Commissioner of Valuation v Hibernian Wind Power Ltd

• Jurisdiction: Ireland
• Judge: Alexander Owens
• Judgment Date: 26 January 2021
• Neutral Citation: [2021] IEHC 49
• Docket Number: [2019 No. 1436 SS]
• Court: High Court
• Date: 26 January 2021

BETWEEN

COMMISSIONER OF VALUATION

APPELLANT

V.

HIBERNIAN WIND POWER LIMITED

RESPONDENT

[2021] IEHC 49

Alexander Owens

[2019 No. 1436 SS]

THE HIGH COURT

Case stated – Valuation certificate – Wind farm – Appellant appealing by way of case stated – Whether the Valuation Tribunal was correct in law in disregarding valuation evidence

Facts: The appellant, the Commissioner of Valuation, brought an appeal by way of case stated arising from a decision of the Valuation Tribunal of 6 February 2018 fixing the valuation certificate for a wind farm at Grouselodge, Rathkeale in County Limerick at the revaluation date of 1 March 2012 at the net annual value (NAV) of €1,020,000. The substance of the first question asked is whether the Tribunal was correct in law in assessing the NAV of the wind farm on the footing that s. 48(3) of the Valuation Act 2001 allows a deduction of an average annual amount calculated over a 15-year period to establish a fund to enable that tenant to replace physical assets which will be worn out at the end of a 20-year period. The substance of the second question asked is whether the Tribunal was correct in law in disregarding valuation evidence which extrapolated from financial accounts relating to ten wind farms in County Limerick (including the Grouselodge wind farm) and used an average price per megawatt hour and an average operational cost per megawatt hour to arrive at an average NAV per megawatt of capacity for the Grouselodge wind farm.

Held by Owens J that the wording of s. 48(3) of the 2001 Act does not permit the “probable average annual cost” of an outlay which will be necessary in order to maintain the property in its current state at the end of 20 years to be calculated by reference to a 15-year period. He held that the requirement to average out the probable costs and expenses “that would be necessary to maintain the property” and quantify them as an annual amount has a clear context. He held that the purpose is to arrive at “the rent for which, one year with another, the property might..., be reasonably expected to let from year to year” at the valuation date on the basis of a yearly tenancy which is of indefinite duration. He held that the potential hypothetical tenant bidding to occupy the property is only concerned with the “probable average annual cost of the...expenses (if any) that would be necessary to maintain the property” in its actual state. He held that commercial considerations which might motivate a tenant to choose to make advance provision by setting aside annually into reserves an amount in excess of the probable average annual amount necessary to meet expenses to be borne by the hypothetical tenant under s. 48(3) are not relevant. None of the authorities cited to him at the hearing supported the case made by the respondent, Hibernian Wind Power Ltd, on this issue. He held that his answer to the first question was “no”.

Owens J held that the Commissioner had not identified any legal error in the reasoning which led the Tribunal to reject evidence based on the extrapolation by the valuer of material from the accounts relating to the ten wind farms. He held that his answer to the second question was “yes”.

Case stated.

JUDGMENT of The Hon. Mr. Justice Alexander Owens delivered on the 26th day of January 2021.

1 This is an appeal by way of case stated by the Commissioner of Valuation (the Commissioner) arising from a decision of the Valuation Tribunal (the Tribunal) of 6 February 2018 fixing the valuation certificate for a wind farm at Grouselodge, Rathkeale in County Limerick at the revaluation date of 1 March 2012 at the net annual value (NAV) of €1,020,000. Hibernian Wind Power Limited (HWP) is the respondent. HWP is a subsidiary of the Electricity Supply Board. The property consists of six Nordex N90 2.5 megawatt turbines. I have to deal with two questions.

2 The substance of the first question asked is whether the Tribunal was correct in law in assessing the NAV of the wind farm on the footing that s.48(3) of the Valuation Act 2001 (the 2001 Act) allows a deduction of an average annual amount calculated over a 15-year period to establish a fund to enable that tenant to replace physical assets which will be worn out at the end of a 20-year period. My answer to this question is “ No”.

3 The substance of the second question asked is whether the Tribunal was correct in law in disregarding valuation evidence which extrapolated from financial accounts relating to ten wind farms in County Limerick (including the Grouselodge wind farm) and used an average price per megawatt hour and an average operational cost per megawatt hour to arrive at an average NAV per megawatt of capacity for the Grouselodge wind farm. My answer to this question is “ yes”.

4 Section 48 of the 2001 Act requires that “the value of a relevant property be determined under this Act by estimating the net annual value of the property.” Subject to an exception which is not relevant to this appeal, the “net annual value” is defined in s.48(3) as:

“…, in relation to a property, the rent for which, one year with another, the property might, in its actual state, be reasonably expected to let from year to year, on the assumption that the probable average annual cost of repairs, insurance and other expenses (if any) that would be necessary to maintain the property in that state, and all rates and other taxes in respect of the property, are borne by the tenant.”

5 The Commissioner and HWP were agreed that it was appropriate to value the property using the receipts and expenditure (R&E) method. This is also referred to as the “profits” basis. At para. 16(i) of the case stated, the Tribunal summarises this method of valuation as follows:

“Under this methodology the NAV is ascertained by reference to the Appellant's accounts; working expenses are deducted from gross receipts to get the divisible balance and from the divisible balance the tenant's share (i.e. the amount required to provide a return on any tenant capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit) is deducted. The remainder of the divisible balance, the landlord's share, is the amount available for the rent under the hypothetical tenancy and thus becomes the NAV.”

6 It was common case that the lifetime of wind turbines is 20 years. It was also common case that it was appropriate, when using the R&E method, to make an allowance against gross receipts for the sum which the hypothetical tenant would be required to set aside, year by year, out of revenue in order to provide a sinking fund to cover replacement of the wind turbines. This annual expense is brought into account as a tenant's expense “necessary to maintain” the property in a state to command the hypothetical rent in calculating the sum available as the divisible balance.

7 When the judgments given courts dealing with this issue speak of annual payments to a “sinking fund”, they mean an allowance of the “probable average annual cost” in the sense of a sum which the tenant must “annually” lay by as a reserve and invest “to make good, when it shall become necessary, an inevitable loss by the destructive agency of time…”: see Cockburn C.J. in R (Boxford Overseers) v. Wells (1867) L.R. 2 Q.B. 542 at 548.

8 The Tribunal agreed with the contention of HWP that the period which should be used for the purposes of calculating the annual amount which the tenant would set aside in order to meet the commitment to replace the wind turbines at the end is 15 years and not 20 years. The evidence was that electricity produced by the wind farm is subsidised under a statutory scheme known as “REFIT” which ran for a term of 15 years. This scheme provides price certainty to renewable electricity generators for each unit they provide to the national grid by subsidising the difference between the wholesale price and the “REFIT” price.

9 The effect of using the 15-year term for the accumulation of the sinking fund would be that the hypothetical tenant would accumulate a reserve fund sufficient to replace the turbines at the end of 15 years from the time when they were installed, rather than at the end of 20 years. The reserve fund could then be invested for a further 5 years until the end of the 20 years and so exceed in value the amount needed to replace the turbines. There would be no need to set aside any further annual sums into reserve between the end of year 15 and the end of year 20.

10 Both valuers used the same mathematical formula and underlying assumptions of capital cost per turbine and interest rate in calculating the sinking fund. No adjustment was made on the annual figure which the tenant would put aside to take into account that the reserve to replace the turbines after 20 years will be accumulated by the end of the 15-year period accepted by the Tribunal.

11 If the approach of the Tribunal is correct, it would follow that if the “REFIT” subsidy were to run for a period of ten years from the valuation date, the hypothetical letting envisaged by s.48(3) of the 2001 Act would assume that the tenant would use the ten year period to accumulate a sufficient reserve to replace the turbines and then hold that reserve until it was required to fund replacement of the turbines at the end of the 20 years.

12 The reasoning of the Tribunal is set out at para.10.16 of the decision:

“The hypothetical tenant and the hypothetical landlord have every reason to expect that serious structural problems will arise in respect of the wind farm. There is therefore little reason to distinguish strongly the respective interests of the landlord and the tenant in maintaining the wind farm. Accordingly, the risk of significant expected replacement costs arising from wear and tear to the wind farm as a result of the operation of the tenants' business appears to be within...