Railtrack Plc v Guinness Ltd.

The Court of Appeal dismissed an appeal from a Lands Tribunal arbitration concerning the valuation of access and air rights required for a major development at Park Royal. The court considered the application of the "willing seller" principle in section 5(2) of the Land Compensation Act 1961 and the proper treatment of allowances for developer profit and additional risk in a residual valuation model. It held that, where the asset being valued is rights over railway land, it is permissible and realistic to treat the hypothetical vendor as a railway infrastructure company and to have regard to negotiations involving the actual railway parties. The Tribunal's adoption of a 20% developer profit allowance in its computer-assisted residual appraisal and a further 20% deduction as an allowance for the specific risk borne by the purchaser of the rights was held to be justifiable on the evidence and not unlawful double-counting.

Background and nature of the claim:

• The dispute concerned the open market valuation of rights of access across railway land needed for the First Central development at Park Royal, west London. Guinness Ltd sought to acquire rights to construct an access road and related rights over land owned by Railtrack and London Underground. The parties agreed to refer valuation issues to the Lands Tribunal under a terms of reference agreement dated 16 May 2000.
• The Tribunal was asked to determine the open market value of the rights on the valuation date 16 May 2000, on assumptions in the TOR that modified ordinary compensation principles (including disapplication of the Pointe Gourde rule and certain provisions of the Land Compensation Act).

Procedural posture:

• The matter was decided by the Lands Tribunal after a lengthy hearing and the Tribunal assessed the open market value of the rights at £5 million. Costs were subsequently determined and no order as to costs was made by the Tribunal. Railtrack (in administration) appealed to the Court of Appeal on points of law under the statutory appeal route from the Lands Tribunal; permission to appeal was required and was partly dealt with on paper before the hearing.

Issues framed by the court:

1. Whether, for the purpose of applying section 5(2) of the Land Compensation Act 1961, the Tribunal erred in treating the hypothetical willing seller as a railway infrastructure company and in having regard to the particular characteristics and negotiation history of the actual vendor (the "willing seller" issue).
2. Whether the Tribunal wrongly allowed deductions for profit/risk which in aggregate amounted to double-counting or were otherwise unjustified (the "profit/risk" issue).

Court's reasoning and conclusions:

• On the willing seller issue the court concluded there was no legal error. Because the rights were rights over a railway, it was neither unrealistic nor forbidden to assume that the hypothetical vendor would be a railway company; therefore the Tribunal could properly have regard to the negotiation evidence involving Railtrack and London Underground when assessing whether a particular figure was one that the parties would have agreed.
• On the profit/risk issue the court analysed the Tribunal's use of a computer-assisted residual appraisal (the Circle Systems output) and the expert valuations. The Tribunal had accepted a 20% developer profit allowance built into the appraisal (applied to total expenditure including site purchase cost) and, applying reasoning derived from the purchaser's valuer, made a separate 20% deduction to reflect the specific additional risk borne by Guinness as the purchaser of the access rights (a down-payment bearing risk distinct from developer profit). The court held that the Tribunal's reasoning was adequate, the percentages were matters of judgment not amenable to legal objection, and there was no demonstrated unlawful double-counting or denial of natural justice.

Relief sought: Determination on appeal of whether the Lands Tribunal's decision was vitiated by errors of law and, if so, appropriate relief (quashing or remit) in relation to the valuation and allowance for profit/risk.

Appeal dismissed. The Court of Appeal held that the Tribunal had not erred in law in treating the hypothetical vendor as a railway infrastructure company for the valuation of rights over railway land and was entitled to have regard to the actual negotiation evidence. The Tribunal's allowance for developer profit (20% in the residual appraisal) and a further 20% deduction to reflect the specific risk borne by the purchaser of the rights were matters of judgment supported by the evidence and did not amount to unlawful double-counting; accordingly there was no basis to interfere with the Tribunal's valuation of £5 million.

Appeal from the Lands Tribunal (arbitral reference) following the Tribunal's substantive decision of 11 February 2002 and the subsequent costs addendum of 29 April 2002. Permission to appeal was considered on paper (permission granted on ground two for the substantive hearing; other grounds refused on preliminary applications made in June and October 2002). The Court of Appeal heard the substantive appeal and dismissed it ([2003] EWCA Civ 188).