Pride Park: Because You’re Worth It
A previous Football Law article provided an explanation of charges brought by the English Football League (“EFL”) against Sheffield Wednesday FC (“SWFC”) and Derby County FC (“DCFC”) in respect of, inter alia, those clubs’ sales of their stadiums. Both charges have now been determined before an Independent Disciplinary Commission (“IDC”).
EFL’s charges against SWFC related to the date of the sale of Hillsborough and the appropriate accounting method that should have been applied in respect of that sale. The IDC in SWFC’s case decided that SWFC had breached the Championship Profitability and Sustainability Rules (“CPSR”) by including the sale of Hillsborough in its accounts for the year ending 31 July 2018 whereas it should have been accounted for in its accounts for the year ending 31 July 2019. SWFC were subsequently sanctioned with a 12-point deduction effective from the start of the EFL Championship’s 2020/2021 season.
This author discussed the IDC’s decision in SWFC’s case in this episode of the Price of Football podcast.
DCFC’s charges related to (i) the ‘Fair Market Value’ of Pride Park when it was sold in 2018 and whether DCFC had incurred losses in excess of the ‘Upper Loss Threshold’ permitted under the CPSR (“the First Charge”); and (ii) the use of amortisation methods in respect of player transfers (“the Second Charge”). The IDC in DCFC’s case dismissed the First Charge, and the Second Charge was only proved in one out of five particulars of that Second Charge.
This article focuses on DCFC’s case, in particular the First Charge and explaining how the IDC arrived at its decision dismissing the First Charge. For those interested in the Second Charge, this episode of the Price of Football podcast (from two minutes in) provides a helpful summary of the same.
As indicated above, an explanation of the background to the First Charge, and an explanation of the CPSR generally is provided in this previous Football Law article. If you are unfamiliar with either of those points it is recommended that you read those explanations.
Factual findings of the IDC
In spring 2018 DCFC provided to the EFL its financial information for the three-year period ending 30 June 2018 in accordance with CPSR, regulation 2.2. DCFC’s CPSR, Appendix 1 Form showed that DCFC’s actual and forecasted loss before tax for that three-year period was £50,043,000, and its Adjusted Earnings Before Tax for that three-year period was -£37,675,000.[1]
On 25 April 2018 DCFC provided to the EFL a revised CPSR, Appendix 1 Form, which still showed DCFC’s actual and forecasted loss before tax for that three-year period as £50,043,000 but its Adjusted Earnings Before Tax for that three-year period had been amended to -£43,927,000.[2]
As things stood at that time, DCFC’s Adjusted Earnings Before Tax of -£43,927,000 for the relevant three-year period were forecasted to be in excess of the Upper Loss Threshold of £39,000,000 permitted under CPSR, regulations 2.9 and 3. However, DCFC’s financial year end for year T of the relevant three-year period was 30 June 2018, therefore giving DCFC time to consider steps it could take to avoid being in excess of the Upper Loss Threshold for the relevant three-year period.[3]
One such step was selling Pride Park, and it was agreed in principle that DCFC – The Derby County Football Club Limited (CRN: 00049139), the company entity of DCFC – would sell Pride Park to Melvyn Morris, the owner and chairman of DCFC.
In May 2018 DCFC sought a valuation of Pride Park from Jones Lang Lasalle (“JLL”) – real estate specialists – which was then provided in June 2018. JLL provided the following valuations of Pride Park:
A profits basis valuation of £81,100,000;
A depreciated replacement cost valuation of £74,400,000; and
A market rent valuation of £4,160,000 per annum.[4]
Further, at the same time, DCFC sought clarification from the EFL on whether the sale of Pride Park could be used by DCFC to satisfy the CPSR requirements.[5] The EFL confirmed, as was also confirmed in The English Football League v Sheffield Wednesday FC, 16 July 2020 and 4 August 2020, that clubs are permitted to sell their stadia for the purposes of complying with CPSR.[6] The EFL also confirmed that (i) where a club sells its stadium to another company and that other company is also owned by the owner of the club, such a sale would be a Related Party Transaction pursuant to CPSR, regulations 1.1.10 and 2.3; and (ii) when a transaction is a Related Party Transaction, the club is required to prove that the transaction was at Fair Market Value pursuant to CPSR, regulations 1.1.8 and 2.3.[7] If a club is unable to demonstrate that a Related Party Transaction was at a Fair Market Value then the EFL is entitled to restate the transaction for what it considers to be Fair Market Value. The ‘simplest’ way that a club can demonstrate that a Related Party Transaction was at a Fair Market Value is through an ‘independent external valuation’.[8]
Consequently DCFC had a meeting with EFL on 22 June 2018 wherein the EFL was provided with information of JLL’s valuations of Pride Park.[9] Further, on 26 June 2018 DCFC forwarded an email to the EFL that was ‘purported to have been sent to [DCFC] by JLL at 18:01 on 21 June 2018’ and which explained JLL’s calculations for its valuations (“the DCFC 26.6.2018 Email”).[10]
The EFL responded to this email on the same day, indicating that if JLL produced an ‘official signed report’ reflecting those calculations then such a report ‘would be reasonable to support a sales price [of Pride Park]’.[11] Later on that same day, JLL provided a ‘valuation letter’ to DCFC, which confirmed (i) the valuations stated above; and (ii) that on the basis of JLL’s market rent valuation, DCFC would be charged an annual rent of £1,000,000 to use Pride Park on the basis of c. 100 days’ use of Pride Park each year (“the 26.6.2018 Valuation Letter”).[12] Again on the same day, DCFC provided the 26.6.2018 Valuation Letter to the EFL and the EFL responded acknowledged that the same ‘is fine and… your comments regarding rental on the face of it are also OK from our perspective’.[13]
Following the EFL’s acknowledgement, on 28 June 2018 DCFC provided to the EFL a revised CPSR, Appendix 1 Form, which now showed DCFC’s loss before tax for the relevant three-year period as £91,024,000, and its Adjusted Earnings Before Tax for that three-year period as -£22,482,000.[14] DCFC’s revised figure for its Adjusted Earnings Before Tax for the relevant three-year period was now under the CPSR’s Upper Loss Threshold of £39,000,000 (but still in excess of the CPSR’s Lower Loss Threshold of £15,000,000 (CPSR, regulations 2.6, 2.8 and 3.1)).
On the same day, DCFC entered (i) a contract with Gellaw Newco 202 Limited (CRN: 11422836) (“GN202”) for the sale of Pride Park to GN202 for £81,100,000; and (ii) a lease with GN202 for DCFC’s use of Pride Park for an unlimited amount of days each year at an annual rent of £1,139,726 (“the Lease”).[15]
On 30 June 2018 JLL produced its final valuation report in respect of Pride Park, which confirmed the valuations stated above (“JLL Valuation Report”).[16]
On 3 July 2020 the EFL emailed DCFC raising several queries, which included:
Whether for the purpose of ‘getting [DCFC] through this process as soon as possible’ the depreciated replacement cost valuation of £74,400,000 could be used as the valuation of Pride Park rather than the profit basis valuation of £81,100,000;
It would be open to DCFC to ‘discuss… in the future’ the profit basis valuation of £81,100,000 as the valuation of Pride Park if DCFC wanted to justify the same; and
How the market rent valuation of £4,160,000 per annum had been reduced to £1,139,726 under the Lease.[17]
DCFC replied to the EFL on the same day:
DCFC agreed to the use of the depreciated replacement cost valuation of £74,400,000 as the valuation of Pride Park;
DCFC Informed the EFL that it could ask any questions it had in respect of the profit basis valuation of £81,100,000 as the valuation of Pride Park; and
DCFC provided information and calculations in respect of the annual rent of £1,139,726 under the Lease.[18]
On 4 July 2018 the EFL emailed DCFC stating that ‘[following] our review we can confirm that [DCFC] has fulfilled the [CPSR] Requirement for the 2017/2018 Reporting Period’.[19] Further, following EFL’s use of the depreciated replacement cost valuation of £74,400,000 as the valuation of Pride Park, the EFL recalculated DCFC’s CPSR figures to now show an Adjusted Earnings Before Tax for the relevant three-year period of -£29,491,000.
What followed those events is what caused the EFL to bring the First Charge:
On 24 December 2018 DCFC emailed the EFL in respect of the valuation of Pride Park, referring to the option for DCFC to ‘discuss… in the future’ the profit basis valuation of £81,100,000 as the valuation of Pride Park and for DCFC to justify the same. DCFC maintained that the profit basis valuation of £81,100,000 as the valuation of Pride Park was ‘appropriate and fair in the circumstances’, relying upon the JLL Valuation Report and advice DCFC had received from counsel. Accordingly, DCFC sought the EFL’s confirmation that the profit basis valuation of £81,100,000 as the valuation of Pride Park could be used by DCFC in its CPSR financial information.[20]
On 16 January 2019 the EFL replied to DCFC requesting that DCFC provide justification and documentary support that the profit basis valuation of £81,100,000 as the valuation of Pride Park represents Fair Market Value.[21]
On 28 January 2019 DCFC provided to the EFL a ‘paper outlining… the main lines of argument… in justifying to the [EFL] that the Profits valuation method should be used in our [CPSR] calculation’, and on 8 February 2019 DCFC provided to the EFL ‘additional information and documents’ in respect of the same.[22]
On 18 February 2019 the EFL, upon consideration of that information provided by DCFC, (i) concluded that the profit basis valuation of £81,100,000 as the valuation of Pride Park was ‘not a materially unreasonable price to have used’; and (ii) accepted that DCFC’s ‘2017/18 [CPSR] Result can be adjusted to reflect the £81.1m sales price’.[23]
On 29 March 2019 DCFC provided to the EFL – 28 days after the required date – its financial information for the three-year period ending 30 June 2019. DCFC’s CPSR, Appendix 1 Form showed that DCFC’s actual and forecasted loss before tax for that three-year period was £60,448,000 and its Adjusted Earnings Before Tax for that three-year period was -£37,717,000.[24] DCFC’s Adjusted Earnings Before Tax for this three-year period was therefore under the CPSR’s Upper Loss Threshold of £39,000,000 (but in excess of the CPSR’s Lower Loss Threshold of £15,000,000).
Middlesbrough FC (“MFC”) then entered the picture by writing a letter to the EFL in respect of DCFC’s sale of Pride Park to GN202 and the Lease, querying that the same had been done to manipulate DCFC’s compliance with the CPSR.[25] The EFL replied to MFC and informed them that ‘the sale of a Stadium is not prohibited under the [CPSR], even if it is to a related party, as long as there is an independent valuation to support the transaction’.[26] MFC’s umbrage did not end there:[27]
On 24 May 2019 MFC sent a letter before claim, contending that DCFC’s sale of Pride Park had been impermissible and, inter alia, that the sale of Pride Park to GL202 had not been ‘carried out at arm’s length’ (CPSR, regulation 1.1.18).
On 19 June 2019 the EFL replied to MFC explaining that the EFL is ‘undertaking a review of some specific items within [DCFC’s] accounts in the context of the [CPSR] for the 2017/18 Reporting Period’.
On 30 July 2019 MFC, unsatisfied with the EFL’s reply, confirmed that they would prepare arbitration proceedings against the EFL unless the EFL confirmed that disciplinary proceedings were being brought against DCFC, or the date by which EFL’s investigation into DCFC would be completed.
On 12 August 2019 MFC sent to the EFL a draft notice of arbitration.
On 16 August 2019 the EFL informed MFC that an independent valuation of Pride Park had been commissioned by the EFL and once this valuation had been received the EFL would decide whether the valuation of Pride Park was at Fair Market Value.
On 22 August 2019 MFC agreed to defer the commencement of arbitration proceedings.
On 6 September 2019 MFC served a notice of arbitration on the EFL, which (i) challenged the permissibility of DCFC including in its Adjusted Earnings Before Tax the profits generated by DCFC’s sale of Pride Park; and (ii) alternatively, contended that the EFL had failed to determine the Fair Market Value of Pride Park and restate the Fair Market Value of the sale of Pride Park.
Those arbitration proceedings were ultimately stayed on 29 November 2019 on terms that, inter alia, the EFL will bring disciplinary proceedings against DCFC on the conditions that (i) the EFL complies with CPSR, regulations 2.3 and 2.4 and (ii) ‘[DCFC’s] Adjusted Earnings Before Tax in 2017/18 and/or any other season [result] in a loss that exceeds the [Upper Loss Threshold] in accordance with [CPSR, regulation 2.9]’.
As a result of that interjection from Middlesbrough FC (which although prompted what follows did not have any bearing upon the IDC’s decision), on 11 July 2019 the EFL wrote to DCFC explaining, inter alia, that there was an ongoing review in respect of DCFC’s ‘2017/18 actual financial results against its [CPSR] Calculation’ and DCFC’s ‘actual results for the 2018/19 financial period against the [CPSR] Calculation’.[28] The EFL also warned DCFC that if either of those reviews resulted in DCFC exceeding the Upper Loss Threshold (presumably for either relevant three-year period) then DCFC would be referred to a Disciplinary Commission (CPSR, regulation 2.9).
As part of that review process, in September 2019 the EFL instructed Wilks, Head and Eve (“WHE”), a firm of valuers, to consider the JLL Valuation Report.[29] WHE’s involvement consisted of:
Sending queries and requests for information to DCFC to be passed on and answered directly by JLL. It appears that DCFC never sent the same on to JLL.[30]
Producing a valuation report (“the WHE Valuation Report”) which the EFL provided to DCFC on 2 December 2019, and which considered Fair Market Value for Pride Park at the time it was sold to GL202 to have been ‘in the range of £42,000,000 to £50,000,000’.[31] When providing the WHE Valuation Report to DCFC and based upon the valuation of Pride Park contained in the same, the EFL also explained to DCFC that the EFL must ‘consider whether it wishes to restate the Fair Market Value of Pride Park’ (CPSR, regulation 2.3).[32]
The WHE Valuation Report used different inputs to that used in the preparation of the JLL Report. In particular:
JLL had based its valuation on a cost of £3,000 per seat at Pride Park while WHE had based its valuation on a cost of £1,600 - £1,950 per seat;
JLL had based its valuation on the actual capacity of Pride Park (33,455 seats) while WHE had based its valuation on capacity ‘adjusted… to reflect utilisation’; and
JLL had based its valuation on a land value of £4,100,000 while WHE had based its valuation on a land value of £3,320,000.[33]
On 6 December 2019 DCFC replied to the EFL contending that the EFL had ‘no power… to consider whether to restate the Fair Market Value of Pride Park’ when it had already (i) initially accepted the depreciated replacement cost valuation of £74,400,000 as the valuation of Pride Park; and (ii) had then later accepted the profit basis valuation of £81,100,000 as the valuation of Pride Park.[34]
On 6 January 2020 members of the EFL’s Executive (its director of legal affairs and two finance directors) held a meeting to ‘consider [CPSR, regulation 2.3] in the context of [DCFC’s] sale of Pride Park’.[35] During this meeting, inter alia:
Consideration was given to the correspondence between the EFL and DCFC, in particular the correspondence during June 2018;
It was noted that in preparation of the JLL Valuation Report, JLL had ‘primarily undertaken a [depreciated replacement cost valuation]’;
Consideration was given to advice from counsel, and an opinion was reached that neither the depreciated replacement cost valuation nor the profits valuation provided by JLL was ‘capable of satisfying the definition of Fair Market Value’;
It was noted that whilst the EFL had accepted previously the depreciated replacement cost valuation of £74,400,000 as the valuation of Pride Park, this was no longer considered ‘a valuation method satisfying the definition of Fair Market Value’. This was the reason why the WHE Valuation Report had been commissioned. (The EFL’s acceptance on 18 February 2019 of the profit basis valuation of £81,100,000 as the valuation of Pride Park appears to have not been part of the discussions at this point.);
Consideration was given to the WHE Valuation Report and it was noted that the WHE Valuation Report considered the profit basis valuation of £81,100,000 as the valuation of Pride Park ‘to be too unreliable’, and that the depreciated replacement cost valuation of £74,400,000 as the valuation of Pride Park was ‘not one which can necessarily reflect disposal on the open market’.
Consideration was given to DCFC’s right to apply to a Disciplinary Commission to review a decision of the EFL to restate the sale of Pride Park to a Fair Market Value (CPSR, regulation 6).
Based upon the WHE Valuation Report’s top-end valuation of Pride Park of £50,000,000, a decision was made ‘to restate the Fair Market Value of the sale of Pride Park... to £50m’ and for DCFC’s CPSR calculations for 2017/2018 and 2018/2019 to be amended to reflect that restatement.
On 16 January 2020 the EFL charged DCFC with breaches of the CPSR ‘for recording losses in excess of the permitted amounts provided for in EFL Regulations for the three-year period ending 30 June 2018’.
The IDC’s decision in respect of the First Charge
Procedural Defences
It is worth noting that the IDC dismissed each of the procedural defences raised by DCFC in respect of the First Charge. These included a procedural defence that the EFL had already determined the Fair Market Value of Pride Park before January 2020, and those procedural defences considered in this previous Football Law article, such as promissory estoppel, estoppel by convention and legitimate expectation.[36] In respect of those four procedural defences in particular, the IDC stated:
Fair market value determined before January 2020: the IDC stated that ‘there is nothing in the [CPSR] to prevent the EFL from revisiting an assessment of Fair Market Value reached in year ‘T’ when that year has become T-1 or T-2, or to limit the EFL to doing so only in ‘exceptional cases’ such as the discovery of a new fact’.[37] Further, the IDC stated:
‘There is nothing unusual or objectionable about the EFL
i) ‘passing’ a club’s [CPSR] submission based on figures and information provided by that club, and then
ii) subsequently carrying out an assessment of that [CPSR] submission following whatever investigations it considers appropriate and in light of any further information provided or obtained
…
The position was no different in February 2019… Discussions about using a figure of £81.1m in place of £74.3m for the value of Pride Park were simply a continuation of the discussions that had gone on [in June and July 2018]’.[38]
Promissory estoppel: irrespective of the representations relied upon by DCFC – which are not specified in the IDC’s written reasons but which the IDC decided in any event were not clear and unequivocal promises or representations – the IDC stated that ‘fundamentally, we reject the suggestion that estoppel principles deriving from private law are applicable without modification to ‘cramp’… [the] exercise by a regulator of its obligations under Rules and Regulations which form a framework governing relations not just between it and one club, but between it and all clubs’.[39] The IDC was of the opinion that the doctrine of estoppel cannot be used ‘against a public body’ and that the proper legal basis for any complaint is ‘legitimate expectation’.[40] With respect, this author considers this opinion of the IDC to be undermined by:
The EFL not being a public body;
A failure by the IDC to give weight to the contractual relationship between the EFL, its clubs and the applicability of the EFL’s Regulations (EFL Regulations, regulation 3.1); and
The jurisprudence in EFL v Birmingham City (explained in this Football Law article) where both parties argued for the application of, and an IDC and League Arbitration Panel applied, contractual principles in respect of the CPSR.
Estoppel by convention: for the same fundamental reasoning given in respect of promissory estoppel, the IDC considered that estoppel by convention was not a defence available to DCFC.[41]
Legitimate Expectation: upon much of the same reasoning applied by the IDC in respect of promissory estoppel and deciding that the representations relied upon by DCFC were not clear and unequivocal promises or representations, the IDC considered that the same representations were not ‘clear, unambiguous and devoid of relevant qualification’ for the purposes of a defence of legitimate expectation.[42] The IDC also applied reasoning echoing that given in respect of the procedural defence that that the EFL had already determined the Fair Market Value of Pride Park before January 2020.[43] Upon that basis, the IDC dismissed this defence as DCFC was unable to establish that there was an enforceable legitimate expectation that the EFL would accept £74,400,000 or £81,100,000 as the valuation of Pride Park.
Substantive issue
As stated at the beginning of this article, the IDC dismissed the First Charge, and made the following determinations and declarations:
‘The… £81.1m recorded in the Club’s Annual Accounts as the consideration paid for Pride Park fell squarely within the range of figures representing the Fair Market Value of Pride Park as at June 2018
…
… the EFL has not satisfied us
i) that the consideration included in [DCFC’s Adjusted] Earnings Before Tax arising from the sale of Pride Park was not recorded at a Fair Market Value, or
ii) that it was justified in purporting to restate that consideration to the figure of £50 million (or any figure below £81.1m) in January 2020’
… [We] declare that [DCFC] was (and is) entitled to use the consideration of £81.1m
i) That it received from the sale of Pride Park, and
That is recorded in its Annual Accounts for the financial year ended 30 June 2018 for the purposes of the [CPSR] and in its 2018, 2019 and 2020 [CPSR] Submissions for the purpose of the [CPSR]…
As a result…
a) The aggregation of [DCFC’s] Adjusted Earnings Before Tax for T, T-1 and T-2 (when T was the financial year ended 30 June 2018) did not result in a loss that exceeded the [Upper Loss Threshold]
b) The aggregation of [DCFC’s] Adjusted Earnings Before Tax for T, T-1 and T-2 (when T was the financial year ended 30 June 2019) did not result in a loss that exceeded the [Upper Loss Threshold]’.[44]
In reaching this decision, the IDC considered the expert evidence that had been relied upon by each party in respect of the Fair Market Value of Pride Park. The EFL relied upon expert evidence Mr Roger Messenger, a senior partner at WHE. DCFC relied upon expert evidence from Mr Christopher Honeywill, director of consultant surveyors Lambert Smith Hampton.[45]
In assessing the expert evidence, the IDC treated parts of Mr Messenger’s evidence with care ‘and on more than one occasion [preferred] the views expressed by Mr Honeywill’.[46]
The experts agreed that the profits basis valuation method is ‘unreliable as a primary method of valuing a football stadium’.[47] The experts also agreed that the depreciated replacement cost (“DRC”) valuation method is the primary and most appropriate method of valuing a football stadium, and is defined as:
‘[The] current cost of replacing an asset with its modern equivalent asset… less deduction for physical deterioration and all relevant forms of obsolescence and optimisation…
Using the DRC method to value… a stadium thus requires the valuer to (i) estimate the rebuild cost of a new equivalent stadium as at the valuation date, (ii) discount that figure to account for matters such as obsolescence and depreciation, and (iii) adjust the discounted figures to reflect finance costs and land value’.[48]
The experts were not agreed on two issues in respect of the DRC valuation:
Firstly, the ‘Build Cost’ (which is understood to be reflective of point (i) above). Both experts adopted a ‘cost per seat’ approach, with Mr Messenger applying a cost per seat in a range of £1,840 to £2,185, and Mr Honeywill applying a cost per seat of £3,500.[49]
Secondly, the ‘Capacity to Adopt’ which is the multiplicand applied to the Build Cost/cost per seat (the multiplier). Mr Messenger applied a multiplicand of 28,000 (the average attendance at Pride Park for the past three seasons), and Mr Honeywill applied a multiplicand of 33,455 (Pride Park’s capacity).[50]
In respect of the ‘Capacity to Adopt’, the IDC rejected Mr Messenger’s multiplicand of 28,000 for seven reasons, which included (i) using an ‘average attendance’ was an approach that only Mr Messenger alone appears to take and one that Mr Honeywill had never seen adopted by any other valuer; (ii) it was not an approach recommended in the professional RICS Guidance on DRC valuations; (iii) football stadiums rarely achieve full capacity in any event due to crowd control measures separating home and away fans by keeping seats between the two sets of fans empty; (iv) similarly, away fans receive a ticket allocation for each match which they may not sell out; and (v) there was an over-reliance upon seating capacity alone rather than Pride Park’s ‘service potential’ and a lack of ‘commercial logic’.[51] As such, the IDC preferred and adopted Mr Honeywill’s multiplicand of 33,455 seats.[52]
In respect of the ‘Build Cost’, the IDC assessed the experts’ approach to considering a modern equivalent asset:
As noted above, when using the DRC valuation method, it is necessary to consider a modern equivalent asset (“MEA”). When considering an MEA, the IDC noted the RICS Guidance on DRC valuations that stated ‘[the] general principle is that the costs reflect those of a modern equivalent asset that offers an equivalent service potential to the actual asset’.[53]
The experts agreed during their oral evidence before the IDC that what is needed when assessing a MEA is:
‘… a consideration of the qualities and facilities offered by the subject stadium; once that exercise has been carried out, (1) the qualities and facilities required of the hypothetical equivalent in order to offer an equivalent level and quality of service can be identified, and (2) an assessment of the cost of constructing that hypothetical equivalent can take place’.[54]
Whereas Mr Messenger had described Pride Park as a ‘bog standard’ middle-of-the-range stadium, Mr Honeywill identified that Pride Park was above such a level because of its original features such as its bowl-type structure and ability to be expanded to accommodate a further c. 11,000 seats, and expenditure of c. £9,000,000 since 2016 to upgrade Pride Park.[55]
The IDC preferred Mr Honeywell’s evidence on this point, and this affected what comparable stadia were to be considered for assessing construction costs of an MEA.[56]
When considering the experts’ evidence on comparable stadia, it was noted that there was a ‘paucity of reliable evidence as to what particular stadia had cost to build’.[57]
Mr Messenger identified eight stadia that he considered the best indication of construction costs for an MEA, the majority of which the IDC noted were not equivalent to Pride Park in quality or facilities.[57] Mr Honeywill identified five stadia that he considered the best indication of construction costs for an MEA, including new stadia yet to be opened for Brentford FC (cost per seat of £4,058), AFC Wimbledon (cost per seat of £3,500) and Southend United (cost per seat of £3,500).[58]
The IDC placed ‘considerable weight… on the realities of building a stadium in recent years’, of which Mr Honeywell had ‘first-hand experience of’ whereas Mr Messenger did not:
‘We saw no reason to reject Mr Honeywill’s evidence about those construction projects [of Brentford FC, Wimbledon FC and Southend FC] and we found the factual information that he was able to give about the costs involved in the construction of those stadia to be extremely useful. The information demonstrated that a benchmark in the region of £3,500 per seat… is a realistic construction nowadays for stadia such as [Brentford FC, Wimbledon FC and Southend FC], albeit that… certain of those projects may well also include elements over and above the construction of the stadium itself’.[59]
The IDC considered that a ‘cost of less than £3,000 per seat buys a club only a relatively basic stadium’ and that Mr Messenger’s range of £1,840 to £2,185 was unrealistic.[60] Further, considering that stadia with a cost per seat in excess of £4,000 were for ‘unique’ and ‘state of the art’ stadia, the IDC considered that an MEA of Pride Park in 2018 would have a cost per seat of not less than £3,000 but no more than £3,500.[61]
Applying that Build Cost (£3,000 - £3,500) to the Capacity to Adopt (33,455) meant that an MEA for Pride Park would cost between £100,365,000 to £117,092,500. The IDC then needed to consider what discount to apply to those figures for ‘obsolescence and depreciation’, and the additions to make to the discounted figure for ‘finance costs’ and ‘land value’.
The IDC, considering that they had found Mr Honeywill’s evidence to be ‘generally… more reliable’, adopted Mr Honeywill’s discount of 30.5% for ‘obsolescence and depreciation’.[62]
The IDC adopted a cost of 5% of the discounted amount for ‘finance costs’ as the experts agreed on this cost.[63]
The IDC, again accepting Mr Honeywill’s evidence, adopted a land valuation (i.e. the land upon which Pride Park is built) of £4,100,000.[64]
Making calculations upon those figures, the DRC Valuation for Pride Park in 2018 was between £77,341,358 to £89,548,251. Considering those figures, the IDC was able to determine that the ‘£81.1m recorded in the Club’s Annual Accounts as the consideration paid for Pride Park fell squarely within the range of figures representing the Fair Market Value of Pride Park as at June 2018’ and the determinations and declarations quoted above were made.
Conclusion
DCFC will be glad to have this dispute behind them (presuming that the EFL does not appeal against the IDC’s decision by 8 September 2020), and it is fair to assume, with respect, that Mr Messenger will not be the EFL’s expert of choice in future disputes concerning Fair Market Value of stadia.
Footnotes
[1] The English Football League v Derby County FC, 24 August 2020, [68].
[2] Ibid, [69].
[3] Ibid, [71].
[4] Ibid, [72].
[5] Ibid, [73].
[6] Ibid, [74].
[7] Ibid, [75].
[8] Ibid.
[9] Ibid, [76].
[10] Ibid, [77].
[11] Ibid, [78].
[12] Ibid, [79].
[13] Ibid, [80].
[14] Ibid, [81].
[15] Ibid, [82].
[16] Ibid, [83].
[17] Ibid, [87].
[18] Ibid, [88].
[19] Ibid, [91].
[20] Ibid, [92].
[21] Ibid, [93].
[22] Ibid, [94]-[95].
[23] Ibid, [96]-[98].
[24] Ibid, [100]-[101].
[25] Ibid, [103].
[26] Ibid, [104].
[27] Ibid, [115]-[120].
[28] Ibid, [106]; [164].
[29] Ibid, [107].
[30] Ibid.
[31] Ibid, [108].
[32] Ibid.
[33] Ibid, [112(h)] and [178].
[34] Ibid, [109].
[35] Ibid, [112].
[36] Ibid, [133]-[170].
[37] Ibid, [135].
[38] Ibid, [135(d)]-[137].
[39] Ibid, [146].
[40] Ibid.
[41] Ibid, [149].
[42] Ibid, [152]-[153].
[43] Ibid, [154]-[155].
[44] Ibid, [209]-[211].
[45] Ibid, [25].
[46] Ibid, [176].
[47] Ibid, [179(a)(ii)].
[48] Ibid, [179(a)(i)].
[49] Ibid, [179(b)(i)].
[50] Ibid, [179(b)(ii)].
[51] Ibid, [185].
[52] Ibid, [186].
[53] Ibid, [188].
[54] Ibid, [190].
[55] Ibid, [191] and [173].
[56] Ibid, [192].
[57] Ibid, [199(a)] and [203(e)].
[58] Ibid, [199(b)].
[59] Ibid, [203(g)].
[60] Ibid, [203(i)]-[204(b)].
[61] Ibid, [204(c)-(d)].
[62] Ibid, [206(c)].
[63] Ibid, [206(b)].
[64] Ibid, [206(d)].
7 September 2020