Iarnrod Eireann v Commissioner for Valuation (Approved)

Factual and Procedural Background

This matter concerns an appeal by way of case stated from the Valuation Tribunal pursuant to the Valuation Act 2001. The appeal arises from a global valuation certificate issued by the Commissioner of Valuation in November 2015, with a valuation date of 31 March 2014, relating to the national railway network operated by a public utilities company ("the Appellant"). The global valuation was conducted on a Receipts and Expenditure ("R & E") basis using the Appellant's 2014 published accounts.

The dispute centers on two main issues in the valuation calculation: the treatment of depreciation of the Appellant’s tenant’s assets (mainly rolling stock, plant, and machinery) and the inclusion of a payroll saving arising from a pay reduction agreement effective from October 2014 to October 2016. The Appellant contended that depreciation should be fully allowed as an expense and that the payroll saving should not reduce the valuation. The Commissioner excluded depreciation on the basis that it was a notional allowance rather than actual expenditure and included the payroll saving in the valuation calculation.

The Tribunal agreed with the Appellant, holding that depreciation of tenant’s assets is an allowable expense in principle but required expert evidence to determine the appropriate level of allowance. The Tribunal also found that the payroll saving should not have been taken into account as it was a once-off event not contemplated at the valuation date. The Commissioner appealed these determinations to the High Court by way of case stated.

Legal Issues Presented

1. Whether the Tribunal erred in law in determining that depreciation of the Appellant's tenant's items is an allowable expense in the R & E calculation.
2. Whether the Tribunal erred in law in determining that the payroll saving of €4,080,000 resulting from the Pay Reduction Agreement should not have been included as a reduction in the Appellant's costs in the Respondent's R & E calculation.
3. Whether the Tribunal erred in law in determining that the Respondent was not entitled to have regard to the Pay Reduction Agreement concluded in September 2014, while simultaneously accepting that the NAV of the Subject Property was to be assessed on the Appellant's 2014 accounts.

Arguments of the Parties

Appellant's Arguments

• Depreciation represents the consumption of economic benefits of tenant’s assets and is a legitimate expense that should be fully allowed in calculating the net annual value (NAV) under the R & E method.
• The hypothetical tenant is presumed to bear the cost of providing moveable assets, including rolling stock, and depreciation of these should be factored into the hypothetical rent, thereby reducing the valuation.
• The pay reduction agreement was a once-off event not contemplated at the valuation date and thus should not affect the valuation.
• Reliance on historic cost depreciation figures is acceptable with appropriate adjustments, consistent with established accounting standards and Supreme Court precedent.
• The approach allowing for an averaging out of renewal costs over time, as supported by case law, aligns with the depreciation approach advocated.

Respondent's Arguments

• Depreciation is a notional allowance and not an actual expenditure; therefore, it should not be deducted as a working expense in the R & E calculation.
• The State funds the renewal of rolling stock; thus, no allowance for depreciation of such assets is warranted in the valuation.
• The Tribunal’s reliance on the RICS Guidance Note is misplaced because it lacks legal authority in Ireland and has not been prepared with input from Irish rating experts.
• The Tribunal erred in permitting depreciation as an autonomous expense without evidence of actual renewal expenditure.
• There is an apparent inconsistency in admitting the 2014 accounts for valuation purposes but excluding the payroll saving arising from a pay reduction agreement concluded shortly after the valuation date.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court acknowledged the artificiality inherent in valuing public utility undertakings, where no open market lettings exist. The R & E method is the established approach for such valuations, endorsed by precedent.

Regarding depreciation, the Court examined the differing views of the parties and the Tribunal. The Commissioner viewed depreciation as a notional accounting allowance, not an actual expense deductible in valuation, particularly absent actual renewal expenditure. The Tribunal, supported by the Appellant and certain precedents, found that depreciation of tenant’s assets is an allowable expense reflecting the capital invested by the tenant and the need to replace assets over time.

The Court found no legal rule prohibiting depreciation as an allowable expense and noted the Supreme Court’s recognition in Great Northern Railway that capital costs of rolling stock, less proper depreciation, factor into hypothetical rent. The Court also considered the Hibernian Wind Power decision, where an annual sinking fund for replacement was accepted as a tenant expense, consistent with depreciation allowance.

The Court rejected the Commissioner’s rigid interpretation of the RICS Guidance Note, concluding that the valuation method must be flexible and fact-specific, allowing for depreciation without requiring actual renewal expenditure at the valuation date. The Tribunal’s requirement for expert evidence to determine the appropriate level of depreciation was deemed a reasonable approach to ensure a principled and evidence-based valuation.

On the payroll saving issue, the Court agreed with the Tribunal that the hypothetical tenant, valuing the property at the valuation date, would not have contemplated the post-valuation pay reduction agreement. Therefore, the payroll saving was not a reliable factor to reduce the valuation. The Court found no inconsistency in using the 2014 accounts generally but excluding future events not contemplated at the valuation date.

Holding and Implications

The Court's final ruling was to affirm the decision of the Tribunal.

The Tribunal did not err in law in determining that depreciation of the Appellant's tenant's assets is an allowable expense in the R & E valuation method, subject to expert evidence to quantify the appropriate allowance based on market value and condition of assets.

The Tribunal also correctly held that the payroll saving arising from the pay reduction agreement concluded after the valuation date should not reduce the valuation.

The decision clarifies that while depreciation need not be based on actual renewal expenditure, it must be evidence-based and reflect the economic reality of asset consumption. The ruling preserves flexibility in the valuation of public utility properties and underscores the importance of principled, fact-specific assessments rather than rigid accounting interpretations.

No new precedent was established beyond affirming the existing legal framework for valuation under the Valuation Act 2001 and relevant case law.