1. Rental value (ITZA) of ground floor and basement retail areas – claimant £225 per sq ft (psf), acquiring authority £210 psf less 5% (from the ground floor ITZA value) to reflect shape of premises.

2. Rental value of upper floors – claimant £56,450 pa (net), acquiring authority £32,050 pa (ERV)

3. The appropriate yield to be applied to the rental value – claimant 5.72% (equivalent yield); 5.47% (net initial yield), acquiring authority 8.50% (equivalent yield)

Based upon the claimants’ assessment of net rental value at £182,900 pa the resultant figure for the freehold was £3,165,000. The acquiring authority’s assessed rental value of £145,000 produced £1,615,000

Disturbance (Rule (6) claim)

a) Abortive relocation costs – claimants £150,966, acquiring authority nil

b) Claimants’ time – claimants £22,650 inc. disbursements, acquiring authority £5,000

c) Accountancy fees – claimants £17,880 plus VAT, acquiring authority £3,000.

13. For the sake of expediency, I consider the evidence in relation to each of the three elements of the disputed valuation in turn, and give my conclusions thereon. This is followed by the evidence and my conclusions on the disturbance issues.

1. Rental value – retail areas

14. Mr Rhodes is a director of GL Hearn, Chartered Surveyors, based in Soho Square, London W1 and is National Head of Valuation and Capital Markets. He has over 22 years valuation experience, including within the central London office, retail and investment markets. He was instructed in January 2011, replacing Mr Amos (for the purposes of the rule (2) valuation), who had previously been negotiating on behalf of the claimants. Mr Rhodes said that whilst extremely familiar with the subject premises’ location, he had not seen them as they had long since been demolished. He relied upon the claimants’ statement of case, a draft schedule of agreed facts, photographs, floor plans, the schedule of condition that had been carried out by Knight Frank and other information (including estimated costings for repairs) passed to him by Mr Amos’s firm.

15. Mr Miles is an investment partner with CWM & Partners LLP, a W1 based high street and shopping centre investment agency and consultancy. He has over 20 years’ retail valuation, sale and acquisition experience, and for over 14 years has specialised in retail investment matters. Mr Miles said that he had been instructed in respect of this matter on 26 February 2009, very shortly after the property had been demolished. He therefore relied upon information provided by both TfL and the claimants including the statement of case and reply, photographs, floor plans, the schedule of condition that had been prepared by Knight Frank, and estimated costings provided by DGA UK Ltd and copies of the leases and tenancy agreements relating to the upper floors.

16. Mr Rhodes and Mr Miles considered and analysed a total of 16 comparables at the eastern end of Oxford Street and the north western section of Charing Cross Road. They were helpfully able to agree the transaction analyses, and a schedule was attached to the statement of agreed facts. They agreed that, as far as the Charing Cross Road rental levels were concerned, the evidence showed a “tone” of £190 psf at the relevant date. It was agreed that the section of Oxford Street east of Oxford Circus was markedly less valuable, as a trading location, than the section to the west, and that the key comparables were those lying to the east of Soho Street in the block that extends from 167 Charing Cross Road westwards to 55-59 Oxford Street. However, it was Mr Miles’s view that evidence from the block on the north side of Oxford Street between Hanway Street and Tottenham Court Road should also be taken into consideration in establishing the tone. Having agreed the Charing Cross Road rental values and that the subject premises were, due to their location at the corner of Oxford Street and Charing Cross Road, worth more than those, there is no need for me set out the evidence on those in any detail.

17. As to the rental values on Oxford Street, the experts considered evidence relating to 7 lettings/rent reviews east of Soho Street:

Date	Property	Rental psf	Transaction	Introduced by
July 2008	43 Oxford Street	£222	New letting	Rhodes & Miles
Sept 2008	55-59 Oxford Street	£284	Re-gearing	Rhodes
Sept 2008	12 Oxford Street	£265	Rent review	Miles
March 2009	33 Oxford Street	£274	New letting	Rhodes
May 2009	53 Oxford Street	£291	New letting	Rhodes
July 2009	41 Oxford Street	£211	New letting	Rhodes
Sept 2009	37-39 Oxford Street	£219	Re-gearing	Miles

18. Mr Rhodes analysed each of the comparables he had introduced and explained the adjustments he had made to reflect differences in size, occupation, repairing liabilities, specific location and time, although in respect of the latter, he said that as opposed to the rest of the UK retail market, West End retail rental levels had remained quite resilient, and over the period July 2008 to September 2009 were more or less static. 33 Oxford Street was a new letting of the whole building (ground floor, basement and four upper floors of offices) in March 2009 (close to the valuation date) at a rental that equated to £274 psf ITZA. The fact that the letting to a retailer was of the entire building made it less attractive to the market, Mr Rhodes said, as they usually find the upper floors, particularly above second floor, superfluous and there will be added repairing liabilities to be taken into account. Allowing a 5% upwards adjustment for that to bring it into line with the subject property, and a £25 psf reduction to reflect the subject property’s location not being directly onto Oxford Street, suggested a like-for-like appropriate rate for the subject property of £265 psf. He said that the letting two months later of the ground floor and basement at 53 Oxford Street at £291 psf supported this view. He allowed the same £25 psf adjustment for all the Oxford Street frontage comparables, and, taking into account other specific adjustments, concluded that with an overall range of ITZA rents along this section of Oxford Street being between £211 and £291 psf, the recognised tone that was established was between £250 and £275. Applying the £25 discount for location to the lowest end of this range produced £225 psf, which produced an overall rental value of the retail part of £126,450.

19. From this should be deducted 5% to reflect the almost triangular shape of the retail areas (this being agreed with Mr Miles) but, in his view, this was balanced out by an increase of 5% to reflect the premises’ position on a prominent splay facing St Giles Circus right on the corner of Oxford Street. In his rebuttal report, he said that the retail units on Oxford Street do not benefit from such prominence. He said that Mr Miles acknowledged that St Giles Circus was a bustling location that enjoyed a high footfall, and was a better trading spot than Tottenham Court Road and New Oxford Street. In the light of this, he felt sure that this add back was fully justified. In cross-examination, Mr Rhodes vehemently refuted the suggestion that that 5% was already taken account of in respect of the £25 location adjustment, which he had applied subjectively using his experience and local knowledge.

20. Mr Rhodes had also considered a number of properties from further along Oxford Street (between Soho Street and Oxford Circus), but concluded that they were too far away to be of much assistance, and were in far better trading locations where the adjustments that would have to be made would be such that the evidence became meaningless. The reason he had looked at them was because, as he acknowledged, the range of rental values that the 5 comparables he had produced east of Soho Street was very broad. This could, in part, be due to the fact that a number of sole-trader tenants tended to be unrepresented. They tended to be more concerned about total occupational costs than about a specific rental rate. As to Mr Miles’s reference to 12 Oxford Street, on the north side, which showed a rental value of £265 psf ITZA, Mr Rhodes said he did not agree with the suggestion that that indicated values were higher on the north side of Oxford Street than the south. It was the only comparable from the north side, and the figure did not support Mr Miles’s contention. The fact that the north side was the “sunny side of the street” meant nothing in terms of rental values, and he was of the view that the letting figure actually added further support to his own conclusions for the subject premises.

21. As to his adjustment which reduced the rental value of the subject premises by £25 psf to reflect their off Oxford Street location, it was submitted that the fact that Mr Miles had only made a £12 psf adjustment for this purpose indicated he thought it was more referable to Oxford Street than Charing Cross Road, and that it did not support the proposition that Charing Cross Road was the first place to look for comparables.

22. Asked about his analysis of the 43 Oxford Street letting, Mr Rhodes acknowledged that he and Mr Miles had analysed the upper floors at slightly different figures, but pointed out that “in the round” they had agreed the ITZA analysis at £222 psf. He did not accept the suggestion put to him that the £25 adjustment he had universally used for position would bring this down to £197. He said that when the 5% adjustment for the fact that there would have been a much higher repairing liability on no.43 was taken into account, the figure came back to £208.50 psf. This was however, only one of the comparables, and he was not using a single property to formulate a view as to the rental tone. It appeared to be agreed that little weight could be given to the comparable at 55-59 Oxford Street as that was a corner unit at the junction with Soho Street, it was a re-gearing of the rent rather than a new letting or arms-length review, and it was not possible to establish whether there were any other terms that needed to be taken into consideration.

23. Mr Rhodes acknowledged the fact that, prior to his being instructed, Mr Amos had provisionally agreed the basic rental value of the retail area with Mr Miles at £210 per sq ft ITZA. The only difference between them had been that Mr Miles sought a 5% discount from the appropriate base figure for the ground floor retail ITZA only to reflect its shape and Mr Amos did not agree. Mr Rhodes said that he whilst he stuck by his opinion of the basic ITZA value at £225 psf, he accepted the 5% discount for shape. Nevertheless, as he had explained, that would be negated by the uplift for location, so his opinion of rental value thus remained at £225 psf.

24. Mr Miles said that although the subject premises had an Oxford Street address, they actually front Charing Cross Road, and, as the Goad plan that was provided with his evidence showed, they were not even on the “splay” as Mr Rhodes had suggested. Whilst St Giles Circus was a “bustling crossroads” it was not a notable shopping destination, and could certainly not be described as “prime” – a point which was accepted by Mr Rhodes. It was agreed that the historic comparable evidence of Charing Cross Road lettings and reviews indicated £190 psf. In his view, due to the subject premises’ precise location, the retail rental value of them would be somewhere between that figure and the tone for the eastern end of Oxford Street. In that regard he referred to the one comparable that he and Mr Rhodes had both used: 43 Oxford Street. That was a new letting to Cinnabon in July 2008 at a rent that, it was agreed, equated to £222 psf ITZA. That figure fits in with the lettings of 41 (£211 psf in July 2009 for a short lease that might have tempered the tenant’s bid), and 37-39 Oxford Street (£219 psf, a re-gearing of Ryman’s tenancy in September 2009, 9 months later than the valuation date in a difficult but generally static market), he said. In his view these three comparables together with evidence of an earlier, 2004 letting of 43 Oxford Street at £233 psf, suggested a “consistent and identifiable” tone of £222 psf, and that was the base figure he adopted before adjustments. He said that the comparables produced by Mr Rhodes at 33 Oxford Street (£274 psf in March 2009) and 53 Oxford Street (£291 psf in May 2009) were less coherent evidence, although he did not explain why apart from the fact that they were shortly after the valuation date and that no. 53 was in a much better trading location being towards the westernmost end of the block under scrutiny.

25. Mr Miles referred to one property on the opposite side of Oxford Street. No. 12, occupied by Cornish Bakehouse, was a rent review in September 2008 at £265 psf. The north side of the street between Hamway Street and Tottenham Court Road was, in his view, a better trading location than the south side of Oxford Street and rental values could be expected to be higher. However, with there only being evidence of the one transaction on that side, as opposed to a good body of evidence from the south side, he did not think that, whilst he took that figure into account, there were any grounds for increasing the tone that he had identified as appropriate for the subject property. In cross-examination, he said he did not think that the £265 achieved in that review added support to Mr Rhodes’ opinion that he tone was £250 - £275 psf. Although he had not produced any other evidence to support his view that the north side was more valuable than the south, he said it was a fact that retailers would pay more to be next to significant multiples and indeed his firm had a letter from Cornish Bakehouse confirming that being next to Virgin had an impact on what they were prepared to pay. Whilst he had said that the level of rents which supported his view were in the range £233 - £211 psf, hence his adoption of £222, he accepted in cross-examination that Mr Rhodes’ evidence on nos. 33 and 53 demonstrated higher levels than that achieved at the rent review on the north side, thus bringing into question his suggestion that it was more valuable, but insisted that he thought it was.

26. Having said that in his opinion the rental value of the subject premises would fall midway between the agreed £190 psf for Charing Cross Road south of Falconberg Court, and the tone for the eastern end of Oxford Street, which he determined at £222 psf, the resulting figure was £210 psf. From this he deducted 5% shape disability from the ground floor ITZA figure and the ERV became £112,770 pa.

Conclusions

27. It needs to be said, firstly, that the experts were not very far apart in their opinion as to rental value: £225 psf v £210 psf before considering property specific adjustments. This was between 6 and 7 percent and well within the accepted margin of valuation error (usually 10%). The valuers also agreed that the comparable evidence for the relevant part of Oxford Street was “all over the place” and that the evidence did not indicate a consistent level of rental values in this location. For this reason, I indicated at the hearing that I was surprised the valuers had been unable to find acceptable middle ground, but they insisted that they could not. It was clear from Mr Miles’s rebuttal report and what he said in cross-examination that he was unable to provide a satisfactory explanation as to why he had excluded the evidence relating to the transactions at 33 and 53 Oxford Street in forming his opinion as to the range of values that should apply to the block between 167 Charing Cross Road and 55-59 Oxford Street. If he had included them in the mix, his “tone” of £222 would undoubtedly have increased quite significantly. Although those two transactions were after the valuation date, it appeared to be the case that the valuers agreed retail rental values in the period July 2008 to September 2009 were pretty static, and in the light of this I think that they should be attributed some weight.

28. As was submitted by Mr Glover in his closing submissions, and which I accept, neither valuer sought to attribute any specific weight to the rent review on the opposite side of Oxford Street, other than Mr Miles argument that values on the north side could be expected to be higher. I agree that it is the rental values on the south side that are important but, as I have indicated, I do think 33 and 53 need to be included in the analysis and am not persuaded by Mr Miles’s dismissal of them. If those two comparables are included in the mix, the range becomes £211 to £291, with the middle ground being £251. Doing the best I can in the light of the evidence therefore, and avoiding the temptation to simply “split the difference” between the valuers, I adopt Mr Rhodes’s £250 psf as the tone for that section of Oxford Street.

29. Being satisfied that Mr Miles’s suggestion of the midway figure between Oxford Street and Charing Cross Road (£190psf) tones is appropriate and logical, whereas Mr Rhodes’s £25 deduction appears to me to be entirely subjective, the resulting base figure for the subject premises becomes £220 psf ITZA, and that is the figure I determine before adjustments, and is close to the agreed ITZA figure for 43 Oxford Street which both valuers considered to be a very useful comparable..

30. As to the adjustments, having agreed that there should be a 5% adjustment to the ground floor ITZA area, the only issue is whether that is cancelled out by an addition of 5%, per Mr Rhodes, to reflect the premises position “on the splay”. Mr Miles acknowledged that, in the right circumstances, such a further adjustment might be appropriate (on top of the arbitrary one that Mr Rhodes had made of £25 psf), but he did not agree with the description and said it was simply a mid terrace unit facing onto Charing Cross Road. I agree. In my view, the premises were clearly round the corner. It was (according to the details on the Goad plan) Dionysus and the O2 shop that were on the splay.

31. I determine therefore that the base rental value for the ground floor (£220) should be reduced by 5% for the shape giving £209 psf for that area, and that there should be no balancing allowance for position. The rental value is calculated thus:

Ground retail Zone A 420 sq ft @ A/1 420

Zone B 160 sq ft @ A/2 80

500

Basement Storage 500 sq ft @ A/10 50

Vaults 240 sq ft @ A/20 12

562 units

562 units @ £220 ZA £123,640

Less 5% ground floor rent for shape £ 5,500

£118,140

Rental value – upper floor offices

32. Mr Rhodes and Mr Miles each adopted a different approach to assessing the rental value of the upper floors. Mr Rhodes said that a prospective purchaser would base his opinion of rental value on the rents actually being paid, subject to an adjustment to take account of the fact that they were gross rents. Effectively, the type of occupation that was in place at the valuation date was equivalent to serviced offices. The claimants were responsible for all the outgoings, including business rates, utilities and repairs, and it was necessary therefore to deduct these costs in assessing what the net rents were in order to reach a figure that was equivalent to an institutional net rent to which a yield would be applied. From his knowledge of service charges applied in serviced office accommodation which were in the region of £8 to £12 per sq ft, he said that it was appropriate to apply the higher level in this instance given the size and nature of the building. As to the rents received, as the lettings of the first and second floor rooms were in 2008, it was fair to assume that the rents achieved were at the market rate, although with the third and fourth floors having been let in 2007, and renewals were imminent, some uplift could be anticipated. To assess the true rental value at January 2009 he undertook an analysis whereby he took the passing rent for each floor into account, the actual costs being incurred (from information from the claimants and their 2008 accounts), made adjustments to reflect other items and produced, at Appendix M of his report, a detailed breakdown.

33. For example, on the first floor, the gross rents payable equated to £70 psf (rounded). From this he deducted the actual known costs for rates, utilities, insurance, water and repairs of £20 psf to produce a rental value of £50 psf. He then deducted a further £7.50 psf (the £12 referred to less £4.50 to account for items that were in his initial deduction) to reflect other costs such as management fees (which in a part owner-occupied property of this type may not even be incurred) to give a net rent of £42.50 psf. Carrying out the same exercise for each floor his analysis became:

Demise	Area (sq ft)	Rate psf	Market rent
1^st floor	375	£42.50	£15,950
2^nd floor	375	£40.00	£15,025
3^rd floor	375	£37.50	£14,075
4th floor	325	£35.00	£11,400
Total	1,450	£39.00 (average)	£56,450

34. Mr Rhodes said that he also took into account the letting on a standard institutional lease of the whole of the upper floors in the subject premises to 1^st Oxford College Ltd in August 2002 at a rental of £52,596 pa, which, when some allowance for growth was accounted for, fully justified his estimate of the rental value, on an institutional basis, at £56,450 pa at the valuation date.

35. It was also appropriate, he said, to do a cross-check against prevailing rentals being achieved in the area, but as he had been able to find little evidence of recent transactions on Oxford Street (where historically rental levels had been in the range £18 to £40 psf), and virtually nothing before the valuation date, he produced details of comparables in nearby Dean Street, Poland Street, Berwick Street and Wardour Street and other locations in Soho from June and December 2009. Some of those were similar sized offices (although mainly slightly larger than the subject premises) over retail units and were all in an area where he thought no location adjustment was required to compare with Oxford Street. He acknowledged that a purchaser would be likely to consider comparables like these in forming a view as to rental value for the offices, but would attach the most weight to what was actually being achieved, subject to the appropriate adjustments. Whilst all of these comparables were lettings that occurred after the valuation date, Mr Rhodes said that his evidence was more closely aligned to the size and specification of accommodation at the subject premises. He said that the West End office market had been late in experiencing an adjustment to rental levels, with this only happening in the second half of 2008. However, he said, by the end of 2009 rents were stabilising following some falls, and therefore whilst the rents on his comparables were agreed after the valuation date, there was a potential that they could have been at lower rates than would have been applicable in January 2009.

36. From a schedule of 19 lettings, Mr Rhodes said that four in particular supported his overall rate of £39 psf for the subject premises. The 1^st floor of 77 Dean Street was let in June 2009 at £37.50 psf. Although it was difficult to quantify, an upwards adjustment would need to be made for the subject premises to reflect the fact that offices of only one third the size would command a higher rate – say 10%. Taking into account an assumption that rental values for higher floors would decrease by about £2.50 psf per floor on buildings with no lift (giving £32.50 for the third floor), he estimated that rent equated to £36.23 psf for the subject premises. Also in June 2009, third floor offices at 11 Poland Street were let for a rental equating to £36.23 psf, and the first floor, which needed redecoration, was let at £35.85 psf. 570 sq ft on the first floor of 12 Berwick Street, which compared well with the subject premises, was let for £40 psf in June 2009. A total of 2,721 sq ft of basement to third floor offices was let at 157 Wardour Street, and making the necessary adjustments this equated to £39.86 psf for the subject premises.

37. Mr Rhodes accepted that the subject premises could certainly not be described as prime, grade A offices but his opinion of value reflected this, he said, and the fact that the premises were fully let at the valuation date. In that regard, he did not agree with Mr Miles that an allowance should be made for voids. The hypothetical purchaser would, he said, simply look at the income stream, and make the sort of allowances that he had applied. Indeed, Mr Miles accepted in cross-examination that purchasers would use rents actually received to assist in informing value.

38. In cross-examination, Mr Rhodes said that he had been unaware of the 6 comparables on Oxford Street that Mr Miles had referred to and accepted that they indicated lower rental values per sq ft than those which he had produced in Soho. However, he said it was notable that Mr Miles had included office suites that were up to 7 times larger than those at the subject premises, and that it was a known fact that substantial premium rents will be paid for small suites. Furthermore, several of Mr Miles’s Oxford Street comparables were affected by the Crossrail scheme. In particular, 91 to 101 Oxford Street (£27.50 psf) had been let cheaply because it was about to be acquired, and 37-39 Oxford Street was going to be right next to one of the main construction sites. Mr Miles had not given any cogent explanation as to why he had adopted a maximum rental value of £25 psf and, he said in his rebuttal report, he had not undertaken a sufficiently detailed comparative analysis. Mr Miles had produced comparables showing a broad range of values of between £17.50 and £29.50 psf but had not explained adequately his reasoning for adopting the figures that he had for the subject premises.

39. Mr Miles referred to 6 transactions relating to upper-floor offices above shops in Oxford Street. Suites ranging from 537 to 759 sq ft at 37-39 Oxford Street (above Rymans, and 9 doors from the subject premises) had been marketed over a period exceeding one year. They were refurbished with new carpets. In January 2009, Wilson College took the two upper floors at £29.50 psf with 3 months rent free. The same figure was achieved for refurbished offices above Grab-A-Bite at 50 Oxford Street, 75 yards from the subject premises. All three 1^st, 2^nd and 3^rd floor suites extending in total to 1,120 sq ft were taken by one occupier in May 2009, the terms having been negotiated at the beginning of the year. The offices were again refurbished with Cat 5 cabling, comfort cooling, new carpets and suspended ceilings. 1,870 sq ft of first floor offices at 91-101 Oxford Street, above Ann Summers, Cornish Bakehouse and Butterfly, were let in May 2009 at rent of “around £27.50 psf” after being on the market for over 2 years. They were again refurbished and had good natural daylight. Mr Miles said that the precise terms of the letting were confidential, but he had been led to believe that substantial incentives had been offered which suggested that the effective rent was probably significantly less. A third floor suite of 1,392 sq ft above 104-108 Oxford Street, on the opposite side of the road, was on the market in January 2009. It was subsequently let for 3 years in April 2009 for £26.50 psf. Office suites in a 7 storey block at 25 Oxford Street, in similar condition to the subject premises, but served by a lift were let in early and late 2008 at £20 psf. Finally, part of the second floor (1,500) sq ft in Phoenix House, 19-23 Oxford Street and very close to the subject premises was let on a standard FRI lease for 5 years outside the terms of the Landlord and Tenant Act 1954 at £20 psf.

40. This evidence, Mr Miles said, demonstrated that better finished offices in the vicinity were letting at rents of between £25 and £30 psf, and in his view the suites at the subject premises, in terms of quality, would be at the lower end of the scale. He therefore adopted £25 psf for the first floor offices, with a reduction of £2 per floor for those on the second, third and fourth floors which equated to an ERV of £32,050 pa, an average for the whole 1,450 sq ft upper floor offices of £22.10 psf.

41. Regarding Mr Rhodes’s approach, Mr Miles said that he did not disagree that evidence of actual rental income could, and should, be taken into account. However, there were a number of aspects of the evidence that had been provided that did not bear scrutiny. According to the claimants’ evidence, the rents being received at the valuation date amounted to £79,900 pa – the letting details indicating rents per sq ft of £70.40 for the first floor, £66.66 for the second, £40.00 for the third and £41.53 for the fourth. But, according to the accounts, rental income was shown at figures which did not correspond with this and also showed an exceptional increase in rent receipts over the 4 financial years to the valuation date. For instance the rental income to the year ended 31/1/09 was shown as £59,160 whereas the income for the period from then to 18 January 2009 was recorded as £103,450. No satisfactory explanation of the anomalies had been provided.

42. Mr Miles said he undertook an exercise to convert the gross rents into net figures, taking costs from the accounts and, where appropriate for overall building costs, splitting by floor area. He also included the equivalent of one months rent per floor to allow for voids, bearing in mind the nature of the various occupancies and the type of agreements under which the floors were held, together with a notional 10% management charge. He produced a breakdown (his Appendix 17) which showed deductions from the gross rent averaging just over 50% of gross income. The net figure became just over £40 psf for the first floor, £37 for the second and between £16.30 and £17.60 for the third and fourth floors, averaging £28.35 overall.

43. Nevertheless, he said he was concerned, bearing in mind the condition of the building (according to the Knight Frank schedule) that the claimants were not allowing enough for repairs. Only £4,677 was shown in the 2008 accounts with only slightly larger sums having been spent in the two previous years. Given his concerns over the reliability of the figures and the calculations he provided, Mr Miles said that it was more appropriate, and safer, to apply a yield to the estimated rental value (£25 psf on the first floor, reducing accordingly) which he had established from his consideration of a pool of comparable evidence at £32,050 pa. That figure was, he said, a subjective judgement. There were simply too many imponderables in assessing an ERV from the gross rents received and a hypothetical purchaser, having undertaken the netting-off exercise, would in his view consider that there was insufficient information and instead rely upon the comparables method. He also had difficulty with Mr Rhodes’s netting-off exercise, and said that when trying to replicate it himself, he was unable to come up with the same or even similar figures.

44. In cross-examination, Mr Miles acknowledged that some of the comparables he had used could have been affected by the Crossrail scheme, but it needed to be borne in mind that the type of offices being considered, and the generally short-term nature of the tenancies meant that tenants could “up sticks and go” at very short notice, there was no shortage of premises to which to relocate, and it was in any event a tough lettings market for landlords. In his rebuttal report, Mr Miles said that offices with an entrance onto the busy Oxford Street were less attractive except for users such as language schools for which, it had been agreed, the bottom had fallen out of the market.

45. As to the comparables that Mr Rhodes had used, Mr Miles said that not only were the transactions some time after the valuation date, whereas his own comparables were both before and after, but Soho was a significantly better location being an established office area, and the offices he had mentioned were all of much higher quality in terms of fit out and condition.

46. Finally, as to Mr Rhodes’s use of the 2002 letting as comfort for his choice of ERV, Mr Miles said that with changes in the marketplace and other factors, 7 years was too long a period away for it to be of any assistance.

47. In Mr Khurana’s rebuttal witness statement of fact, he said that in respect of the lettings of the upper floors (which he had said tended to be on a short term basis while the claimants considered their longer term options of what to do with the accommodation), the rents were usually received on a monthly basis and certain payments were settled in cash. As to why, as Mr Miles had pointed out, the rents received appeared to have increased by over 300% in the year up to the valuation date, Mr Khurana said that they included the ground floor rent from the currency exchange concession for a full year, the new letting of the first floor, and the income from all of the upper floors. No invoices for rent were given to the tenants, hence the claimants being unable to provide that information to the acquiring authority. It was submitted for TfL that with the lack of available information, a reasonable purchaser would not have relied upon a netting-off exercise and would have relied upon the, traditional, comparables method to establish the ERV.

Conclusions

48. I am satisfied that Mr Miles’s comparables are far more appropriate than those adopted by Mr Rhodes, and that the dates of the transactions were, as was submitted by TfL “as close as may be.” It is clear from the evidence, and in fact, that the streets in Soho where Mr Rhodes’ comparables were located were in a more attractive and desirable location for office users, and although the suites referred to were mostly if not all also above shops, the area would be much more conducive to, and thus in demand, from office occupiers. Mr Rhodes produced no evidence from within the immediate vicinity of the subject premises, and his only reference to rental value in Oxford Street was that rental levels for offices “varied between approximately £18 and £40 psf.” Mr Rhodes adopted £42.50 psf for the first floor, which was more than the highest rent in the range that he gave. The offices in the subject premises were, it was accepted, to a pretty basic standard and in my view a prospective purchaser would not think the ERV was anywhere near the highest level being achieved in the area. Mr Rhodes’s estimate, calculated in his preferred “netting-off” basis (to which I shall turn) amounted to about £39.00 psf overall across all three upper floors which was again near the top of the range.

49. Regarding Mr Rhodes’s exercise to establish a net rent from the gross figures paid by the occupiers, I found (as did Mr Miles) his calculations all but unfathomable. His efforts to make deductions to reflect known costs and allow further deductions based upon the “going rate” for prevailing service charges was unhelpful and confusing. Mr Miles said he had a go at replicating the exercise, and could not come up with Mr Rhodes’s figures – they were just over £6,000 apart. I accept his concerns over the veracity of the figures (particularly bearing in mind what Mr Khurana said) and also agree that the allowances made for repairs appear to be extremely low. As to Mr Rhodes’s reference to the 2002 letting, I agree with Mr Miles that it was far too long ago to be of value. It is apposite also to note that those tenants, 1^st Oxford College, who appeared to have paid a very full rent at the time, did not remain in occupation for very long.

50. On balance, I am drawn to the conclusion that whilst a prospective purchaser would undoubtedly take the rent-roll into consideration, he would, in my view, allow a higher deduction for repairs, and would, in attempting to establish the ERV, build into the equation management charges and an allowance for voids. He would also seek out the sort of comparable evidence that Mr Miles had provided, ie actual rentals achieved on repairing and insuring leases on similar premises within the immediate vicinity. If he were to make appropriate deductions from the gross rents received, he would come up with an ERV which was much nearer the levels being achieved on the comparables. Having said that, I do think that that Mr Miles’s assessment of £25 for the first floor, reducing for the floors above and ending up with an average of about £22 psf seems a little understated in the circumstances. I therefore adopt £25 overall which I feel more fairly reflects the tone of the comparables. This compares favourably with two of Mr Miles’s comparables: 37-39 Oxford Street (537 – 759 sq ft) in January 2009 and 269 – 442 sq ft at 50 Oxford Street in May 2009, both at £29.50 psf. These suites were also close in size to those in the subject property. The submission for the claimants in closing that Mr Miles’s comparables were “all much larger” and don’t reflect the premium that would be paid for smaller suites is therefore without merit. The £29.50 for these smaller units is quite significantly above he levels achieved for the larger suites that Mr Miles listed.

51. The resulting net rent, or ERV, is 1,450 sq ft x £25 = £36,250pa. When added to my conclusion on the rental value for the retail areas of £118,140 the total ERV amounts to £154,390 – say £155,000 pa, to which a yield is applied.

Yield

52. The experts considered between them 17 investment sales that had occurred in the period June 2006 to December 2009. Six took place prior to the valuation date, and 11 thereafter. They were able to agree the net initial yields but adopted different approaches in adjusting those figures to arrive at an appropriate yield for the subject premises. Mr Rhodes’ resultant equivalent yield was assessed at 5.72%. It was put to him in cross-examination that, after allowing for purchaser’s costs of 5.725%, the net initial yield was 5.47% based upon his rental value of £182,900 pa. The reason for the difference, he said, was because he had, in his calculations, allowed for the fact that the 3^rd and 4^th floors had only a matter of weeks to go before the lessees’ terms expired, and he had therefore factored into his adjustments from gross to net rents anticipated imminent increases in rental income on those floors. Thus, the gross value was based upon potential total rental income of £206,350 pa whereas his ERV of £182,900 was based upon actual income, less his adjustments. His precise calculations which had been carried out on Argus Investor (bespoke valuation software) were set out at his Appendix N. Mr Miles had based his rental income on ERV, and hence the net initial yield and the equivalent yield in his valuation were the same.

53. Mr Rhodes said it was necessary to look at events both leading up to, and following the valuation date and this regard he analysed how the Investment Property Databank (IPD) index performed during 2008 and 2009. That index, as Mr Miles explained in his report, was the industry standard for investment performance in the property sector, whose indices form the benchmark by which fund managers make comparisons with other forms of financial investment. The question of precisely how much reliance could be placed on specific figures within the index, due to the broad, national and blended (prime and secondary) nature of its make-up was in dispute. Mr Rhodes said that 2008 showed there to have been a severe outward movement in yields as the market adjusted to the impact of the credit crunch. The movement accelerated in the last quarter of 2008 following the crash of Lehman Brothers with capital values falling by as much as 10% across the board. By contrast, falls in the first quarter of 2009 were less marked, although continuing, and by the middle of the year had stabilised. Later in the year, yield compression became evident as confidence returned and prices began to rise. It was accepted, therefore, that at the valuation date the market was in the depths of a sharp downward movement in values, and few transactions were taking place. However, within 6 months this had all begun to change. Although there was little movement in the late summer, he made no time adjustment to those comparables, although he did adjust the December 2009 transactions.

54. In Appendix K to his report, Mr Rhodes also produced a “General Market Commentary” referring to GDP, movements in the CPI and RPI, conditions in the financial markets and availability of funds. He said that although lending criteria had hardened significantly during 2008, there remained a substantial amount of equity available for investment in real estate, and “a more balanced market saw a ‘flight to quality’” as buyers started to look more for growth prospects than for yield compression.

55. Mr Rhodes said that as he was unaware of any investment sale transactions near to the subject property at around the valuation date he looked further afield, and concluded that in terms of equivalent types of location, the transactions in Soho were the most appropriate. Having analysed the sales, he made percentage adjustments for building type, covenant strength (acknowledging that the type of tenant would be considered by the market as fairly weak compared with large, corporate West End occupiers), location (which he accepted was not “prime” but was on the edge of the most prime shopping street in the UK) and, where appropriate, time. The type of purchaser who would be interested in the subject property, he said, would either be a small private investor or property company (purchases up to £5 million) and often in cash, but could also be an owner occupier. In that regard, he thought Mr Miles had ignored the owner occupier market and had assessed his opinion of yields as if it was a forced sale. He had not taken into account the requirement to value on a willing seller/buyer basis.

56. Mr Miles said that in choosing an appropriate yield it was necessary, when analysing and adjusting the comparables, to assess the general economic situation and then to consider the market context at the valuation date. This was particularly important bearing in mind the considerable period of time over which the comparable transactions were spread and the fact that the market during that period had moved from peak, into a deep recessionary trough, and then started to pick up again. It was also essential to consider, in making comparisons, that the subject premises were a relatively small triangular shaped building in a secondary location with the type of occupation that could not be described as a blue chip covenant. It was his view that Mr Rhodes had failed to sufficiently reflect this information in his analyses.

57. In his initial report, Mr Miles set out at some length details and statistics relating to the state of the economy at the valuation date, and included in his appendices relevant extracts from source material including the GVA Grimley Quarterly Economic and Property Market Review from January 2009 where they said the rapidly worsening state of the UK economy was leading to a ‘severe recession’, and reviews from the Office of National Statistics (ONS) where their Economic and Labour Market Review in July 2009 observed that the economy had moved into an ‘official recession in the third quarter of 2008’ and that by January 2009 output had fallen by 4.9% over the previous year. The effects of the downturn were being felt clearly by UK retailers, Mr Miles said, and the December 2008 the RICS Commercial Property Forecast was reporting some of the bleakest conditions on the high street for 25 years. Statistics released later in 2009 showed just how severe the decline had been.

58. In this context, Mr Miles agreed with Mr Rhodes that dramatic falls in investment values were being experienced. He also referred to the IPD Index. Its Q1 2009 report showed total returns from the retail sector having fallen some 35.5% from the peak of the market in June/July 2007. The index showed values falling (and yields rising) throughout the period, and falls were fastest at around the valuation date. Although it was forecast that values would continue to fall rapidly during 2009, some stabilisation occurred in respect of prime investments as the year progressed, but secondary investments (into which the subject premises fell) continued to suffer. This served to substantially increase the gap between prime and secondary yields. The IPD “All Property Equivalent Yield” (which was a blended yield from all 11,214 UK properties that made up the databank), showed a yield of 8.45% at the end of December 2008. As this was a blended rate incorporating both prime and secondary investments, it could reasonably be assumed, Mr Miles said, that secondary yields were well in excess of that - other research data showing secondary yields exceeding 10%. However, in cross-examination he said that he thought the IPD index was not a reliable indicator for the central London investment market, and that he did not rely upon its findings as his principal consideration. All the IPD index did, he said, was support the conclusions he had reached from his main benchmarking exercise. He said that his 8.5% conclusion for the subject property was well below the average of 9.3% that was being achieved in sales of secondary investments at auction at the relevant time. He also said that he did not agree with Mr Rhodes’s suggestion that the evidence showed smaller lots achieved better yields.

59. Mr Miles said that research into the commercial auction market (which typically involved smaller lots like the subject premises) by Jones Lang LaSalle and IPD showed a 46% reduction in volumes during 2008, success rates had also fallen and the growing price differential between prime and secondary was confirmed. Investments offering short income security suffered the largest falls, and the trend continued into 2009. Average initial yields on properties let on leases with between 5 – 9 years unexpired increased by 238 basis points to 7.91%

60. Against this background, and due to the historically low trading volumes, there was limited directly comparable sales evidence. Nevertheless, he said that he had considered 181-183 Oxford Street (“Bik Bok”) that was sold close to the valuation date, and 43 Oxford Street (“Cinnabon”) that was sold at the peak of the market in 2007 as particularly helpful, and some other Oxford Street units, but had had to look farther afield as well. To provide robustness to his valuation he had performed a benchmarking and extrapolation exercise from the data referred to above, and had also considered two settlements related to the scheme.

61. Having set out the valuers’ respective approaches, I turn now to the principal comparables.

62. 38 Charlotte Street W1. Mr Rhodes said this transaction, which occurred in October 2009, reflected an initial yield of 4.66% and an equivalent yield of 5.12%. The ground floor restaurant premises were let on a lease with 12 years unexpired, but the upper floor offices had less than a year remaining. Making no adjustment (from IPD) for time, he deducted 1% for the fact the ground floor was on a long lease and added back 0.5% for the fact it was, in his view, in a worse location, the yield for the subject property would become 5.16%. However, as it was in his opinion “reversionary”, and as the subject premises were valued on the basis they were rack-rented, he estimated an equivalent yield would be 0.5% higher and thus applied 5.75%. Mr Miles, in dismissing the usefulness of this comparable, said in his rebuttal report that it was located in a very different area in Fitzrovia which was more a restaurant orientated than a retail location, and was also a more popular office area. There was potential for conversion of the upper floors to residential and the reversion on the ground floor was not for 12 years, whereas the longest reversion on the subject premises was 4.75 years. He said that, as with all his other comparables, Mr Rhodes’ adjustments had been entirely arbitrary, and no explanation had been given for why he chose a particular percentage.

31 Percy Street W1. This property, which principally comprised offices on short-term lets with a residential flat on the top floor, let on an assured shorthold tenancy, sold at auction in October 2009 for £1.59 million representing an initial yield of 5.98% and an equivalent yield of 5.27%. Again, Mr Rhodes made no adjustment for time but deducted 0.5% for its poorer location producing 5.48%. He then went on to say:

“However, the property was in my opinion over-rented and part was used for residential purposes for which adjustments have to be made. If a yield of 5% was applied to the residential element, providing a net capital value of £265,000, this would increase the initial yield on the offices to 6.17%. To reflect the property being over-rented, the equivalent yield is estimated to be 0.75% lower, providing an adjusted yield of about 5.50%. Therefore, applying this evidence to the subject property, I would apply a yield of about 5.0%.”

Mr Miles said that, again, this building could not be considered comparable. It was a fine Georgian office building in a well preserved terrace in the heart of Fitzrovia and in no way could it be deemed a poorer location, There was no evidence to support the suggestion that the property was over-rented or any of the other adjustments he had made.

37 Percy Street W1 This was a similar property to 31 Percy Street, fully let as offices to a single tenant with 6 years remaining on the lease. It was sold in December 2009 for £1.4 million, producing a net initial yield of 4.73%. As it was sold later in the year, Mr Rhodes made an adjustment to 5.0% to reflect movement in the IPD index. This was then reduced by 0.5% for the poorer location and a further 0.75% because it was believed to have been over-rented, producing a yield for the subject premises, in comparison, of 3.75%. Mr Miles made the same criticisms as he had for 31 Percy Street and added that the auction particulars stated that the rent was £70,000 pa which equated to £36.36 psf. On the basis of Mr Rhodes’s opinion that it was over-rented, it was by implication his view that the rental value was only £29.09 psf. It was submitted in closing that not only was there no evidence to support the adjustments that Mr Rhodes had made, but no allowance had been made for the fact that the building was let to a company with a net worth of over £8.3 million and that there was over 6 years unexpired on the lease.

35 Whitehall W1 This was a café, offices and 2 residential flats in a Victorian building about 100 yds south of Trafalgar Square with a rental income of about £125,000 pa. It was sold by auction in October 2009 for £2.54 million representing a net initial yield of 4.96% Mr Rhodes said no adjustment was required for time or type of income stream, but allowed 0.50% because it was, he said, an inferior location. Again, Mr Miles said there was no satisfactory explanation for the failure to adjust for time. He agreed that the location could not be considered comparable as it was not a retail location but one that was heavily dependent upon passing tourists. He thought that it was a better shaped building, and although the unexpired term profile was similar to the subject property, he did not think it was a suitable comparable.

48 Lexington Street W1 Mr Rhodes said that this comprised ground floor and basement retail let for 15 years from February 2009 at £40,500 pa with 4 floors of vacant offices above. The retail area was, he thought, 33% of the rental value of the whole. It was sold by private treaty in December 2009 at a net initial yield of 1.78% and an equivalent yield which he estimated at 5.50%. He then added 0.25% to reflect time, deducted 0.5% for its alleged inferior location and then added another 0.25% to reflect the lease length of the retail element making the comparable figure for the subject property 5.5%. Mr Miles said that it appeared Mr Rhodes had, in calculating an equivalent yield, assessed the value of the vacant offices at £75,000 pa but there were no details of the areas. In his view the location was not comparable, it was a modern building in Soho, an area where restaurants predominate and was also a different type of investment in that a substantial part was vacant. He did not accept this property as a useful comparable.

140 Upper Street Islington N1 Mr Rhodes included this private treaty sale, from February 2009. It comprised ground and basement retail with a 3^rd floor maisonette let to an off-licence chain that had 8 years remaining on their lease. There was a first and second floor maisonette that had been sold on a 99 year lease. He adjusted the net initial yield of 6.23% by several factors to give a comparable yield for the subject premises of 5.50%. Mr Miles stressed that the location, being predominantly residential, together with the letting/sale profile and other factors made it an inherently unsuitable comparable.

63. Mr Rhodes said that whilst all of these comparables were from transactions that took place after the valuation date, they provided a reasonable guide as to level of value and therefore yield profile for properties that were not dissimilar in size, type or occupational profile. Small lots like these, he said, demonstrated that there was a premium in yields over larger, more institutional lots. He then turned to what little evidence there was from Oxford Street.

64. 43 Oxford Street WC1 “Cinnabon” This was a “key” comparable that was relied upon by both experts. It comprises a retail unit on the south side of Oxford Street about 125 metres west of the subject premises with accommodation on basement, ground and three upper floors let to a single tenant at £185,000 pa. It was sold in April 2007 for £3.26 million which represented a net initial yield of 5.36%. It was agreed that, apart from precise location, the premises were very similar although Mr Rhodes said that the fact the whole building was in a single retail occupation, with upper floors not being self contained, was a disadvantage in the market. Mr Rhodes said that this transaction, and the one relating to 37-39 Oxford Street (see below) does no more than indicate the levels of yield being achieved at the peak of the market. He said that to adjust these yields from 2007 to the valuation date would, in his opinion, be “far too subjective”, but acknowledged in cross-examination that there had been a significant movement in yields. He said, however, that it was important to look at the wider market. Mr Miles said that IPD reported falls of around 35.5% between July 2007 and January 2009 which was in line with the central London falls in the evidence he had produced. Applying a 35.5% reduction from the April 2007 sale price implied a market value at the valuation date of about £2.1 million, reflecting a yield of 8.32%.

65. In respect of Mr Miles’s calculation to produce the 8.32%, Mr Rhodes said this was clearly wrong, and at paragraphs 4.12 and 4.13 of his rebuttal report set out what he considered to be the correct mathematics. In his suggested correct methodology, he also grossed up the purchase price of £3.27 million to include purchaser’s costs, producing a figure of £3.447 million. The resulting calculation produced a yield at the valuation date of 7.27%. In cross-examination, he was absolutely adamant that his methodology was correct, and was accepted valuation practice. The acquiring authority submitted that it was doubtful whether the grossing up was right, but even if it was, it made little overall difference to the valuation. What was of far greater concern was the basic mathematical error that Mr Rhodes, not Mr Miles, had made. As TfL pointed out in paragraph 43 of its skeleton argument, Mr Rhodes had divided the gross price by 1.355. That meant that the question he answered was not “what would the value be if £3.26 m (or the grossed up figure of £3.447 m if that were correct) be if it was reduced by 35.5%.” but “what is the figure which, if it grew by 35.5% would equal £3.26 m.” Using Mr Rhodes’ grossed up figures, the reduction becomes just 26%.

66. Mr Miles went on to say that 43 Oxford Street was in a better location, offered better income security and quality to the subject property. To “stress test” whether his conclusion that the yield for the subject property would be worse (higher) than that, he undertook the benchmarking exercise (referred to above), and concluded that in the light of all the evidence, the appropriate yield for the subject property would have been 8.5%.

67. 37-39 Oxford Street Mr Rhodes said that this property, which was sold in March 2007 at a net initial yield of 3.08%, provided, along with 43 Oxford Street, an indication of values at the peak of the market. In his report, he said (para 8.4.33):

“These two transactions are of assistance as they provide an indication of value at or around the peak of the market in 2007. However, as can be seen, they provide two quite different yield profiles. In my opinion, the second transaction [37-39] provides a better guide in comparison to the subject property as it was similar in nature as it comprises retail space [let to Rymans] with self contained offices above. But given the very different market conditions and the date at which these were achieved, these only provide, in my opinion, the very best yield that could have been obtained for the subject property. To adjust the yields from these dates to the valuation date is, in my opinion, far too subjective.”

68. In cross-examination Mr Rhodes accepted that he had been aware that the upper floors were vacant at the time of sale, and that would be the reason for the very low NIY. He acknowledged that, based upon the asking price, the equivalent yield had been calculated at 5.5% in the sales particulars and agreed with Mr Miles that, allowing for voids and taking account of the subsequent lettings, that would have represented an equivalent yield of 5.34% which was close to that achieved on 43 Oxford Street. Mr Miles said that this was a far better property than the subject in terms of the quality of the building, and its location, and the upper floor offices had also been refurbished. He did not agree Mr Rhodes’s view that it was subjective or inappropriate to make date adjustments and indeed, his view was that it was essential to do so.

69. Mr Rhodes also referred to 145 Oxford Street which was the property that the claimants intended to purchase. The purchase price agreed in August 2009 equated to a “blended equivalent yield” of 6.65%, and the onward sale in December 2009 was at 5.21%. Whilst this was an indication of how strongly the market had recovered during that period, he said that the initial agreement to purchase was an off-market transaction and might have been at a discounted price. Summarising his opinion in cross-examination, Mr Rhodes said that whilst he did not dispute that Mr Miles’s evidence showed there to have been a significant deterioration in the investment market between the peak in 2007 and the valuation date, he was insistent that his evidence proved smaller lot sizes were less severely affected. The type of purchaser who would be interested in the subject premises was also different from a large institutional investor, and there was evidence that those smaller purchasers would be interested in buying up lots while the cycle was still in a downward trend in order to make a profit when the market returned.

70. 181-183 Oxford Street WC1 “Bik Bok” This was also relied upon by both experts, and was considered by Mr Miles to be the comparable that best demonstrated why the yield for the subject premises needed to be very substantially different. It is located further west along Oxford Street and in a much more prime retail location, almost adjacent to the M&S Pantheon Building and much closer to Oxford Circus. It comprised basement and ground floor retail and three upper floors of offices. It was agreed that the location was far better, as was the tenant profile, and that it was more of an “institutional” type investment. It was sold for £14 million in February 2009, close to the valuation date, at a net initial yield of 5.87%. Mr Rhodes said that whilst he accepted this was a much more attractive investment and that an institutional buyer would see it as less risky, his evidence showed that small lots (like the subject premises) achieve significant premiums in terms of yield over the larger, institutional ones – hence his yield for the subject premises being close. Mr Miles said that this comparable was prime, with retail rental values there being almost double those that applied at the eastern end of Oxford Street. The sale was over £2 m below the asking price, and the investment had been on the market for 8 months. This, together with the fact that the yield of 5.87% was well below CBRE’s Q4 2008 estimate of 5.20% was probably an indication that the market was still falling in January 2009. It stood to reason, Mr Miles said, that the yield for the subject premises must be very significantly higher than what was achieved for this more attractive investment.

71. Mr Miles said that two properties, one on each side of Bik Bok had sold in 2006/2007 at the height of the market. In June 20006 Prudential sold 197-213 Oxford Street, 3 doors to the west, at a net initial yield of 4.1%. In June 2007, 161-167 Oxford Street was sold at 3.75% NIY. The average of these two sales was 3.925% which was a rise in yield (fall in value) between then and the valuation date of 45%. This corresponded with the sort of movements that had been recorded in the IPD All Property nationwide index, and demonstrated that central London was performing no better.

72. He then referred to four other buildings: 82 Charing Cross Road, 79 New Cavendish Street, 15-17 Broadwick Street and 12-13 Conduit Street. None of these, he said, were really comparable. They were predominantly office buildings in different locations but they had all been sold twice in the period 2006-2010 and the results confirmed the extent of the movement in the market during that time. 82 Charing Cross Road sold in December 2006 at 4.45% NIY and again in February 2008 at 5.73% NIY. 15-17 Broadwick Street sold in April 2009 at 7.93% NIY and again in April 2010 at 5.35% NIY. 79 New Cavendish Street sold in May 2006 at 4.9% NIY and again in June 2009 at 8.0% NIY. 12-13 Conduit Street (“Belstaff”) had sold in December 2005 at 3.70% NIY and sold again in February 2009 for 7.05% NIY. In response to these, Mr Rhodes said that they were very different properties to the subject, and that Mr Miles had produced no supporting information to back up those figures, but accepted in cross-examination that despite having had the opportunity to do so, he had not sought the additional information. He said that he had concentrated upon properties that were similar to the subject.

73. Mr Miles finally referred to two scheme related settlements from January 2009: 7 & 17 Oxford Street where the claimants had been professionally represented. They settled at net initial yields of 6.25% and 6.19% respectively, although the latter was agreed to be reversionary, and the equivalent yield was 6.27%. Both of these properties were in better trading locations, fronting directly onto Oxford Street and were also significantly better in terms of occupier profile. He said that he appreciated that settlements carry less weight than actual open market transactions, but it stood to reason that there must be a substantial outward movement in yield for the subject premises in comparison, and he estimated this to be at least 2 – 2.5%.

Conclusions

74. I consider first, and very shortly, the question of mathematics rehearsed in respect of the 43 Oxford Street comparable (see paragraph 65 above). Mr Rhodes’s methodology is mathematically wrong, and I agree with Mr Miles’s reasoning why that is so. Mr Miles’s assessment of the yield at the valuation date on the basis of the falls from the peak of the market that his research had shown was correctly stated at 8.32%.

75. Mr Rhodes relies principally on post valuation date transactions in Soho, Fitzrovia and Whitehall. He then makes arbitrary adjustments to arrive at a figure which results in a yield for the subject premises of about 5.50%. I found his evidence and the adjustments he made to be unconvincing and I agree with Mr Miles that the types of property, their occupier profiles and locations are sufficiently different to make them of little meaningful assistance. I find it rather surprising that he only made a time adjustment for the comparables that were sold in December 2009, even though the market statistics clearly showed (as set out in detail by Mr Miles in his rebuttal report) that from the middle of 2009 onwards the market was showing signs of considerable improvement. In respect of 37-39 and 43 Oxford Street, I find Mr Rhodes’s suggestion that “to adjust the 2007 yields to the valuation date would be far too subjective”, truly incredible. The evidence of the significant falls in value and increases in yields was clearly set out in the IPD All Properties index which was referred to by both valuers. However, Mr Rhodes seemed to dismiss that on the grounds that “smaller lots” were not affected in the same way, and in any event the statistics related to a broad range of property types, and did not concentrate upon investments of this type. Despite what he said, Mr Rhodes’s evidence does not, in my judgment, prove that smaller lots achieve better yields. It seems to me to be inconceivable that Mr Rhodes could suggest a yield for the subject premises almost exactly the same as the figures that were achieved on the Oxford Street comparables at the very top of the market. As Mr Miles said, they were also much better properties in terms of location, accommodation and occupier profile.

76. I found Mr Miles’s approach to the exercise altogether more satisfactory. He took what seemed to me to be an entirely logical and straightforward approach. He looked firstly at the sale of 181-183 Oxford Street (Bik Bok) which was only 4 weeks before the valuation date. It was an infinitely better property in a prime location with a better occupier profile and achieved a yield (5.87%) which was lower than that being suggested by Mr Rhodes for the subject premises. Although it was a much larger investment at £14 million and would have appealed to a different market, that transaction on its own must place a very large question mark over Mr Rhodes’s choice of yield. Mr Miles also referred to sales of properties either side of Bik Bok that had occurred in 2006 and 2007 and then considered 43 and 37/39 Oxford Street which were nearer to the property in terms of location and lot size.

77. Mr Miles then went on to carry out what he described as a benchmarking exercise and looked at a wide range of relevant property data, not just relying upon IPD. However, he concluded that, when taking the statistical evidence as a whole, the falls in the central London investment market between 2007 and the valuation date more or less mirrored IPD, but the upwards movements after that date accelerated at a faster rate than the UK in general – which brought even more into question Mr Rhodes’s failure to make time adjustments to the principal comparables upon which he relied. Mr Miles then, usefully in my view, considered investments that had been sold twice during the period under scrutiny and, although it was accepted that less weight could be applied to the two settlements he mentioned, all of this evidence went to support his conclusion that there would be a very substantial difference between the prices being achieved at the peak of the market, and provided clear justification for the level of yield that he was proposing.

78. I prefer Mr Miles’s approach in general, and am satisfied that his conclusions support a yield for the subject premises very substantially different to that suggested by Mr Rhodes. Mr Miles concluded from 43 Oxford Street that the 35.5% fall that had occurred suggested a yield for 1 Oxford Street of 8.32% and then set out his reasoning for finally settling for 8.5%, principally taking into account the specific peculiarities of the subject premises. In that regard, I do think he might have been a little harsh, and I do accept that the market for properties such as this includes owner occupiers and small investors who might be prepared to buck the market trend, as Mr Rhodes suggested, although that would in my view only be by “a single bid”. I note also that Mr Miles accepted in cross-examination the fact that none of the comparables in his schedule of investment transactions on Oxford Street in the period 2006-2009 “remotely approached” 8.5%. However, as far as that schedule was concerned, there were only two transactions below £10 million (43 and 37/39 Oxford Street) and the highest was £165 million.

79. All in all, based upon the whole range of evidence that was before me, and bearing in mind that whilst 1 Oxford Street was not “prime”, it was still in a very good trading location. I cannot see any justification for a yield that would be more than two percent above 181/183 Oxford Street (whereas Mr Rhodes’s figure was below it). It would also not be more than 1.25% worse than the settlements Mr Miles referred to, and I conclude therefore that an appropriate yield in January 2009 would have been 7.50%. Applying that that to the rental value previously determined, the valuation under rule (2) thus becomes:

Estimated Rental Value £ 155,000

Y P in perp @ 7.5% 13.33

Gross value £ 2,066,150

Less purchaser’s costs @ 5.725% £118,287

Freehold value £ 1,947,863 say £1,950,000

Abortive relocation costs

80. The principal issue here is whether it was reasonable for the claimants to seek to relocate their business to 145 Oxford Street, and whether selling the contract on as they did disentitles them to any compensation that they might otherwise have been entitled to under this head. If the claim, which is for £150,996, is held to be compensatable, there is a further issue as to whether Foley Estates, the introducing agent, were entitled to a fee, and if so, whether the fee paid was reasonable.

81. Mr Rajiv Khurana said that it was only in the summer of 2008 that it became clear the Crossrail project was likely to go ahead, and that there was a real prospect of the subject premises being compulsorily acquired. The search began for alternative premises in September 2008, and Mr Amos and a Mr Colin Baxter were instructed to find suitable properties. He said that, as confirmed by Mr Rhodes in his rebuttal evidence, there were very few properties available, either on or off-market. Only premises at 129/131 Oxford Street (where initial negotiations broke down) and 145 Oxford Street were deemed suitable. Negotiations, which required up to 3 hours per day of his time, proceeded in respect of no. 145 and contracts were exchanged for its purchase, at a price of £6,000,000, on 16 November 2009 on payment of a 5% deposit. The premises had been introduced to the claimants by Foley Estates, and a fee of 1.5% of the purchase price had been agreed with them and was eventually paid. It had been proposed to fund the purchase with 50% in cash, and the remainder on a commercial mortgage. In response to the suggestion that the premises were vastly different to the subject premises, Mr Khurana said that the quality and character were not entirely different. Whilst it was acknowledged that they were larger, the premises would have allowed the family to continue run a business from an Oxford Street ground floor retail unit, and to let the upper floors as an investment along similar lines to what they had historically been doing.

82. Mr Khurana said in cross-examination that a four month completion date had been agreed with the vendors to allow time for the compensation monies to come through. However, he said that it had become apparent that the level of compensation that they had originally expected was unlikely to materialise, this making funding of the purchase impossible, and took steps to place the premises back on the market on 18 November 2009. Six potential cash purchasers came forward, and the contract was sold to one of them at £7,850,000 gross of costs on 22 December 2009.

83. Mr Amos is a partner in Michael Rogers LLP based in their London and Reigate offices and has over 21 years experience in commercial and compensation valuations in the London area. Although he had initially been instructed by the claimants in September 2008 to negotiate all aspects of the compensation claim, he was replaced by Nigel Laing of GVA Grimley in April 2009. However, that surveyor’s instructions were terminated in December 2009 and Mr Amos was re-appointed to deal with the disturbance aspects of the claim. In respect of the claimants’ purchase of 145 Oxford Street, he set out the acquisition costs that that had been incurred, and which were being claimed:

RBS advance fee relating to loan facility £ 5,000

Weightmans solicitors fees £ 10,471 + VAT

Sim Kapila accountancy fees (solely relating to that property) £ 22,275 + VAT

Capital Finance & Funding mortgage arrangement fee £ 23,250 + VAT

Foley Estates introductory commission @ 1.5% of purchase price £ 90,000 + VAT

£150,996

84. Mr Amos said that following exchange of contracts for the purchase, the claimants learnt that the acquiring authority had reduced its initial assessment of value for the subject premises from the £2,216,570 used for the purposes of the advance payment to £1,615,000 – a reduction of over £600,000. This created a shortfall equivalent to about 20% of the proposed equity stake which meant the property became unaffordable, and the claimants thus decided to sell on the benefit of the contract.

85. As to whether the proposed premises were suitable for relocation, Mr Amos said that whilst acknowledging they were three times the size of the subject premises, and thus not ideal, the premises would have allowed the family, who had been operating in Oxford Street for 25 years, to continue trading in that area. There was nothing else available that was suitable. This was implicitly acknowledged by Mr Miles in his acceptance that there were no comparable investment transactions in the immediate vicinity at around the valuation date. The fact that the proposed premises were larger and proportionately more valuable was, Mr Amos said, an inevitable consequence of the shortage of suitable premises to which they could relocate. Mr Amos said that he did not accept Mr Miles’s suggestion that the claimants knew of the acquiring authority’s revised valuation before they exchanged contracts. He said that it was only late in November, after contracts had been exchanged, that it became clear that compensation of more than £1.615 million would not be available, although he accepted in cross-examination that the claimants were previously made aware of TfL’s valuers’ views that the value was below the amount of the advance payment that had already been made.

86. Regarding Foley Estates’ fee, Mr Amos acknowledged that a 1% finders’ fee was the “norm” but said that a higher fee was appropriate where an off market transaction had been introduced. He also said that another agent (Blanchflower Lloyd Baxter) had quoted a fee of 2%.

87. In cross-examination, Mr Amos accepted the proposition that the claimants would not have been able to achieve the profit on the resale that they did without incurring costs. He also said that the purchase and sale-on of 145 Oxford Street had occurred during the period in which he had not been involved.

88. Mr Miles said that 145 Oxford Street was in a significantly better trading position, occupying a high profile and prominent site on the corner of Oxford Street and Berwick Street only 380 yards east of Oxford Circus. Most of the adjacent and nearby retailers were multiple in nature. The premises, at 7,691 sq ft, were also almost three times the size of 1 Oxford Street and he thus considered them to be eminently unsuitable for the claimants’ proposed relocation. He also said that in his view it was questionable as to whether Foley Estates were due a fee at all, as fees are only usually payable on completion, but in any event 1.5% was higher than the accepted industry standard of 1% for such work.

89. Mr Bachelor is a senior surveyor with TfL’s Operational Property Department, having been with them for 20 years, and deals with property matters and compensation issues generally. In respect of this head of claim, he reiterated the comments made by Mr Miles. In cross-examination, he accepted that he had been aware of BLB’s proposed 2% search and acquisition fee and that although he had voiced issues over other elements of the claimant’s claim, no questions had been raised in respect of that.

90. It was submitted for the acquiring authority that this head of claim was doomed to fail in principle as the claimants had not suffered a loss. Indeed, they had made a very handsome profit which they could not have made without incurring the fees they say the compensating authority should now be repaying. Furthermore, 145 Oxford Street was patently unsuitable. The claimants ran their own business from the ground floor and basement of the subject premises with the rest of the building let as an investment. Whilst relocation of a business is something that may be considered in the context of disturbance, the purchase of an investment is too remote to fall within rule (6). This point had been dealt with explicitly by Denning LJ in Harvey v Crawley Development Corporation [1957] 2 WLR 332 where he said, at 493:

“Supposing a man did not occupy a house himself but simply owned it as an investment. His compensation would be the value of the house. If he chose to put money into stocks and shares, he could not claim the brokerage as compensation. That would be much too remote. It would not be the consequence of the compulsory acquisition but the result of his own choice in putting the money into stocks and shares instead of putting it on deposit at the bank. If he chose to buy another house as an investment, he would not get the solicitor’s costs on the purchase. Those costs would be the result of his own choice of investment and not the result of the compulsory acquisition.”

A claim for fees incurred in the acquisition of an investment has to be made under section 10A of the 1961 Act but, it was submitted, it had not and no mention of it had been made in the claimants’ skeleton argument or opening submissions, despite it having been referred to in the acquiring authority’s skeleton argument.

91. The question was whether the investment of £6 million on the proposed premises to relocate the claimants’ business was a reasonable exercise, and palpably it was not, as it was nearly three times the size, and even twice the value ascribed to the subject premises by the claimants’ valuer. It was also in a vastly superior trading location.

92. It was also submitted that as there was no claim for loss of profits between January and November 2009, it was not possible for the claimants to prove that a business loss had occurred. In Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111, the Privy Council rejected “the Crown’s submission that a claimant can never be entitled to compensation on a relocation basis if this would exceed the amount of compensation payable on an extinguishment basis “ (for which in this instance there was also no claim) but went on to say (at 126H):

“It all depends on how a reasonable businessman, using his own money, would behave in the circumstances. In such a case, however, the tribunal or court will need to scrutinise with care, to see whether a reasonable businessman having adequate funds of his own might incur the expenditure.”

93. On the question of causation, and reasonable mitigation, it was submitted that the claimants were, indeed, aware of the acquiring authority’s opinion of value before they committed to an exchange of contracts on the new premises, but proceeded with the purchase in any event. Mr Laing had been told, at a meeting on 13 October 2009, what Mr Miles’s valuation opinion was. On the claimants’ case, they proceeded with a transaction which by the time of exchange they knew could be unaffordable. These were not the actions of reasonable businessmen seeking to mitigate their losses. It was fortuitous for the claimants that the transaction took place in a rapidly rising market, and not only did they not suffer a loss, but instead made a tidy profit on a venture that must be at their own risk.

94. It was submitted for the claimants that the fact they made a profit on the deal was entirely irrelevant to the question of entitlement to compensation. If they had completed the purchase, and subsequently sold at any time in the future at a profit, there would be no question of a compensating authority arguing that because of the profit, there should be no entitlement to the fees incurred in respect of the acquisition. Subsequent changes in the market (whether up or down) were irrelevant. As to whether the premises at 145 Oxford Street was suitable, for the reasons given by Mr Khurana (that the family could continue its long established business), and the lack of availability of anything else remotely suitable, then they clearly were. The claimants did not, it was said, consider the differences between the properties to be so great as to render a move to the new ones unreasonable.

Conclusions

95. Firstly, I do not accept the acquiring authority’s argument that the claimants could not claim disturbance costs because a part of the building consisted of an investment, and that it would be necessary for a claim to have been made under section 10A. The circumstances here were different to those that applied in Harvey. In that case, the example that Denning LJ was giving related to a whole property “which the owner did not occupy”. It was purely held as an investment. In this instance, the new premises would precisely replicate what the claimants were losing in terms of the type of business and income stream. They would be able to relocate their business and continue trading (after a delay), and would also be able to replace the lost investment income from the upper floors. That investment income was lost as a result of the compulsory acquisition.

96. I am also not convinced that the size and location of the new premises are relevant when it comes to the question of entitlement, and accept the claimants’ arguments in this regard. They wanted to relocate their business and from the evidence I am satisfied that they made reasonable efforts to do so. There was nothing else available that was suitable. However, the question with which I do have considerable difficulty is the one referred to in the passage from Shun Fung quoted by the acquiring authority (paragraph 92 above). What would a reasonable businessman, using his own money, do in the circumstances? It seems to me that the question has been answered by the claimants themselves. They came to the conclusion that, with their own premises likely to be less valuable than had originally been thought, they could not afford 145 Oxford Street. The key question is: were they aware of the acquiring authority’s position prior to exchange of contracts. I conclude that they were. Mr Miles said that he had explained his valuation to Mr Laing at a meeting approximately one month before contracts were exchanged (paragraph 8.13 of his first report), and, as Mr Amos accepted in cross-examination, there was no suggestion that that information had not been reported to the claimants. I am also mindful of the fact that section 52(5) of the Land Compensation Act 1973, relating to advance payments, makes it clear that a claimant who receives such a payment is at risk of having to repay any amount by which the payment exceeds the final amount determined. Again, they would have been aware of that.

97. Whilst, as the acquiring authority said in its closing submissions, if the claimants had decided not to proceed once Mr Miles’s opinion was known, it might reasonably be argued that that decision was caused by the actions of the authority, the fact remains that even once the revised, downwards, valuation was known, the claimants chose to proceed. They thus purchased despite, not because of, the authority’s actions. The result is that I must conclude that the claimants are not entitled to any of the costs claimed as they are too remote, were not caused by the compulsory acquisition and were not incurred in mitigation of a loss.

98. If I am wrong, and the claimants were entitled to compensation, then I think the costs they incurred were entirely reasonable as far as the agency, mortgage and legal fees are concerned. I accept the claimants’ argument concerning the level of Foley Estates’ fees and note that, despite having had the opportunity to do so, TfL through Mr Bachelor did not query them. That they were entitled to claim them should also, in my view, not be in question. Mr Khurana said that the firm acted on verbal instructions and, although in terms of good practice, it should have confirmed its instructions and given details of the circumstances under which fees would fall due, they appeared to be acting in good faith. Contracts were exchanged and that contract was subsequently sold on (as it transpired at a significant short term profit), and whilst there might have been a case for arguing whether or not the fees were strictly payable in law (and that scenario was not argued before me), it would have been wrong to deny the introducing agent his fee. The profit on the transaction would not have been made if the property had not been initially introduced “off market” by Foley Estates.

99. As to Sim Kapila’s fees, these did seem to me to be excessive but again, that point was not specifically argued.

Claimants’ time

100. Mr Amos carried out a calculation, based upon unaudited financial statements of the claimants’ businesses, to assess an appropriate hourly rate for the time that Mr R Khurana and Mrs R Khurana spent relating to the compulsory acquisition. They were the principal income generators, and their absence from the business on other matters would have a direct negative result. He concluded that a fair “blended” rate for the two of them was £50 per hour. He produced time sheets (which he had prepared) for the period 2 September 2008 to the date of entry which showed a total number of hours spent through that period on CPO matters as 89.5, and a further 349.5 hours subsequently relating to the search for alternative premises and other disturbance related matters, although Mr Khurana had said that, in reality, he thought many more hours should have been claimed for. This amounted to £21,950 to which £700 for disbursements (which were not disputed by TfL) should be added making a total of £22,650.

101. In cross-examination, Mr Amos accepted that it had been he who calculated the number of hours spent, from discussions with the claimants, and that no specific records had been kept by them other than the dates of meetings.

102. In the claimants’ closing submissions, the claim was reduced from 439 hours to 304.5 hours, a reduction of 134.5 hours which was for hours claimed post possession that were related to other matters. The revised claim became £15,225 but the disbursements were not mentioned. It was also submitted that if the Tribunal was to decide that the hours spent on 145 Oxford Street were not recoverable, the total should be reduced by a further 137.5 hours (based upon the claimants’ having spent 70% of the post acquisition hours on that issue), which would reduce the total claim under this head to £8,325. In respect of the authority’s offer of £5,000 it was suggested that no weight should be given to this figure as Mr Bachelor had failed to give any reasoning for its make up, and it appeared to have been entirely arbitrary.

103. Mr Bachelor said that whilst the principle of compensating the claimants for losses incurred due to their time being diverted onto CPO matters was accepted, there were questions over the methodology used by Mr Amos. It was normal, he said, for the claim to be based upon loss of net profits. The choice of the hourly rate was also disputed, and any hours claimed in respect of time taken on matters relating to 145 Oxford Street should also be removed from the equation as no loss had occurred. Mr Bachelor also said that the number of hours spent overall seemed to be disproportionately high bearing in mind the large number of professional advisors that the claimants were using, and that he had based his offer on the levels that had been offered to, and accepted by, other claimants.

104. The acquiring authority submitted that the claimants had failed to prove this part of the claim, that Mr Amos’s calculation of the hourly rate was novel and without foundation, and that any time spent by the claimants after the date of the notice of reference are not properly items of disturbance compensation, and would be catered for under the ambit of costs (as was accepted by Mr Walton). It was accepted that, discounting the post reference hours, a claim of £8,350 remains. However, on the basis of Mr Amos’s calculations, it was alleged that the claimants have failed to prove any loss

Conclusions

105. I do think it is not unreasonable for Mr Khurana to claim an amount representing the time he spent on 145 Oxford Street up to the date of the notice of reference. Although I have determined, for the reasons given, that the claimants are not entitled to the compensation claimed under the heading abortive costs, the time that he personally spent in finding and researching their suitability was part and parcel of his efforts to relocate the business, just as would be the time spent researching any other property that was then either deemed unsuitable, or did not proceed.

106. I agree with the claimants’ submissions that even if the method (from the gross income) that Mr Amos used was found to be flawed, £50 per hour is not an unreasonable sum. The acquiring authority said, and it was accepted by the claimants, that time spent post-reference could not be claimed here and it was calculated that the sum of £8,350 remained for the period up until the end of April 2009 (including time spent on 145 Oxford Street).

107. In my view, this sum is entirely reasonable and I am satisfied that that compensation in this sum should be paid.

Sim Kapila’s professional fees

108. The £17,880 (plus VAT) claimed here related to three invoices provided by Sim Kapila, Chartered Accountants, copies of which, together with time sheets were appended to Mr Amos’s main report and rebuttal report. These were for forensic accountancy services incurred in respect of, as Mr Amos described: “an analysis of the scope for a claim for business loss; financial consultancy to the claimants and liaising with their other advisors; co-ordinating and providing all information necessary to submit and support a compensation claim; value the business and make financial decisions.”

109. The acquiring authority did not dispute Sim Kapila’s hourly rate of £215, that he had spent 83 hours on the matter, that the invoices had been properly raised and the work related to the matters stated. However, their argument was that the claim should only relate to the work carried out in respect of advising on a business loss claim, and there should be no liability to pay fees for work that clearly duplicated tasks carried out by other professional advisers. Also, they said, the provision of invoices and timesheets did not satisfy the evidential burden of proof. Mr Bachelor said that the timesheets were not disputed, but that some of the work appeared peripheral to what he was required to do. The acquiring authority had made an offer of £3,000 to cover these fees, and Mr Bachelor said he thought that was reasonable.

Conclusions

110. I am entirely satisfied that the burden of evidential proof has been established by the claimants, and consider that the fees claimed were reasonably incurred. I therefore determine the compensation under this head at £17,880. It is understood that the question of VAT is no longer in issue.

111. This decision resolves the issues before me. I determine compensation in the sum of £2,200,000.00, less any advance payments already made, calculated as follows:

Value of the freehold interest in 1 Oxford Street, London W1: £1,950,000.00

Abortive relocation costs £ NIL

Claimants’ time: £ 8,350.00

Sim Kapila’s fees: £ 17,880.00

Losses on forced sale of fixtures & fittings (agreed): £ 88,500.00

Mortgage redemption cost (agreed): £ 7,652.16

Basic and occupiers loss payment (agreed): £ 100,000.00

Professional fees of Michael Rogers, Lattey & Dawe,

Ash & Co and Charterfields (agreed) £ 27,161.00

£2,199,543.16

Say £2,200,000.00

112. The parties are now invited to make submissions on costs, and a letter relating to this accompanies this decision, which will become final when the question of costs has been determined.

DATED 29 November 2011

P R Francis FRICS

United Kingdom Upper Tribunal (Lands Chamber)

BETWEEN MR LAKSHMI NARAIN KHURANA (1)

MR RAJIV KHURANA (2)

MRS RUMA KHURANA (3) Claimants

The following cases are referred to in this decision:

DECISION

Introduction

Facts

1. Rental value – retail areas

Rental value – upper floor offices

Yield

Conclusions

Abortive relocation costs

Claimants’ time

Sim Kapila’s professional fees

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You are here: BAILII >> Databases >> United Kingdom Upper Tribunal (Lands Chamber) >> Khurana & Ors v Transport for London [2011] UKUT 466 (LC) (29 November 2011) URL: http://www.bailii.org/uk/cases/UKUT/LC/2011/ACQ_193_2009.html Cite as: [2011] UKUT 466 (LC)