SME (Hammersmith) Limited v Transport for London

Compensation for the extinguishment of a business by compulsory purchase must reflect the value to the claimant of the profitable business lost with its assumed tenure. Comparable franchise transactions may assist, but their reliability depends upon the available evidence and the assumptions necessary to derive an earnings multiplier.

A transaction based on historical earnings should not be adopted without allowing for the purchaser’s anticipated future profitability. Equally, a valuation should not assume that the whole anticipated improvement was reflected in the price. The appropriate multiplier is a fact-sensitive assessment and does not establish a precedent for future cases.

The claimant’s KFC franchise business at Farringdon was extinguished by compulsory acquisition for the Crossrail scheme. The parties agreed assumed maintainable earnings of £107,000 and that the claimant would have obtained a new 15-year lease with the protection of Landlord and Tenant Act 1954 Part II.

They also agreed the other heads of compensation. The sole disputed issue was the multiplier to apply to the agreed earnings. The claimant relied principally on the Marz/Marsden portfolio transaction and sought a multiplier of 17. Transport for London relied principally on the Herbel/Kram transaction and sought 7.5.

1. The Tribunal determined the extinguishment loss at £1,498,000, by applying a multiplier of 14 to agreed maintainable earnings of £107,000. Total compensation, including agreed losses and fees, was £1,707,969.04, plus statutory interest.

2. The correct inquiry was the value to the claimant of the business lost through compulsory purchase, operating from the premises with the assumed new lease and the security of tenure under Landlord and Tenant Act 1954 Part II.

3. The Marz/Marsden transaction was the most reliable comparable. The acquiring authority had not shown that the recession adversely affected the quick-service restaurant or KFC sector so as to undermine it. Nor was a further reduction justified for its greater proportion of freehold or drive-thru outlets after the agreed freehold adjustment.

4. The Herbel/Kram transaction carried little weight. The freehold value and notional rent could not reliably be calculated, the put-and-call option could not be valued without its terms, and the analysis improperly relied on a short period of post-acquisition trading without the historic figures or evidence of the purchaser’s expectations.

5. The Tribunal did not adopt the Marz/Marsden multiplier of 17 without adjustment. Comparable prices reflect some anticipated future profitability, but not necessarily all of it. On the limited evidence, a multiplier of 14 was appropriate. The Tribunal stated that this fact-specific multiplier should not be treated as a precedent.

The decision was final save for the costs of the reference, on which further submissions were invited.

not stated in the judgment.