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|Judgments - Coventry and Solihull Waste Disposal Company Limited v. Russell (Valuation Officer)
HOUSE OF LORDS
Lord Steyn Lord Cooke of Thorndon Lord Hope of Craighead Lord Clyde Lord Millett
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
COVENTRY AND SOLIHULL WASTE DISPOSAL COMPANY LIMITED
RUSSELL (VALUATION OFFICER)
ON 25 NOVEMBER 1999
I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hope of Craighead. For the reasons he has given I would dismiss the appeal.
LORD COOKE OF THORNDON
I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Hope of Craighead and Lord Clyde. For the reasons given by them I, too, would dismiss this appeal.
LORD HOPE OF CRAIGHEAD
This appeal is concerned with an entry in the non-domestic rating list relating to a hereditament at Bar Road, Coventry which is known as the Coventry Waste Reduction Unit. The appellant, Coventry and Solihull Waste Disposal Company Limited, is the owner and operator of the hereditament. The respondent, Anthony Russell, is the Valuation Officer for the Coventry City Council area.
On 1 April 1990 the respondent made two entries in the rating list relating to the appellant's premises. The first, which was listed as Assessment No. 13007, was in respect of subjects described as "Refuse Destructor and Premises", the rateable value of which was £610,000. The second, which was listed as Assessment No. 15215, was in respect of subjects described as "Pipeline and Appurtenances", the rateable value of which was £38,500. On 29 November 1993 the respondent issued a notice that Assessment No. 13007 had been altered with effect from 26 February 1993 so as to reflect structural alterations to the hereditament by increasing the rateable value to £1,150,000. The appellant appealed to the Coventry and Solihull Valuation Tribunal on the grounds that the two assessments should be merged into one, and that the combined rateable value of the hereditament should be reduced by applying to it the formula for the determination of rateable value which had been prescribed by the Electricity Generators (Rateable Values) Order 1989 (S.I. 1989 No. 2474) as amended.
The Valuation Tribunal held that the two assessments should not be merged and that the rateable value of the pipeline should not be altered. A small reduction was made to the rateable value for Assessment No.13007 by adjusting the respondent's valuation of the hereditament, which had been based upon the contractor's method of valuation. The appellant appealed from that decision to the Lands Tribunal. The appeal was held by the President, H.H. Judge Bernard Marder Q.C. He allowed the appeal and ordered that the two entries in the rating list should be deleted and that there should be substituted a single entry which described the hereditament as comprising the refuse destructor, the power generation plant and the pipeline with appurtenant premises. He ascribed a rateable value of £143,034 with effect from 26 February 1993 to the hereditament which he determined on the basis of the formula.
The respondent then appealed to the Court of Appeal by way of case stated under section 3(4) of the Lands Tribunal Act 1949. Two issues were before the Court in that appeal. The first was whether the two assessments should be merged into a single assessment. The second was whether the hereditament, whether it comprised the plant and the pipeline or just the plant, should be valued in accordance with the 1989 Regulations on the basis of the formula. The respondent's appeal on the first issue was dismissed. All three members of the Court of Appeal (Robert Walker L.J., Waller L.J. and Hobhouse L.J. (now Lord Hobhouse of Woodborough)) held that the pipeline formed part of a single hereditament comprising the incinerator plant, the generator plant and the pipeline and that the two assessments should be merged into a single assessment. But by a majority (Robert Walker L.J. dissenting) the Court of Appeal allowed the respondent's appeal on the second issue on the ground that the 1989 Regulations did not apply to the hereditament. The parties were agreed that on this basis the rateable value of the hereditament was £928,500. The respondent has not appealed against the decision of the Court of Appeal on the first issue. The appellant has appealed against its decision on the second issue, as to whether or not the hereditament fell to be valued under the 1989 Regulations in accordance with the formula. It is the second issue only which is before your Lordships in this appeal.
The Coventry Waste Reduction Unit was built for Coventry City Council in the early 1970s. It came into operation in 1975. It was designed to receive waste from householders and commercial and industrial undertakings collected by the local authority's refuse collection services. It was also designed to take in waste which people brought in their own vehicles to a civic amenity centre on the premises. The waste was to be incinerated, leaving a residue of ash and ferrous material which could be more readily disposed of. An integral part of the original design was a heat transfer station and pipeline. They were completed in 1976. The purpose of this facility was to transfer heat in the form of hot water produced by steam from the boilers from the energy raised by the incineration process to nearby works now occupied by the car manufacturer Peugeot. Subsequent refinements were incorporated into the premises to enable various material such as glass and metals to be received separately for re-cycling. On the coming into force of the Environmental Protection Act 1990 local authorities were required to discontinue from operating their own waste disposal facilities, and waste disposal contracts had to be awarded on the basis of competitive tendering. The appellant company was formed in 1992 for the purpose of operating the waste disposal facilities previously operated by Coventry City Council and Solihull Metropolitan Borough Council. On 1 April 1994 in accordance with a transfer scheme made under Schedule 2 to the Act of 1990 the plant and the pipeline were transferred to and vested in the company.
The subject matter of this appeal arises out of substantial alterations to the premises which were carried out in 1992 and 1993 before they were vested in the company. Approximately £8.5m was invested in the construction of an electricity generating plant and associated equipment. In consequence of these alterations, which became operational on 26 February 1993, electricity is generated by using steam from the boilers of the incinerator plant to drive a turbine. Some of the electricity is used on the premises, but most of it is sold though the Non Fossil Purchasing Agency and supplied to the distribution network of East Midlands Electricity Plc. The plant generates 12.9 Mw of electricity, of which 11.4 Mw is exported through the distribution network. For the purposes of the 1989 Order, 11.4 Kw is the plant's declared net capacity. The plant continues to use the steam from the boilers to supply heat to the works occupied by Peugeot. The Lands Tribunal held that the plant was originally constructed to dispose of Coventry's waste by incineration and that, although the operations of the plant had been expanded so as to enable electricity to be generated, the disposal of Coventry's refuse together with that of Solihull remains the principal reason for its existence. This finding has not been disputed by either party to the appeal.
The 1989 Order
The Local Government Finance Act 1988, under which the 1989 Order was made, brought about major changes in the system of finance for local government in England and Wales. It has three main elements: a system of taxation of individuals to be known as the Community Charge, rates on non-domestic property and a revenue support grant. Part III of the Act deals with non-domestic rating. Section 41(1) provides that the valuation officer for a charging authority shall compile, and then maintain, lists for the authority, to be called its non-domestic rating lists, in accordance with that Part of the Act. Section 56(1) gives effect to Schedule 6 to the Act, which provides for the determination of the rateable value of non-domestic hereditaments.
The primary rule is that which is set out in paragraph 2(1) of the Schedule. It provides that the rateable value of a non-domestic hereditament shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant's rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent. The traditional methods of valuation - the comparative method, the revenue method and the contractor's method - remain available to the valuer in order that he may determine the annual value of the hereditament. Provision is made in paragraph 2(4) for maintaining a uniform level of valuation for subsequent entries with that when the list was compiled by requiring, as a general rule, that the day by reference to which the determination is to be made is the day on which the list came into force. The respondent's assessment of the rateable value of the premises with effect from 26 February 1993, when the alterations to the plant became operational, was made by applying these rules. He used the contractor's method in order to determine the rateable value of the hereditament under paragraph 2(1).
The starting point for the appellant's argument is to be found in paragraph 3(1) of Schedule 6. This paragraph provides that the Secretary of State may by order provide that in the case of a non-domestic of such description as may be prescribed paragraph 2 of the Schedule shall not apply and its rateable value shall be such as is determined in accordance with prescribed rules. This method of valuation is known as valuation by formula. On 22 December 1989 the Secretary of State for the Environment as respects England and the Secretary of State for Wales as respects Wales made the Electricity Generators (Rateable Values) Order 1989. The provisions of the 1989 Order, which came into force on 23 December 1989, were amended by the Gas and Electricity Industries (Rateable Values) (Amendment) Order 1990 (S.I. 1990 No. 804), in force from 1 April 1990, and the Electricity Industry (Rateable Values) (Amendment) Order 1991 (S.I. 1991 No. 959), in force from 1 April 1991. The appellant's argument is that its premises fall within the description of the hereditaments to which the Order applies which is set out in the 1989 Order as amended, with the result that they are to be valued in accordance with the formula which article 4 prescribes for the rateable values of such hereditaments.
The basic structure of the 1989 Order is quite simple. Article 3 of the Order defines the conditions which must be fulfilled by the hereditament if the formula is to be applied to it. Article 4 sets out the valuation formula. The formula requires a fixed amount to be applied to the declared net capacity of the plant in or on the hereditament which is used or available for use for the purposes of generating electricity. The declared net capacity is defined in article 2 as meaning the highest generation of electricity at the main alternator terminals which can be maintained indefinitely without causing damage to the plant, less so much of that capacity as is consumed by the plant.
Where the primary source of energy used by the plant is wind or tidal power, which varies according to the weather conditions in its capacity to produce energy, the rateable value is the sum of £6,405 applied to the declared net capacity. In any other case the rateable value is the sum of £12,810 applied to the declared net capacity. These figures are derived from the rate used to adjust the rateable values of the major power stations, now largely owned by PowerGen and National Power, which are rated centrally under section 52 of the Act of 1988 for the purposes of central non-domestic rating lists and not locally. Under the Order which applies to these power stations (S.I. 1989 No. 2475) total rateable values are prescribed, and a recalculation factor is used to enable the prescribed rateable value to be adjusted from year to year in accordance with changes in the capacity of the generator. The rate used for that adjustment is £12,810 per Mw, which is derived from the total of the prescribed rateable values.
The difficulty which has given rise to the dispute as to the rateable value of the hereditament lies in the wording of article 3 of the Order. In its amended form it is in these terms:
It is clear that three conditions must be satisfied for a hereditament to fall under article 3. First, it must be used or be available for use for the purposes of generating electricity. Second, it must fall within one of the three paragraphs of article 3(2)(a). Paragraphs (i) and (ii) refer to the function of the hereditament. Paragraph (iii) applies where the burning of refuse is the primary source of energy. Third, it must fall within one of the three paragraphs of article 3(2)(b), which are concerned with the capacity of the generating plant. Paragraph (?) provides that generating plant will satisfy the condition if it uses wind, tidal or water power as its primary source of energy. Paragraphs (ii) and (iii) provide that, in order to satisfy the condition in article 3(2)(b), the generating plant must have a minimum declared net capacity. If the primary source of energy is the burning of refuse special conditions apply. The general rule in paragraph (?) of article 3(2)(b) is that the generating plant must have a declared net capacity of 25 Mw or more, whereas for all other sources of energy other than wind, tidal or water power the minimum is set by paragraph (iii) at 500 Kw. But an exception is made for those generating plants whose primary source of energy is the burning of refuse which satisfy the conditions set out in either paragraph (?) or paragraph (ii) of article 3(2)(a).
The Lands Tribunal held that the primary function of the appellant's hereditament is the destruction by incineration of refuse. That being so, it is unable to fulfil the condition set out in paragraph (?) of article 3(a), which requires that use for the purposes of generating electricity is its sole or primary function. It is plain both from the agreed facts and from the Tribunal's findings that its primary source of energy is the burning of refuse. As that is the primary source of its energy the hereditament undoubtedly fulfils the condition set out in paragraph (iii) of article 3(2)(a). But that is not enough if the hereditament is also to satisfy the conditions set out in article 3(2)(b), as the declared net capacity of its generating plant is only 11.4 Kw. It must also fulfil the condition set out in paragraph (ii) of article 3(2)(a). The parties are agreed that the alterations to the plant which became operational on 26 February 1993 comprised a scheme for the production for sale of both electrical power and heat (a "CHP scheme"). So the concluding words of paragraph (ii) are satisfied. The argument relates to the question what paragraph (ii) requires in regard to the primary function of the hereditament.
To complete the background mention should be made of the legislative history of the 1989 Order, and in particular of paragraph (ii) of article 3(2)(a). In its original form article 3(2) of the Order set out only two conditions which had to be satisfied for the formula to be applied to the hereditament. The first was that it was used or available for use wholly or mainly for the purposes of generating electricity. The second was that the generating plant had a declared net capacity of 500Kw or more, or used wind or water power as its primary source of energy. The 1990 Amendment Order did two things. It made provision for the application of the formula to hereditaments which used tidal power as their principal source of energy. And it substituted a new article 3(2), which set out in each of sub-paragraphs (a) and (b) three alternative conditions which had to be satisfied. Except for those described in paragraph (ii) in each of these two sub-paragraphs, these have remained unchanged following the amendments made by the 1991 Amending Order.
In paragraph (ii) of article 3(2)(a) of the original Order the words used were "it is so used or available in connection with a scheme for the production for sale of both electrical power and heat." In paragraph (ii) of article 3(2)(b) of the original Order the words were "if its primary source of energy is the burning of refuse, has a declared net capacity of 25 megawatts or more." Article 2 of the 1991 Amendment Order made two changes to the wording of these paragraphs. The first was the substitution, in paragraph (ii) of article 3(2)(a), of the words from the beginning to "available," of the words "its primary function is." The second was the insertion in paragraph (ii) of article 3(2)(b), after the word "refuse," of the words "and neither paragraph (?) nor paragraph (ii) of sub-paragraph (a) applies." In the Explanatory Note to the 1991 Amendment Order it was stated:
The issue between the parties
The issue between the parties is one as to the proper construction of the words of paragraph (ii) in the amended article 3(2)(a). Reduced to simple terms, it is whether the primary function of the appellant's hereditament "is in connection with" the CHP scheme which came into operation there on 26 February 1993. The appellant's argument was that the words "in connection with" are ordinary words which should be given their ordinary meaning. All that was required for the ordinary meaning of those words to be satisfied was a "connection" between the function of destroying waste by incineration and the CHP scheme. The fact that there was a connection between them was amply demonstrated by the fact that it was the act of destroying the waste by incineration which enabled the CHP scheme to operate. There was therefore a close and substantial connection between the primary function of the hereditament, which was the destruction of waste by incineration, and the scheme. If it were to be suggested that a functional connection was needed to satisfy the condition, the connection here was plainly a functional one.
Miss Williamson Q.C. submitted that this reading of the paragraph was consistent with what she took to be the legislative purpose of the Order. She said that this was to provide financial incentives to ratepayers to encourage operations which were beneficial to the environment. The appellant's premises were beneficial to the environment in two respects. They were used to incinerate waste. And they harnessed the energy produced by that process to create for sale both power and heat. This reduced the need for the recipients to rely on power and heat produced by alternative sources of energy.
The respondent's argument as to the wording of paragraph (ii) of article 3(2)(a) was directed primarily to the words "function" and "is" which precede the words "in connection with." Mr. Holgate Q.C. submitted that the effect of the paragraph was that the condition was only satisfied if the primary function of a hereditament which was used or available for use for the purposes of generating electricity was its use in connection with a CHP scheme. The word "function" directed attention to the purpose or the object for which the hereditament was used. The words "is in connection with" were intended to link the primary function linguistically with the scheme. He recognised that the wording of the paragraph was unsatisfactory, and that it was capable of bearing either of the two meanings contended for. But he submitted that there were compelling reasons, when the phrase was taken in context and the balance of advantages and disadvantages on either construction were taken into account, for preferring the respondent's construction and holding that in this case the condition was not satisfied.
The wording of the amended paragraph (ii) of article 3(2)(a) is far from satisfactory. But I think that the words used, when taken in their context and in the light of the legislative history, are more consistent with the interpretation which the respondent has contended for than that urged upon us by the appellant. Any lingering doubt as to where the balance lies is removed when the implications of the competing version are considered, having regard to the part which the Order plays in the context of the system which Schedule 6 to the Act of 1988 lays down for the valuation of hereditaments which are to be entered in the local non-domestic rating lists.
The amendment which was made to the paragraph by the 1991 Amending Order inserted the words "its primary function is" in place of the words "it is so used or available." It is reasonably clear from the juxtaposition of these words that the purpose of the amendment was to restrict the condition by directing attention to the primary function for which a hereditament used for the purposes of generating electricity is used or available. Under the original wording the condition was satisfied in the case of such a hereditament irrespective of its primary function. All that was needed was evidence to show that its use or availability for use for generating electricity was in connection with a CHP scheme. The primary function of the hereditament could be an entirely different one, so long as there was such a connection. It was enough that its use in connection with a CHP scheme was ancillary to the primary function of the hereditament. By substituting a reference to the primary function the amendment was seeking to introduce a different test. The appellant's argument, which directs attention to the words "in connection with," fails to give sufficient content to the amendment. It concentrates on the words "in connection with," which were left untouched by the amendment. In the result, the effect on this argument of the amended paragraph, when taken as a whole, is virtually indistinguishable from that of the unamended paragraph. It seems unlikely that this was the intention of the amendment.
The structure of article 3(2)(a), in its original form, was to direct attention in paragraphs (?) and (ii) to the use of the hereditament and in paragraph (iii) to its primary source of energy. The wording of the amendment suggests that the amended paragraph (ii) was intended to retain the same direction. The natural meaning of the phrase "its primary function is" requires an examination of the use of the hereditament. Its use is inherent in the concept of what is to be seen as its function. The words "its use" is absent from the amended paragraph, but I think that they are implied by the context. In seeking to provide what Mr. Holgate described as a linguistic bridge between the primary function and the CHP scheme the draftsman used the word "is." It is that word, rather than the phrase "in connection with," which defines the bridge. To give it its full sense the word should be read as if the bridge which it provides had included after the word "is" the words "its use." If those words had been included in the amendment they would have removed all doubt as to its effect. Just as paragraph (?) requires that use for the purposes of generating electricity must be the sole or primary function if it is to be satisfied, it seems to me that paragraph (ii) requires that use in connection with a CHP scheme must be the primary function if it is to be satisfied. This provides a measure of symmetry to the first two paragraphs which, if either of them can be satisfied, will enable a hereditament whose primary source of energy is the burning of refuse to benefit from the lower threshold of declared net capacity in paragraph (iii) of article 3(2)(b).
Looking at the matter more broadly, in order to assess the advantages and disadvantages of the competing arguments, there are two important points which tell heavily against the appellant's construction and favour that of the respondent.
The first is that, if the appellant is right, a very substantial amount of the value of their hereditament will be left out of account in the rateable value which is ascribed to it in the list. In the case of the typical power station a sound test of its annual value, within the meaning of paragraph 2(1) of Schedule 6 to the Act of 1988, is its capacity to generate electricity. Where the sole or primary function of the hereditament is to generate electricity, the value of the entire premises, including all the buildings, plant and machinery, will be reflected in the amount which the hypothetical tenant would pay for the subjects if measured by a figure related to its declared net capacity. The figures which have been selected for use in the formula set out in article 4 of the 1989 Order are linked to the values ascribed to major power stations which are rated centrally. This is a sufficient indication, if this were needed, that the intention was to ensure that local power stations were entered at the same level of value in the local lists. In its amended form paragraph (ii) of article 3(2)(a), on the respondent's interpretation, extends that level of value to a hereditament of which it cannot be said that its sole or primary function is its use for generating electricity because its primary function is to supply for sale both electricity and heat. On the appellant's argument the same level of value would be extended still further to a hereditament whose primary function was an entirely different one, the value of which in that respect was unrelated to the declared net capacity of its generating plant.