40,000 should be made.
34.	The valuation is thus:
Rental value – shops			£11,640
Rental value – residential		£  6,450     
								£18,090
YP @ 10.5%	   				    9.524	
								172,549	Say 	£175,000
Less cost of refurbishment 						£  40,000     
Value									£135,000
To this figure should be added the Basic loss Payment at 7.5%:		£  10,125
Agreed re-investment costs 							£    2,000  
35.	This decides the issues between the parties, and I determine compensation for the compulsory acquisition of 1221-1225 Ashton Old Road, Openshaw, Manchester, in the sum of £147,125.
36.	The parties agreed that this reference should be determined under the simplified procedure which is, in general, a no costs regime.   I assume that by so agreeing they intended that no order for costs should be made, and I therefore make no such order.

					DATED 9 June 2011

					P R Francis FRICS