Land value and the principle of reality

In a nutshell the case before HHJ Blohm KC in the High Court in Bristol concerned an expert determination. The issue was the price which Industrial & Community Wind Generation (No.2) Limited (“ICWG”), the tenant under a lease (“the Lease”), should pay to the Council, the landlord under said Lease, in respect of the purchase of the freehold land (“the Land”) upon which a valuable wind turbine (“the Turbine”) had been constructed.

The origins of the dispute

Over a decade ago in 2012 ICWG entered into an option agreement with the Council. The option agreement was to acquire a lease of the Land.

The next year, in the knowledge of its option, ICWG sought and obtained planning permission to build the Turbine on the Land. When permission had been secured, ICWG exercised its option and the Lease, with a 25-year term, was created.

In the months that followed ICWG constructed the Turbine on the site. The Court was told that the expense of doing so exceeded £1million.

The sums due to the Council under the Lease came in two main forms: rent proper, calculated at £30 per kilowatt of installed capacity; and royalty payments, calculated as 50% of the income arising from the sale of electricity generated on the Land. By 2024/2025 both sums together were generating circa £80,000 per annum for the Council.

The purchase notice

After 10 years ICWG was permitted, under the terms of the Lease, to serve a “Purchase Notice” through which it could buy the freehold out of which the Lease had been granted.

After some attempts to bypass the strict process set out in the Lease a valid Purchase Notice was served in September 2023. The Lease specified that after the service of a Purchase Notice the matter was to be referred to a “Qualified Expert” who was, among other things, to have ‘at least 5 years’ experience relevant to wind energy projects’.

A Qualified Expert (“the Expert”) was duly appointed. However, even before the appointment of the Expert, ICWG had attempted to get the Council to agree that the basis for the Expert’s valuation must be that the site was treated as bare land. Shortly put, given that the Council was making £80k per year under the Lease, and the bare land figure that ICWG had suggested for the purchase was a grand total of £50,000 (i.e. as a once and for all payment), the Council was not minded to agree.

The expert determination

The Expert determined the matter in the Council’s favour.

Both sides had been aware from the outset that under the terms of the Lease “Company’s Equipment” (that is – ICWG’s Equipment) was to ‘remain the property of the Company’ and that the Council was ‘to have no interest in or ownership of’ it. Naturally, the Company’s Equipment included the valuable Turbine.

Thus, that ICWG had built, and retained ownership of, the physical Turbine was never in doubt. However, the Council considered that ICWG was reaching too far in concluding that the value generated by the Turbine was not to be factored in when the price of the freehold Land was determined. Further the Council considered that the paragraph in the Lease referring to the strict valuation process did not sensibly suggest a valuation of the Land (/ “Premises” as described in the below) on a bare land basis. Schedule 6 Para 19.1 of the Lease set out the following:

“At any time after the tenth anniversary of this Lease the Company shall be entitled to purchase the Premises from the Landowner at an open market value being the best price at which the Premises could reasonably be expected to be sold at arm’s length in the open market at the date on which the Company serves on the Landowner notice of its intention to purchase the Premises (“the Purchase Notice”)”

The Expert agreed with the Council and determined a purchase price of £490,000, taking into account: (1) the income stream which would be generated under the remainder of the Lease; and (2) the value of the bare freehold reversion at the end of the full term of the Lease. As regards (2), the Land would be bare after the Lease had run its course because ICWG was obliged to remove the Company’s Equipment before yielding up the Land to the Council.

The High Court challenge

The decision of the Expert as to the open market value of the Land was to be binding on the parties ‘save in the case of manifest error’.

ICWG, having threatened numerous times in correspondence with the Expert before his decision that it would challenge any determination which did not align with its analysis, duly brought a Part 8 claim to unseat the determination.

The Council defended the Expert’s decision, and argued that, in any event, it was not manifestly erroneous.

While there were many references to factual events, law and parts of the Lease, a flavour of the parties’ positions is set out below.

ICWG’s main arguments in support of its case included:

1. The existence of a ten-year period (in para 19.1) suggested that the commercial “deal” between the parties was that after a guaranteed payment period for the Council, ICWG would be granted the ability to buy the Land cheaply.
2. That the definition of “Premises” suggested a bare land analysis for the purposes of valuation – akin to, in essence, it being intended under the Lease that “only” the bare Premises were to be valued.
3. That there was no express warrant for the expert to value the Land “subject to the Lease”, problems and complexities arose from his doing so, and that his approach was therefore manifestly wrong.
4. An emphasis on the unfairness for ICWG, if it were to pay twice – both for the construction of the Turbine, and then for the Land rendered valuable by the same. This argument was supported by reference to rent review principles and, in particular, the case of Historic House Hotels Ltd v Cadogan Estates Ltd [1994] 7 WLUK 341.

The Council’s main arguments included the following:

1. It flowed from a combination of (i) the requirement for the Qualified Expert to have at least 5 years’ experience in wind energy projects and (ii) the contractual interpretation principle of common sense, that (iii) the Expert was right to approach his task as a nuanced exercise involving wind energy analysis, and was right to value the Land subject to the Lease. The alternative, that the Land was to be valued merely as bare land, would not have required such an expert.
2. That there was a fundamental flaw in ICWG’s position that without the Lease the Land should be valued as bare land. If one saw through fully the thought experiment of discounting the Lease, the valuation of the freehold would in fact be higher, not lower, than the Expert’s valuation. The valuation specified in para 19.1 was to be as at the date of the Purchase Notice, and on that date the freehold (in the hypothetical scenario where there were no Lease) in fact was unencumbered with the valuable Turbine standing upon it. It was not in any sense merely bare land.
3. That there was a Lease, that there was planning permission for a Turbine and that there was a valuable Turbine on the site were all inescapable factors pertinent to the Land’s valuation. Freehold land with the benefit of such existences should not be valued as a bare field.
4. That the commercial deal between the parties was not a period of guaranteed income for the Council followed by an opportunity for ICWG to buy the Land cheaply. Rather the commercial deal was more of the nature – “if you’re making money; we’re making money”.
5. When parties go to an expert with specialist knowledge of a field, and when the expert exercises – in arriving at his determination – the said specialist knowledge that was sought after, it would be surprising if that exercise of knowledge or expertise could be said to have led the expert into manifest error. Reference was made to the accountancy cases of Flowgroup [2021] EWHC 344 (Comm) and Invensys [2002] 1 All ER (Comm) 222. The Expert had described his approach to the income under the Lease, as being “typical” in his experience.

The outcome

HHJ Blohm dismissed the claim.

In his Judgment, given ex tempore, among other factors HHJ Blohm emphasised the importance of the principle rebus sic stantibus (“things standing thus” / “as things stand” or in modern parlance – the principle of reality) in the context of this case.

In light of said principle the hypotheticality of the bare field analysis was unjustified. Put another way, the Lease, its profitability, and the functioning Turbine were all plain existences tied into the freehold land and there was no justification for a valuation which sought to evade them.

HHJ Blohm referred to the case of Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307 and Lord Briggs’s definitive statement at [52]:

“It is axiomatic that in any complicated process of valuation, the valuer must take the relevant aspects of the world as he finds them (unless constrained by his instructions), and that he must, after looking at each element of the process, stand back and ask himself whether his provisional valuation makes commercial or business sense, viewed in the round.”

Here the world of the freehold Land unavoidably included the profitable Lease which was generating money for the Council. Not only was the Expert “not guilty” of making a manifest error, he had, as the Council had argued, got his analysis and determination right.

Adam Boyle is a barrister at St John’s Chambers. He advised the Council in respect of this matter from mid-2023 (both before and after the Expert determination) and acted from the outset and throughout the hard-fought litigation.

The Claimant was represented by Devonshires and Guy Fetherstonhaugh KC of Falcon Chambers.