Part 9 - The Empty Property Rate and demand in the rating hypothesis

The Empty Property Rate and demand in the rating hypothesis.

1. The Empty Property Rate – legislative background and impact

1. Background

Since 1601 Rating has been a tax on the occupation of land including buildings. In 1966 an additional rate was created providing for rates to be payable by owners on some vacant properties. ‘Owner’ and the ‘class of property’ to which unoccupied rates apply are defined in the Local Government Finance Act 1988 and subsequent Regulations. This has been extended and modified, with the Rating (Empty Properties) Act 2007 being the latest change to empty rate legislation. This Act came into effect on 1 April 2008 and made changes to the empty rate provisions including increasing the unoccupied rate liability for many classes of property.

1.01 Legislation

The Local Government Finance Act 1988 makes provisions in sections 45 and 46 for the rating of unoccupied hereditaments. It defines who is liable to pay rates if a property is vacant and that the unoccupied liability only applies to those hereditaments prescribed by Regulations.

The Non-domestic rating (Unoccupied Property) Regulations 2008 SI 386 defines the classes of hereditament liable for unoccupied property rates.

The Rating (Empty Properties) Act 2007 removes the 50% empty property relief from 1 Aril 2008.

1.02 Unoccupied hereditaments: liability

Owners of hereditaments will be liable for unoccupied rates if all the conditions in the LGFA 1988 s45(1) are met. These are;

1. on the day none of the hereditament is occupied

2. on the day the ratepayer is the owner of the whole hereditament

3. the hereditament is shown for the day in a local non-domestic rating list in force for the year, and

4. on the day the hereditament falls within a class prescribed by the Secretary of State by regulations

Therefore no part of a hereditament must be occupied, the hereditament must be in the local list and be one of the classes prescribed by Regulations.

Owner of the hereditament is defined in section 65(1) as ‘the person entitled to possession of it’.

1.03 Relevant non-domestic hereditament

The class prescribed in s45(1) are all ‘relevant non-domestic’ hereditaments. ‘Relevant non-domestic’ hereditaments are defined in Reg 2 Non-domestic rating (Unoccupied Property) Regulations 2008, SI 2008 No. 386. They are ‘any non-domestic hereditament consisting of, or part of, any building, together with any land ordinarily used or intended for use for the purposes of the building or part.’

The first part of the test is that the hereditament must consist of buildings. As the definition relates to buildings or buildings with land then hereditaments that do not primarily consist of buildings cannot be relevant non-domestic hereditaments under these regulations and will not be liable to the unoccupied rate.

Having defined the class of hereditaments prescribed as being liable to empty property rates Reg 4 of SI 2008 No 386 sets out a list of hereditaments that do not fall within the prescription and are therefore not subject to unoccupied rate.

1.04 Property liable for unoccupied rates

Reg 4 of SI 2008 No. 386 lists hereditaments not prescribed for the empty property rate. These are, in effect, exempt from the empty property rate. They are any hereditament:

(a) which… has been unoccupied for a continuous period not exceeding three months

Properties vacant for up to three months (or 6 months in the case of defined industrial property including warehouses – see below) are not subject to empty property rates for that period. The unoccupied rate is not applied until three months has elapsed since the property became vacant.

Reg 5 covers the possibility that an owner might seek to gain additional three month void periods by quickly re-occupying and then vacating. Any occupation of less than six weeks duration is ignored when determining whether a property has been continuously unoccupied for three months. Therefore successive three months periods cannot be claimed after short periods of occupation.

Where a hereditament has been unoccupied for a period of three months is divided (for example if part is let) into two or more hereditaments, the unoccupied liability is payable on the vacant parts from the date of division without any further three months of non-liability (see Brent London Borough Council v Ladbroke Rentals Ltd 1981 CA RA 153).

A hereditament which has not previously been occupied shall be treated as becoming unoccupied on the day determined under Schedule 4A to LGFA 1988 (completion notice procedure), or where this does not apply, on the day for which the hereditament is first shown in the local rating list.

Changes of ownership do not trigger a fresh three months exemption from unoccupied rates.

(b) which is a qualifying industrial hereditament that… has been unoccupied for a continuous period not exceeding six months

‘qualifying industrial hereditament’ means any hereditament other than a retail hereditament in relation to which all the buildings comprised in the hereditament are-

(a) constructed or adapted for use in the course of a trade or business; and

(b) constructed or adapted for use for one or more of the following purposes, or one or more such purpose and one or more purposes ancillary thereto:-

i. the manufacture, repair or adaptation of goods or materials, or the subjection of goods or materials to any process

ii. storage (including the storage or handling of goods in the course of their distribution)

iii. the working or processing of minerals

iv. the generation of electricity

‘Retail hereditament’ any hereditament where any building or part of building comprised in the hereditament is constructed or adapted for the purpose of the retail provision of-

(a) goods, or

(b) services, other than storage for distribution services, where the services are to be provided on or from the hereditament;

Up until 1 April 2008 empty property rates were not chargeable on qualifying industrial buildings at all. Since that date they have been brought within the ambit of the empty property rate but are given an extra three months void period compared to other properties ie they have a six months period.

The test of what is a qualifying industrial hereditament has two limbs;

• the property must be used for trade or business
• it must be constructed or adapted for one of the mentioned purposes

For example an animal breeding station owned by a pharmaceutical company may have fallen under the first limb (used for trade or business). It does not fall under the second limb, as it was not one of the mentioned uses.

It is a matter for the Billing Authority whether a property is a qualifying industrial hereditament and the description in the local rating list is not conclusive of this.

For example a garage and premises comprising car showroom, repair shop, stores etc. is not an industrial hereditament. It is constructed for the purposes of enabling the occupier to supply goods and services directly to the public. This is a commercial use similar to that of a shop not a factory (see Post Office v Oxford City Council 1980 CA RA 129).

Owners of vacant property may wish to avoid liability by bringing their hereditament under the classification of ‘relevant industrial hereditament’. To this end they may wish to have the description of their property in the List amended. The List description is a means of identifying the hereditament and must be accurate. It should not be altered without good reason simply so a ratepayer can use it to persuade the Billing Authority that the property is a qualifying industrial hereditament. Unless the description is incorrect, it should not be altered unless some overt act of occupation or physical alteration to the building or change of planning permission has taken place, which would indicate that the description was no longer appropriate. The regulations do not mention the actual use of the hereditament, the description or analysis codes. The test is solely concerned with the construction or adaption for use of the building. The description in the Rating List is not conclusive and not binding on the Billing Authority.

(c) whose owner is prohibited by law from occupying it or allowing it to be occupied

For example under London Building Acts (Amendment) Act 1939 a building was required to have a means of escape in case of fire. As the property does not have a fire escape no unoccupied rates were liable as the occupation of the property was prohibited by law (Tower Hamlets v St Katherine by the Tower 1982 QBD RA 261).

(d) which is kept vacant by reason of action taken by or on behalf of the Crown or any local or public authority with a view to prohibiting the occupation of the hereditament or to acquiring it

Note that a planning restriction does not necessarily prevent occupation. For example in Westminster City Council v Hailbury Investments Ltd (1985 CA RA 1) planning restrictions prevented the use for office purposes of four empty hereditaments described in the list as offices. The hereditaments were not exempt from unoccupied rates since occupation was not prevented only limited by planning restriction.

(e) which is the subject of a building preservation notice within the meaning of the Planning (Listed Buildings and Conservation Areas) Act 1990 or is included in a list compiled under section 1 of that Act

(f) which is included in the schedule of monuments compiled under section 1 of the Ancient Monuments and Archaeological Act 1979

If only part is listed it will liable to unoccupied rates (Providence Properties Ltd. v Liverpool City Council 1980 QBD RA 189).

(g) its rateable value is less than £2,600 (from 1 April 2011)

£1000 for the 1990 Lists [SI 1989/2261 reg 2(2)(g)]; £1500 for 1995 Lists [SI 1995/549 reg 2], £1900 for 2000 Lists [SI 2000/520 reg 2] and £2,200 for the 2005 lists except the last year which was at £15,000.[SI 2009/353] The first year of the 2010 lists was at £18,000. [SI 2010/408]

(h) the owner is entitled to possession only in his capacity as the personal representative of a deceased person

(i) where, in respect of the owner’s estate, there subsists a bankruptcy order within the meaning of section 381(2) of the Insolvency Act 1986

(j) whose owner is entitled to possession of the hereditament in his capacity as trustee under a deed of arrangement to which the Deeds of Arrangement Act 1914 applies

(k) whose owner is a company which is subject to a winding-up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act

(l) whose owner is a company in administration within the meaning of paragraph 1 of Schedule B1 to the Insolvency Act 1986 or is subject to an administration order made under the former administration provisions within the meaning of article 3 of the Enterprise Act 2002 (Commencement No. 4 and Transitional Provisions and Savings) Order 2003

(m) whose owner is entitled to possession of the hereditament in his capacity as liquidator by virtue of an order made under section 112 or section 145 of the Insolvency Act 1986

1.05 Charities and Community Amateur Sports Clubs (CASCs)

Empty property belonging to charities and Community Amateur Sports Clubs (CASCs) are not normally be liable to empty rates - A new section; S45A is inserted into the 1988 Act setting out two classes of properties which will be ‘zero rated’ if unoccupied. Previously these two classes had a maximum liability of 20% of the occupied charge when vacant but now they will have no liability when empty. New section S45A(2) and (3) specifies that the classes of property which will be zero rated if unoccupied are:

1. property owned by charities or trustees for charities that appear likely next to be used wholly or mainly for charitable purposes and

2. property owned by registered CASCs that appear likely next to be used wholly or mainly for the purposes of such a club.

1.06 Calculation of rates payable under unoccupied liability

From 1 April 2008 unoccupied liability is 100% of the occupied liability [The Rating (Empty Properties) Act 2007 ] unless the property is subject to an order by the Secretary of State in England or the Welsh Ministers in Wales.

1.07 Other Powers

A new section, S66A was inserted by the 2007 Act into the LGFA 1988 empowering the Secretary of State and the Welsh Minister to make regulations to deal with steps that owners might take (or omit to take) in an attempt to avoid unoccupied rates through causing or allowing the state of their property to change. Such regulations would allow this to be done by making an assumption that the state of any property forming part of an unoccupied hereditament has not changed either:

• since before a prescribed event or
• as the result of an act or omission by or on behalf of a prescribed person.

The Government and Welsh Government have not implemented any of the powers to make anti-avoidance regulations. However, the Act enables retrospective anti-avoidance legislation to be introduced if it is proven, for example, constructive vandalism (soft stripping) by owners to avoid rates liability is undertaken to a significant extent.

The Secretary of State is given powers to prescribe such classes of unoccupied properties that will be liable to unoccupied liability as the Secretary sees fit [s45 (9)] These classes may be prescribed by reference to the following [s45(10)];

a) the physical characteristics of the hereditament;

b) the fact that the hereditaments have been unoccupied at any time,

c) the fact that the owners fall within a prescribed description.

1.08 Valuation of unused hereditaments

All hereditaments are valued vacant and to let so non-occupation should normally have no effect on valuation.

In exceptional circumstances the fact that a hereditament is vacant may have an effect on the valuation. This will only be the case where the hereditament is of a specialised type. The following tests will need to apply:

i) the hereditament was vacant at or before the AVD with no intention of resumption of occupation, or

ii) the premises were vacated post AVD as a direct consequence of a material change of circumstances.

In extreme cases it may be accepted that no demand exists at the AVD and hence no beneficial occupation arises. See also Rat Man Section 4 Part 1 Rental Adjustment Practice Note 2 Valuation of Space where a Supply/Demand Imbalance exists at AVD.

1.09 General

Any unoccupied liability may also be subject to Transitional Arrangements.

The functions of the Secretary of State have been transferred to the National Assembly of Wales [National Assembly for Wales (Transfer of Functions) Order 1999, SI 1999/672, art 2, Sch1].

1.10 Conclusion

• In general the liability for unoccupied rates is a matter for the billing authority.

• Caseworkers should be aware that empty properties may be liable to rates in the circumstances described above.

• Caseworkers should not amend descriptions merely to assist in a claim that a hereditament is a qualifying industrial hereditament.

• See also RM for rental adjustment for the treatment of hereditaments where supply exceeds demand.

1.11 The potential effect of the 2008 changes

Without any special anti-avoidance regulations, contentions that assessments should be reduced or deleted fall to be considered under existing rating law and practice. It is recommended that all relevant facts are gathered for all properties, new and existing, Challenge or VON, inspecting internally, if necessary and as soon as possible. This is to ensure the VO has a detailed and accurate record of the property as it was at the Material Day. An aide memoir to assist inspection is provided in the Property Inspector Manual. Careful consideration of the factors covered in the Rating Manual Section 2: part 8 practice note on disrepair and in this section then need to be undertaken before reaching a decision.

It is important when considering a case to know at what date the physical state of the property has to be considered. Rating manual - Section 2: Part 4, provides examples to illustrate the application of the regulations relevant to the 2005 and later rating lists. The main situations in dealing with empty property will be:

• compiled list challenge – e.g. a statement that the property has been in disrepair since the date of compilation of the rating list. The material day is the date of compilation

• deletion – where the entry is to be deleted then the material day is the date of the event justifying the deletion

• material change of circumstances IPP– the material day is the date the IPP is received by the VO

• Valuation Officer Notice – for a VO initiated alteration the material day is always the date of the happening e.g. demolition or MCC, unless the date cannot reasonably be ascertained, in which case it will be the date of the rating list alteration

1.12 Valuation considerations for empty property

Particular matters that need to be considered in the valuation of empty properties and, indeed, contentions that the value should be reduced or hereditament deleted are likely to encompass the following issues:

• disrepair and schemes of alteration

• domestic property: when next in use, private storage premises

• vacant former agricultural buildings

• vacant new buildings

• no demand - obsolescence

These likely contentions are covered in turn in the sections that follow. An aide memoir to assist caseworkers is attached at Appendix 1.

1.13 Disrepair and Schemes of Alteration

Rating Manual Section 2: Part 8 provides extensive guidance in the form of a practice note. This has been extensively rewritten following the cases of Newbigin (VO) v Monk [2017] UKSC 14 and Jackson (VO) v Canary Wharf Limited [2019] UKUT 136 (LC) though it was originally prepared at the time of the passing of the Rating (Valuation) Act 1999. This practice note should be referred to when considering unoccupied premises in disrepair.

Rating Manual: Section 2: Part 2: A - The Hereditament, provides detailed guidance about when a hereditament comes into existence and when it may cease to exist.

1.14 Domestic Property

Section 2, Part 5 of the Rating Manual covers the domestic/non-domestic borderline and the issues to be considered when deciding whether or not property is domestic. Consideration may need to be given to when the property is next in use and whether it comprises private storage premises.

1.15 Vacant Former Agricultural Buildings

Exemption from NDR is covered in Section 2, Part 6 of the Rating Manual. Where a building has previously benefitted from exemption due to agricultural use, but this use has since ceased, its exemption needs to be reconsidered as it may now become liable to NDR.

1.16 Vacant New Buildings and Completion Notices

Section 2, Part 3 of the Rating Manual covers the treatment of vacant new buildings, including those subject to Completion Notices and illustrates how this impacts the rateability of vacant buildings

2. Demand or lack of it in the rating hypothesis and obsolescence

2.01 No demand - obsolescence

Existing buildings and hereditaments can become obsolete: technology moves on, demand changes, replacement buildings are constructed. Rating is a tax on rental value. Just because a hereditament exists does not mean it has a rental value - demand may have gone.

In considering questions of obsolescence and demand, it is important to remember to consider this as at the AVD. The rating system works by taking values at a common valuation date, the AVD. All things about the property and its locality are taken then subject to the exception of those things listed in para 2 (7) to schedule 6 of the 1988 Act which are taken at the Material Day. These are:

a. matters affecting the physical state or physical enjoyment of the hereditament

b. the mode or category of occupation of the hereditament

c. the quantity of minerals or other substances in or extracted from the hereditament

d. the quantity of refuse or waste material which is brought onto and permanently deposited on the hereditament

e. matters affecting the physical state of the locality in which the hereditament is situated or which, though not affecting the physical state of the locality, are nonetheless physically manifest there

f. the use or occupation of other premises situated in the locality of the hereditament

The valuer is therefore asked to consider what would have been paid by way of rent at the AVD in the AVD world, subject to making the assumption that certain broadly physical matters were then how they actually were at the material day. So demand levels (subject to any variations in demand that would flow from the physical changes assumed), the state of technology, what would then be regarded as obsolete and people’s attitudes generally need to be viewed as they were at the AVD.

3. Valuation of space where a supply/ demand imbalance exists at AVD

3.01 An existing RM Practice Note, Rating Manual - section 4 - part 1 - Rentals Method - Practice Note 2 : 1995 : 1995 Revaluation - Valuation of Space where a Supply/Demand Imbalance exists at AVD, gives advice on the approach to dealing with oversupply at the time of the 1995 rating lists and these principles apply equally to later lists.

3.02 A difficulty for VOs is in judging whether a property is actually obsolete or simply has not (yet) let. Consideration should be given to the following:

• Was the property occupied at AVD? This is primary evidence of demand.

• Are there other similar properties in the locality that are occupied? Does this mean that the subject property has simply been ‘unlucky’, rather than there being no demand for the type and locality of the accommodation? A terrace of five shops or offices can be envisaged with four occupied. It may be there is only demand for four. This does not mean that the demand for the fifth, vacant one should be regarded as nil. It is the general demand for the mode and category of occupation in the locality that needs to be considered - not the specific.

• What rent is being asked?

• Accepting that at the material day the subject property is vacant and to let the vacancy of other hereditaments in the locality may be value significant. It must be determined if the ‘emptiness’ is due to a physical cause in the locality e.g. oversupply or whether it is the actions of the actual landlord which has created an artificial environment within blocks of property e.g. to preserve the property for redevelopment. Where units of assessment are within blocks of property in one ownership the actions of the owner should not be allowed to affect the hypothetical landlord situation- see Coppin VO v East Midlands Airport Joint Committee (1970) 16 RRC 386 and on appeal (1971) RA 449.

• What other terms are being offered?

• Is it outside the Landlord &Tenant Act 1954?

• Has a proper marketing campaign been undertaken? Failure to let will suggest a lack of demand but is by no means conclusive (was the rent asked too high for example). Is the demand now different from that at the AVD?

3.03 Where a hereditament was, or similar hereditaments in the locality were occupied at the AVD this is likely to indicate there was demand at that time. If the hereditament becomes vacant during the five years of a rating list then, having regard to demand levels at the AVD, it is reasonable to regard it as not being obsolete. However if it is vacant at one AVD and is still vacant at the AVD for the subsequent rating list, then this does suggest demand no longer exists and the valuation should probably be reduced to nil. Obviously this is subject to the particular circumstances of the case and the answers to the questions about marketing, the actual owner’s intentions and level of rent outlined above.

3.04 Any contention that the property is incapable of being let must be considered in relation to the relevance of the rental evidence. Comparable occupied properties of similar size, age and character will evidence demand.

3.05 At page 43 of the decision in Sheil (Valuation Officer) v Borg-Warner Limited [1985] RA36 (LVC/260/1982) Mr C R Mallett FRICS, member of the Lands Tribunal said:

"As a valuation for rating purposes is based upon the concept of the value of the occupation it is not surprising that the solution is not always easy to find when the premises are empty. If I may paraphrase what the Member (Mr J H Emlyn Jones FRICS) said in the Lands Tribunal decision of Lambeth London Borough v English Property Corporation Limited and Shepherd (VO), the mere fact that premises are unoccupied does not of itself justify a lesser value, than that applicable to similar premises which are occupied—- I would add that other considerations arise where empty premises are materially different from those which are occupied and where it can be shown that the premises remain empty because of lack of demand."

3.06 In Sheil (VO) v. Borg Warner the VO’s appeal was dismissed as the appeal property was considered materially different from those occupied and active marketing had failed to find a new occupier, evidencing that there was no demand for the property in its current state.

3.07 In any individual case the appellant needs to demonstrate that there would be no demand for the appeal property at AVD in its physical state having regard to any physical changes to the locality at the material day. Whilst not conclusive the absence of any marketing or restrictive marketing e.g. outside the Landlord and Tenant acts, short-term lets with no prospect of continuance, separately letting the car park etc, are all indicators that the intention of the owner/landlord is not that of the reasonable landlord.

3.08 Evidence of superior properties, which have not let is not evidence for the appeal property. For example, the office property sector comprises a wide range of properties of varying ages, design, specifications and locations. Different markets exist for the different types of property available. The market for modern and refurbished buildings with high specifications in office locations is quite distinct to that for older properties with lower specifications in secondary or periphery mixed use locations.

3.09 In Tulang Properties Limited v Noble (V O) (1985 RA 47) the Lands Tribunal held that even where a property is considered unlettable there remains a value.

3.10 The property was held to be unlettable. Evidence was given of comprehensive marketing of the property over a prolonged period including offering incentives of rent-free periods of up to 5 years with no obligation to continue. It was held that the subsequent selling price of the property was firm evidence of value and that the VO comparables suggesting £8psm were not comparable to the appeal property. The assessment was reduced from £16,500 gross value, £13,722 rateable value to £13,500 gross value, £11,222 rateable value.

3.11 The figure of £13,500 gross value could be obtained by starting with the sale price of £244,000 and applying 14%( to give annual value) and 40% (for the tone of the list), or by applying £6.50psm (the comparables were in excess of £8psm).

3.12 Care should be taken when relying on sale price evidence that the price does not represent the value for redevelopment that would change the character of the hereditament, such as conversion to residential use.

3.13 RM section 2: part 2 deals comprehensively with correct identification of the hereditament in vacant property.

3.14 Demand has to be considered in the context of the hereditament. It is considered that the pattern of hereditaments existing at the time of vacation is effectively frozen unless there is some overt act showing that this pattern has changed. This is well illustrated by the 2008 valuation tribunal case on Dudley House in Leeds where both ratepayers and VO were represented by counsel. This concerned a vacant 1960s office building that had always been let in parts. The ratepayers sought a single assessment on the basis of contiguity and because the owner as ratepayer was ‘in effect’ in ‘occupation’. The decision in Dudley clearly turned on the facts of that case, and the crucial fact was that it was a 15 storey tower that had been in multi-occupation since it was built in 1972 and it had never been occupied as a whole. To assess it as such would create a highly improbable hereditament. The VO argued that without some ‘overt act’ the existing pattern of assessments should not be disturbed seeking support from Osborne v Williamson [1980] RVR 122 where the ratepayer argued that two hereditaments (a flat and a maisonette in the same building) had become one, after both had fallen empty. The valuation tribunal confirmed that the Dudley assessments should not be merged. This decision endorsed the approach taken by the VO to determine the hereditaments within the property. An appeal to the Lands Tribunal, RA/15/2008, was subsequently withdrawn and so the VT decision stands.

3.15 In Osborne v Williamson the Valuation Officer (the Respondent) argued that:

"There were two separate rateable hereditaments with two separate occupiers on 1st April 1973 when the valuation list came into force. These two hereditaments had not in any way changed since that time but remained structurally in the same condition, each being capable of separate letting at the date of the proposal."

The Lands Tribunal accepted that argument:

"In my judgement the submissions put forward by the respondents are to be upheld and I consider that the local valuation court came to a correct decision. Before the ground floor flat became vacant in February 1976 there were clearly two hereditaments in existence and this position was in no way altered when the flat became vacant. —– If the flat when empty constituted a separate hereditament, I cannot see how it ceased to be a hereditament when another hereditament, that is to say the maisonette, subsequently became empty. It would in my judgement require some overt act on the behalf of the owner indicating a merger of the two parts with a clear intention of effecting a single occupation of the whole before it could be properly said that the two parts ceased to exist as separate hereditaments."

3.16 A recent case, Hewitt (VO) v Telereal Trillium 2016 examined what should happen to the rateable value of an office block where the occupiers were in the process of moving out at the AVD and no particular, potential new tenant could be identified in the market who would have been interested at the AVD. It was clear the private sector would not have been interested in an office block of this size in its location (near Blackpool) and all possible public sector occupiers were already accommodated in other office buildings at the AVD.

3.17 The Tribunal accepted it was sound law that a tenancy had to be assumed under the terms of the rating hypothesis in the LGFA 1988 and that the hypothetical landlord and tenant would agree terms. It was content that if there was something about the property that made it intrinsically valueless then a nil value would be agreed between the parties and be the appropriate RV in line with Lambeth LBC v. English Property Corporation and Shepherd (VO). It, however, accepted there were other comparable properties in the locality which were occupied at the AVD indicating it was not intrinsically valueless and it considered the hypothetical landlord and tenant would negotiate a rent by reference to the ‘general demand’ or tone for those other office properties with similar characteristics. It said:

There is no reason to conclude that the public sector occupants of those comparable premises, if not already accommodated in those premises, would have been unable to enjoy beneficial occupation of Mexford House and find such occupation of substantial value."

3.18 Telereal Trilium (Mexford House) was appealed further and ultimately, the Supreme Court upheld the Upper Tribunal decision by a majority verdict in favour of the VO, confirming the value of an unoccupied hereditament for which no actual tenant can be identified may be determined by reference to the value of comparable property which is occupied.

3.19 This is a useful case giving guidance on the situation where a hereditament simply happens to be empty when other similar properties in the locality are occupied and where it could as easily have been that it was one of the other properties that had become empty instead. It is a different situation where there are unique characteristics about a property and it is clear there is no demand for those unique characteristics at the AVD and it has become, in the words of the Tribunal, ‘intrinsically valueless.’ Good examples might be the Victorian village school which, whilst perfectly occupiable has ceased to have value as a school because of the construction of a new school nearby or, indeed, a ‘white elephant’ large office block built in an unusual location for a specific occupier who no longer needs it and it is clear that no one at the AVD would have wanted to occupy the hereditament at any rent.

4. Beneficial occupation and ability to pay

4.01 Introduction

Although rateable value is defined as the rent which at which a hereditament might reasonably be expected to let, it is not normally necessary to consider the hypothetical tenant’s ability to pay that rent. Ability to pay is fundamental to rating, but within the concept that ability is measured by what the hypothetical tenant would pay and presumably is therefore prepared to pay in rent. It is not measured by the rent the particular occupier can, or would like to, afford. This rule has not been breached where, in very particular circumstances, the courts have taken ability to pay into account. They have only done so because the actual occupier is the only possible tenant and therefore that occupier’s ability is the measure of what the hypothetical tenant could afford to pay.

4.02 Most hereditaments have a variety of possible occupiers, and any factors limiting the bid of one party will not affect the hypothetical landlord when he can look to the bids of other parties. When hereditaments are valued by reference to rental evidence, that evidence will consist of rents which inherently must have been affordable by the parties who paid them. The Receipts & Expenditure method automatically by its very structure proceeds on the basis of a commercially motivated hypothetical tenant’s ability to pay, and it is not necessary for the valuer, when using this particular method of valuation in the context of commercially profitable hereditaments, to make any special adjustment for this factor. It is only when considering the valuation of certain hereditaments which are incapable of generating a profit large enough to attract a wide range of potential tenants that in special circumstances it will be necessary to consider ability to pay. In some of these instances ‘ability to pay’ acts as a ceiling on the value indicated by the Contractor’s Basis.

4.03 Ability to pay considerations

The resources and ability of the actual occupier to pay rent are not normally called into question. The circumstances of the actual occupier are not normally to be carried into the rating hypothesis. This is a principle which was robustly spelt out in the House of Lords by Earl Loreburn in Chertsey v Metropolitan Water Board [1916] 1 AC 337],

"In the calculation imposed on us by the Act of Parliament we are dealing with fictitious persons and with things that can never happen. A piece of reality like the balance at the bank of the person supposed to be the tenant (but who is in fact the owner) has no place in such a calculation. Fact is good and fiction may be useful, but a mixture of the two is hopeless………..If in estimating the rent which might be expected you may regard the financial position of the real person whom you assume to be the tenant, then the rent must shift up and down according to that person becoming richer or poorer year by year. I add that it must also shift as the imaginary landlord becomes richer or poorer. No one could have thought of such a proposition were it not that valuers are hard put to it by no fault of their own, and that fallacies flourish in a region of fancy."

4.04 Exceptional circumstances may however arise where this general rule is displaced. In Tomlinson (VO) v City of Plymouth and Plymouth Argyle FC (1960) the Court of Appeal referred to the limited means of the ratepayers who had bargaining power ‘by virtue of their being the only bidders for the hereditament’. In this case Plymouth Argyle FC, which had very limited means, were seen as the only possible tenants for their football club, and if it ceased to exist, any replacement club would in effect be Plymouth Argyle in a new guise and still the only possible tenant, with equally limited means.

4.05 There are many instances where the actual occupier is the only potential hypothetical tenant of the hereditament, but it does not follow that the ability of that occupier to pay rent should be called into question. Lord Justice Schiemann alluded to this in Hoare (VO) v Spratling [1998RA391 at 409] when considering properties occupied by the National Trust:

"However, I am not to be taken as holding that the mere fact that (in cases such as the present with only one hypothetical tenant) that hypothetical tenant gives evidence that he would never pay any rent is conclusive. I see force in counsel for the valuation officers’ submissions that this would have potentially very grave implications."

4.06 It may be that despite being the only possible tenant the actual ratepayer may be perfectly able to pay, though perhaps unwilling to do so. Nonetheless in negotiation with the hypothetical landlord a substantial rent may result reflecting the importance of occupation to the ratepayers. In Eastbourne BC and Wealden BC v Allen (VO) (2001) the Lands Tribunal considered local authorities’ ability to pay in relation to some council owned indoor leisure centres comprising sports halls and swimming pools. It was argued that due to central government restraints the local authorities would have been unable to pay substantial rents arrived at using a contractors basis of valuation. The Tribunal found the evidence showed the local authorities could have afforded the rents though this would have meant cutting down on other services or raising charges and that they would have been reluctant to do either. The Tribunal said:

"…we can see no evidence to suggest that either authority would have been so reluctant to take the necessary steps to find the money elsewhere that it would have closed the leisure centre rather than pay the rent demanded. On the contrary, it is clear that each authority attached considerable importance to the services provided by its leisure centre as a popular recreational amenity for its residents."

The evidence is likely to point the same way for all central and most local government occupiers; accordingly ability to pay considerations do not arise for central and most local government hereditaments even where they are of specialised type.

4.07 There are however occasionally instances where the exceptional circumstances featured in the Plymouth Argyle case arise. In such cases ability to pay is a valid consideration and it may actually provide a ceiling value lower than that indicated by the contractor’s basis. These circumstances arise where the following considerations apply:

a. The only potential tenant is the actual occupier or another body which is likely to have the same financial standing as the actual occupier, and

b. There is evidence to show that the finances of the actual tenant are very limited (NB In the Plymouth Argyle case there was specific evidence that the finances of the only possible tenant ‘were in difficulties’) and will not enable a tenant to pay a rent indicated by the Contractor’s Basis. In many instances, where the only possible occupier is a voluntary organisation, the limitations of its budget are always likely to apply to its ability to pay a rent. This may also apply to certain parish councils, more particularly those administering rural areas where the services which they provide are very limited in range

4.08 Practical application of ‘ability to pay’ analysis

4.09 Where these circumstances exist, the valuer must limit his valuation to the rent which the hypothetical tenant can be expected to afford.

4.10 The first step in this process in this process is the identification of the hypothetical tenant. Ability to pay considerations may apply where the only potential hypothetical tenant is the actual occupier or is to be found within a limited class of other potential tenants, all of whom share the same characteristics as the actual tenant. For example, a local village cricket club may be the only potential tenant of its own premises. Similar premises in a more urban area may be capable of attracting a number of various clubs. Where the only possible tenant is the actual occupier, the financial position of that occupier will be the starting point for the ability to pay analysis. Where there is more than one possible tenant, the enquiry needs to take into account the financial position of other organisations which might be in the market to take the hypothetical tenancy.

4.11 The next step involves taking a careful look at the accounts of those organisations potentially in the market for the hypothetical tenancy. It should be remembered that organisations which do not in fact have to pay any material amount of rent, might arrange their finances differently if they had to meet this additional outgoing. In Marylebone Cricket Club v Morley (VO) 53 R&IT 150 (1960), the Lands Tribunal approved the substitution of a higher level of income from subscriptions than that which the club had actually set. Similarly an organisation may not be fully realising the potential for maximising income from fund raising. Non-profit-making organisations may not be seeking to achieve this. The level of subscriptions set by other comparable organisations, and the amount which they raise from fundraising or donations may be a useful guide in ascertaining whether a particular organisation is maximising its total income. Also, it is material to consider whether other comparable organisations are making more use of their premises and achieving greater maximisation of income. Similarly in respect of outgoings it is necessary to consider whether the organisation has minimised running costs and maintenance. In Bluebell Railway v Ball (VO) 1984RA 113, the Lands Tribunal held that it was appropriate to take into account the fact that the occupier’s outgoings were reduced by the use of voluntary labour. Similarly where the direction of the occupier is provided by individuals who take no salary or expenses, it is wrong to impute notional expenses of this nature as the hypothetical tenant would have regard to this free service in making a rental bid. It is also correct to have regard to the lower rates payments due to any any charitable relief when considering outgoings, provided that it can be assumed that the only prospective hypothetical tenant would be a charity.

4.12 In other respects an ability to pay analysis proceeds in the same manner as a receipts and expenditure valuation (see Rating Manual Section 4 Part 2) as far as the identification of the tenant’s share of the divisible balance.

4.13 The estimation of the tenant’s share of the divisible balance should be approached differently in an ability to pay analysis as compared with a normal receipts & expenditure valuation. The hypothetical tenant in an ability to pay scenario is likely to have no profit motive. In the methodology of the receipts & expenditure valuation, the tenant’s share is intended to cover interest on capital and an allowance for profit and risk. The absence of a profit motive means that it can be assumed that the hypothetical tenant of an ‘ability to pay’ hereditament will require only a sum to cover risk and interest on his capital, ie the total cost of his non-rateable assets and working capital. While in reported cases the tenant’s share has often been estimated as a direct percentage of the divisible balance, the amount of any such percentage should be informed by the tenant’s required return on its capital. In estimating that return account should be taken of the costs involved in raising capital. Those costs may involve borrowing either at the market rate (and in this regard, the relevant rate of interest should be as at the AVD), or at a lower rate from supporters or well-wishers. Where capital is donated, the tenant’s share does not need to cover any notional interest, since the hypothetical tenant will also be the recipient of such donation. Sometimes capital may be raised through the sale of shares, and in this instance the amount of any dividends paid will need to be covered in the tenant’s share, to the extent that the capital raised was used to acquire non-rateable assets. In considering whether allowance needs to be made for contingent risks within the tenant’s share, double-counting with allowances made elsewhere (in the estimation of annual expenditure and income) should be avoided.

4.14 While profit may not be required as part of the tenant’s share, it may be that the likely occupier will require a ‘surplus’ to assist in the development of the facility or to further other aims. The objects of the occupier in an ‘ability to pay’ context need to be considered and this includes the destination of any surplus. In this respect too, an ‘ability to pay’ analysis differs from a receipts and expenditure valuation in which it has been held that the destination of profits are irrelevant (even where they are diverted by statute Port of London Authority v Orsett Union (1920 HL AC 273). This was considered in Bluebell Railway v Ball which involved a heritage railway operated other than for profit by a charity whose objectives include the acquisition and preservation of locomotives and rolling stock. It was held to be correct to allow an element within the tenant’s share to be ‘ploughed back’ into the acquisition of further rolling stock for preservation. This principle may have wider application where occupiers to whom the ‘ability to pay’ principle applies have objectives which require capital outlays outside the hereditament, and which would be for them a ‘first call’ on their resources, before quantifying their rental bid. It must be appreciated that these aims are not shared with the hypothetical landlord whose interest is in letting the hereditament for the best possible rent. The negotiations between hypothetical tenant and landlord are envisaged as amicable. Although the parties are differently motivated, with the tenant perhaps seeking a large surplus, and the landlord a high rent, there must be envisaged an agreement at the end with both parties prepared to compromise to greater or lesser extent, depending upon where the greater bargaining power lies. If a surplus is not necessary for the tenant, this fact will be taken into account by the landlord and will influence the hypothetical negotiations.

4.15 Reference should be made to the following decisions of the Lands Tribunal in considering the effect of ability to pay in relation to valuations:-

1. First Class Cricket Grounds

(a) Warwickshire County Cricket Club v Rennick (VO) 52 R&IT 787

(b) MCC v Morley (VO) 53 R&IT 150

2. Amateur Cricket Clubs

(a) Heaton Cricket Club v Westwood (VO),

(b) Astley Bridge Cricket Club v Westwood (VO) 52 R&IT

499

3. Amateur Football Club

Blackman (VO) v Lowe and Tavistock RDC 51 R&IT 74

4. Tennis Club

Ripley Tennis Club v Snell (VO) 44 R&IT 809

5. Rugby Club (Union)

Tyldesley RUFC v Cole (VO) 1989 LT 29 RVR 152

6. Heritage Railways

(a) Winchester and Alton Railway Limited v Whyment 1981 RA 258;

(b) Bluebell Railway Limited v Ball (VO) 1984 RA 113

5. Restrictions on access/ use and impact on valuation (Inc. statutory restrictions)

5.01 Introduction

The 2007 budget changes to Empty Property Rate liability have created a variety of issues for Valuation Officers [VOs] to consider whilst maintaining local rating lists accurately in accordance with the statutory basis.

However, it is not the role of the VO to engage in discussions about the outcome of potential avoidance schemes.

In ‘restricted access’ cases, it is argued that a hereditament has been divided so that part of it is left with no, or very limited, access allegedly because there is no right of access (either legally or physically) through the other hereditament. It is effectively landlocked and the rateable value should be greatly reduced or nil, or the assessment should be deleted.

5.02 Issues arising

Commonly two scenarios have developed where a nil value or deletion is sought using this argument:

1. Access is physically available - but allegedly denied by the separate occupation of parts of what was the former hereditament.

Particular examples include:

• warehouses/factories where the only access is across the front concrete parking/storage area and this has been let to a third party, but with no right of access reserved to the vacant warehouse/factory building behind

• an advertising hoarding erected across the frontage, including the door of a vacant shop in a shopping mall, with the advertising right subsequently let

• advertising hoardings erected around a vacant car showroom obscuring it, but not preventing vehicular access

• the letting of the front offices together with car parking of an industrial unit where the letting expressly excludes the industrial part, which is left vacant with only a very limited access or even no access at all

2. Access is physically prevented - for example by building walls, or demolishing stairs, to seal off part.

Particular examples include:

• a first floor office divided by a stud partition leaving part with no access whatsoever

• a warehouse divided by a block wall, possibly not to full height, but leaving no access at ground level to the remaining area

• an old, vacant ‘Woolworth’ type shop on 3 floors. The ground floor is re-let (but not the first or second floors) and the stairs are removed to enlarge or maximise the ground floor shop area, thus leaving no form of access to the upper floors

5.03 Basic principles

Fundamentally, rating is a tax on the occupation of land. So if land is occupied, providing its use is not exempt or domestic, it will be rateable and will usually form a separate hereditament based on that occupation.

Thus, where a landlord lets part of an existing hereditament, with or without the intent to deny access to the remainder, the occupation by the new lessee will form a new hereditament and the remainder will form a separate hereditament that is invariably empty.

Ordinary common sense suggests that a landlord will not let part of a property where the effect of that letting damages the value of the remaining part, or renders it valueless. However, in a recessionary market, owners or landlords may make the judgement that letting only part of their property and leaving part empty, and without access, is to be preferred to leaving the whole property vacant. Hence, even though some landlords may appear to have acted irrationally or made an unwise letting, the consequences on the ground have to be taken into account when valuing for rating.

5.04 Identification of the Hereditament

In both the circumstances described above, the first question to be answered is this:

Has a new hereditament come into existence?

This can be answered by following the principles set out in Rating Manual Section 2 - Part 2 The Hereditament.

Each case must be decided on its own particular facts and care should be taken to establish them. If the facts indicate there is a new separate rateable occupation, then a separate hereditament will normally result.

However, if parts of a property are simply removed to prevent access to the remainder of the same hereditament, such as staircases to upper floors, then the repair assumptions in Schedule 2(1) LGFA 1988 will need to be considered.

Alternatively, sometimes works are carried out to physically seal off part of an existing hereditament so that there is no way into it. It is unlikely that the mere sealing off of part of a hereditament on its own will cause it to cease to be part of the existing hereditament (in particular when considering the repair assumptions).

Where separate occupation of the part with access occurs, for example because it is let, then this will normally establish a separate, and smaller, hereditament, without the ‘landlocked’ piece.

Following the separate occupation, the landlocked part will often require works to provide access to it before being capable of occupation. It will not be a hereditament until access is constructed or a completion notice is served which deems the works to provide access to be complete.

Remember: a valid completion notice may not be capable of being served if the works required are outside that hereditament.

5.05 Practical considerations

In considering any case where it is alleged a hereditament should be divided and that the value of one or more of the new hereditaments has been damaged or destroyed by a loss of access, the following points should be resolved:

1. Who is really in paramount occupation?

This is the important test, set out in Westminster City Council v Southern Railway [1936] and more recently in the Supreme Court case of Cardtronics and others v Sykes (VO) & others: https://www.supremecourt.uk/cases/docs/uksc-2018-0225-judgment.pdf

The test explores the Landlord/Lodger principle and is explained in Rating Manual Section 2 Part 2 Hereditament.

Where there are two possible occupiers, the test is whether the landlord has retained paramount control?

If the purported occupier’s purpose is subordinate to the owner’s, then it is the owner who is in occupation of the ‘occupied part.’

Is the owner attempting to give the appearance of occupation by a third party whilst carefully guarding the substance of control personally?

2. Is the document purporting to create the separate hereditament (the lease, licence or letter) a sham?

There are two types of sham:

• a document which looks genuine, but externally the parties have agreed otherwise
• a document which is not what it is expressed to be, e.g. it is called a lease but is legally actually a licence. The alleged occupation may then be seen as merely the actions of the owner, rather than the ratable occupation by a purported tenant/licensee

If there is any doubt or question about the status of the document, then technical advice should be sought.

If the document is a sham then it can be disregarded. The alleged occupation may then be seen as on behalf of the owner, rather than rateable occupation by the purported tenant/licensee.

3. Is the purported occupier a separate legal person from the owner or, if the purported occupier is a separate legal person, is the situation one where it is appropriate to ‘lift the corporate veil’?

Rating Manual Section 2 Part 2 Hereditament explains the concept and advises that only rarely can this be done. An exception is where the two companies share the same directors (and so on and, whilst the two companies are separate legal entities, this is true in law only, not reality.

4. Is it possible for an implied reservation of an easement of access to be made?

This may be possible when the agreement is silent on access. But, if the agreement specifically says there is no access, then an easement cannot be implied.

However, if an easement of access can be implied, then the question goes to valuation and not to whether there can be beneficial occupation at all.

5. Where it is accepted that there are two hereditaments, is it reasonable to have regard to the bid that might be made by:

• a single hypothetical tenant for both parts or, in the alternative
• the landlord of the landlocked portion to secure access through the let portion

For example, where the upper parts of a shop are rendered physically inaccessible by the removal of stairs, it is unlikely anyone would wish to rent both parts together because it would appear the value of the ground floor on its own is equal to, or exceeds, that of the two parts together. Bear in mind that this value judgment must be made in relation to the market as it existed at the AVD, and this may be different from the time the parts were separated.

Where the let off part, as an apportionment of the whole, represents only a small part of the total value the situation is rather different. Applying the ‘Principle of Reality’, it seems reasonable to envisage an overbid being made for the smaller portion to secure it. Clearly the letting will damage the value of the landlocked portion but certainly not render it of no value at all. This bid might be by landlord or prospective tenant. The hypothetical landlord might clear the way and this would occur in advance of the hypothetical tenancy starting.

This would be rather like the assumption made when looking at disrepair that the hypothetical landlord is deemed to do the work in advance of the letting, or regularising planning permission as referred to in S&P Jackson (Manchester) v Hill (1980) RA 195.

6. Two summaries of decisions by the Valuation Tribunal on the broad principle of restricted access are set out at the end of this Appendix.

5.06 Valuation

What constitutes the hereditament is an essential question to decide before undertaking a valuation.

When establishing the extent of the hereditament, it should not be forgotten that the reason the owner has undertaken the change or the letting may well be a reflection of the rental value of the premises, rather than simply a device to avoid rates.

The removal of a staircase to the upper floors of shop premises, and the subsequent letting of the shop only, may well have been because the landlord judged the letting value of the upper parts to be low and outweighed by the greater value of the space previously occupied by the staircase.

In such a case, it is likely the total RV of the ground floor only hereditament would be equal to, or even in excess of, when the upper parts were included. Of course these matters of valuation need to be decided in terms of AVD values and attitudes and that position may be different to when the actual owner made the decision.

5.07 Conclusion

This is a complex and developing area of rating:

• on one side, there will be situations of completely genuine lettings or sub-lettings
• on the other will be found poorly constructed, very obvious, avoidance devices which do not result in a separate hereditament

Hence each case needs to be carefully considered, with a detailed record of the thought processes retained to enable the VOs decision to be explained.

VOs need to be ready to take cases to VT when separate assessment does not appear appropriate.

It may be that, on examination, many cases prove to be shams or where the landlord has really retained control. Nonetheless it remains likely that there will be examples involving genuine leases to third parties of areas of land or buildings or part of buildings which do restrict or prevent access to the rear or upper parts or involve actual and significant use of the land, which will result in a separate assessment. This will leave the landlocked part to go into the local rating list at a low or nil value or, in exceptional circumstances where access is impossible, cease to be shown in the rating list at all.

Such a consequence is inevitable because rating is a tax on occupation, not an apportionment of actual value. So, where VOs, after careful consideration, are satisfied that separate occupation exists, they should not be worried about altering the rating lists to show separate entries as required.

The role of VOs is not to resist any change to a rating list but to ensure accurate maintenance of rating lists in accordance with the law and regulations.

5.08 Valuation Tribunal Cases

There have been two notable valuation tribunal cases on this point. In both cases the VO approach was successful:

(1) 149 Regent Crescent, The Trafford Centre, Manchester

Manchester South Valuation Tribunal - 14 July 2009

Appeal Number: 424514432244/113NO5/22

A shop had been stripped by the previous tenant. It had no plastering, flooring, ceiling, electrical wiring, fire protection or other services, although it did have a shop front. The landlords, Peel Holdings, let the frontage to a connected company, Peel Advertising Ltd, to erect a timber advertising hoarding. This they did, obscuring both display window and door, whilst leaving a rear service door as the only access to the shop.

• The owner’s agent argued there was a separate rateable occupation of the advertising right and the shop would require work beyond rebus to make it capable of beneficial occupation. The agent said it was normal practice where an advertising hoarding is placed over a new un-let shop not to assess the shop but to assess the advertising. The present situation was no different.

• The VO argued the works to make the shop unit useable came within the normal repairing assumption of RV. As the owners were in paramount control of both shop and advertising right as evidenced by the terms of the licence, this was a case where the corporate veil could be lifted.

• The VT considered the owners were in paramount control of the whole unit. The mode or category of occupation remained as a shop. The repair work was not major and no structural alteration was required. The VT saw the comparison with a new, never-occupied shop with an advertising hoarding across the frontage as a different situation.

(2) Gamston Airfield, Nottinghamshire

Nottinghamshire Area Tribunal - 14 August 2009

Appeal Number: 301014349165/037NO5/5

A warehouse on an airfield had been un-let for some years. The owners let the concrete hard-standing, turning and parking in front of the warehouse to a company by lease and received a rent. The company purported that it intended to make use of the land to dismantle aircraft in order to recover and resell the parts. At the VT, the only evidence of actual use was presented by the VO, who said a single old aircraft had been sitting on the concrete during her various inspections. The lease did not provide for any access to the warehouse over the concrete.

• The VO (represented by counsel) did not accept that the lease agreement was genuine. It was possible the agreement was a ‘sham’, that is the written document did not represent the true agreement of the parties. Whilst the agreement seemed to show there was no right of access, the reality was that the owners had retained full access rights - signs attached to the warehouse showed it was actually ‘to let’. Even if the agreement was genuine, a right of way by necessity could and should have been implicitly reserved to the owners, giving access.

• The ratepayers said the lease was a genuine transaction; there was no right of access retained to the warehouse; there could be no easement of necessity and therefore the warehouse was of no value and should be deleted from the list in accordance with the IPP.

• The VT noted the lease agreement provided for the land to be used as outside storage and not for the stripping of aircraft. There was no evidence that any intensive use of the land had been made - the occupation was slight only and would not have interfered with access to the warehouse. As the occupation was not in accordance with the terms of the lease, there was a question mark over whether the agreement represented the true relationship between the parties to the lease. Whilst there was no reserved right of access, the ratepayers accepted that there would have been no problem about inspecting the warehouse for maintenance or possible letting. The owners, as evidenced by the ‘to let’ board, intended to try and let the warehouse. It was difficult to comprehend a situation where a hypothetical landlord would knowingly carve up his property and effectively devalue his investment by more than 80% - such a scenario fell in the face of commonsense and could not be accepted by the VT. The VT placed greater weight on the facts that were actually happening on the ground as to access and so, rather than to the lease agreement. Consequently the ratepayer’s appeal was dismissed as the VT found the warehouse capable of rateable occupation.

Appendix 1.  Vacant Property Inspection Checklist

The Property:

• Rating file and plans - Are they correct?  Check for issues that may affect demand.  Poor access, low headroom, poor layout etc.

• Have there been any changes since AVD?  Since 01 April 2005?  Since Material Day?

• Photos - General photos and specific photos of poor repair

• Detailed notes on the physical state of the building to complement photos

• Note services connected

• Details of last use and when vacated

• Future plans for property?  Redevelopment?  Demolition?

• Photos of any ‘For sale’ or ‘To Let’ boards.  Make a note of agents and phone numbers-Make a specific note of items which appear to be incomplete or missing

The Surrounding Area

• Notes about the immediate area.  Is this an estate or an isolated property?  Are there residential properties near by? 

• Road, rail and bus links.

• Other vacant properties?  Being marketed? Development sites being marketed?

• Condition of other, similar properties

• MCCs?  Changes since AVD?  Since 01 April 2005?  Since Material Day? New or recent developments

Other research

• Internet marketing – printout website adverts?  Contact agents for sales or letting particulars

• BA web sites for planning applications

Appendix 2. Caseworkers EPR aide-mémoire

Remember you are looking at the economic position at AVD and the physical position on the Material Day.  MCCs should be distinguished from economic changes.

Inspection – It is vital the property is inspected and detailed inspection notes are kept.  Photographs should be takes to evidence the state of the property

Demand – it is the general demand for this type of property that is considered

• Was the property occupied at AVD?  If yes then demand is proven.

• Were similar properties in the locality occupied?  If yes then the general demand for this type of property is proven.

• Is this a unique type of property?  The property must be evidenced as materially different from other properties in the locality to prove this contention.  The locality for a sui generis use eg abattoir may be regional and it must be established that no market exists for that use in that locality.

• Was there active marketing at AVD?  Details of marketing should be obtained.  Proposed lettings contracted out of the landlord and tenant act would deter potential tenants and suggest that the owner plans an alternative use for the site.

• Are there redevelopment plans?

• If there would clearly be no AVD demand in the MD physical situation, then nil value is appropriate.

Check with Team Leader and/or EPR coordinator. Ensure thought process fully recorded.

Value

• Is the current RV too high?

• Check valuation scheme for settlements, rents etc.  Be wary of ‘catch all’ schemes with a diverse range of different properties and different sizes.

Repair

• If repair is an issue a breakdown of costs will be needed to enable identification of relevant repair costs, excluding improvements.

• Consider the economic reasonableness test.  Is it worth the hypothetical landlord carrying out the repairs or would he accept a lower rent?  The type of property and the age will affect the landlord’s decision.  If the current value has been agreed for the current rating list this will provide a benchmark against which to determine economically reasonable repairs and the period of time for ammortisation.

• Where the cost of repairs is in dispute assistance should be requested from the building surveyor.

Other factors

• Capital Value

• Life expectancy in current state and in ‘repaired’ state

• Supporting case law

Appendix 3. Fire Regulations and their effect on the use of property

1.0       Introduction

This document  details the effect of fire safety regulations on the rateable hereditament, the fire safety regulations applicable to non domestic properties, their enactment, which is a matter for the fire safety authorities and the occupier, and provides guidance on when enforcement action may affect rating assessments.

The Regulatory Reform (Fire Safety) Order 2005 (FSO) came into effect in October 2006 and replaced over 70 pieces of fire safety law. A detailed synopsis of the fire regulations and process of enactment is provided at section 3.0 et seq below.

2.0       The effect of Fire Regulations on the rateable hereditament

The FSO abolished the requirement for properties to have a fire certificate and replaced it with a duty on a ‘responsible person’ (usually the owner, occupier or employer) to carry out a risk assessment and implement appropriate measures to minimise the risk to life and property from fire; and to keep the assessment up to date by maintaining a fire management plan.

As the fire safety standards required under the FSO are personal to the occupation of the property and not the building itself the presence or absence of such items is considered not material to the consideration of the hereditament to be entered in the rating list but a matter for valuation.

2.1          New properties

The Building Regulations 2006 Approved document B - Fire Safety requires that a new building must provide means of fire escape to enable the building to be passed as complete and therefore capable of occupation.  A property being brought into the rating list as a result of a completion notice will therefore be assumed compliant with the FSO and capable of occupation.  In rare circumstances the completion notice may exclude adjacent property which would act as the secondary essential means of escape for the hereditament deemed to be complete.  In this situation it is not possible to assume that the escape route conforms to the statutory requirements and such circumstances may be relevant to the valuation.  (John Kiel Ltd v Woolway [1997] R.A. 37 LT held that although the effect of the completion notice was to deem the first and second floors of the building completed, the hereditament comprising those floors was of little or no value because the necessary fire escape through adjacent property was not completed.)

Where the VO is considering assessment of a new property without a completion notice and the building is occupied then evidence of beneficial occupation is present and the resulting valuation will reflect the facts.  If the building is unoccupied and without a completion notice RM Section 2 Part 3 Unoccupied new and altered buildings and completion notices guidance should be followed.  Liaison with the billing authority is recommended to determine if a completion notice is to be served.  New unoccupied property should not normally be brought into assessment without a completion notice unless the Valuation Officer has established evidence that the property is capable of beneficial occupation reflecting the properties physical state at the material day, is a rateable hereditament and therefore should appear in the rating list.  Normally consideration of comparable occupied properties in similar physical condition will indicate if the building is capable of occupation in its current physical state.

2.2          Existing properties

A breach of the FSO does not prevent occupation of the building until a statutory notice is served in the form of a prohibition notice.  If a prohibition notice is in force then it is illegal to occupy the premises.  This will be sufficient to prevent the owner being liable to the Empty Property Rate on the basis that the owner is prohibited by law from occupying it or allowing it to be occupied.  (Under the London Building Acts (Amendment) Act 1939 a building was required to have a means of escape in case of fire.  As the property did not have a fire escape, there was no liability to unoccupied rates as the occupation of the property was prohibited by law (Tower Hamlets v St Katherine by the Tower 1982 RA 261).)

A legal restriction on occupation such as a prohibition notice or closing order needs to be considered for valuation but it is not considered it is fatal to there being a rating assessment.  Certainly the premises are a hereditament on the basis that they may be liable to a rate.  Whether the notice or order would affect the valuation or reduce it to nil would depend on whether the works to make it compliant are possible rebus sic stantibus, come within the category of works a landlord would consider economically reasonable to do to remedy disrepair before a tenancy commences or a prospective tenant would envisage undertaking if not repairs. provides guidance.  If these works would result in the lifting of the notice or order then this is something to which regard can be had in the valuation.

3          The Fire Safety Regulations and process for enactment.

The Regulatory Reform (Fire Safety) Order 2005 (FSO) applies to England and Wales. The powers and functions of the Secretary of State under the Order have been transferred to the National Assembly for Wales in respect of Wales. With the introduction of the Regulatory Reform (Fire Safety) Order 2005 (‘the Order’) in October 2006, Fire and Rescue Authorities and other bodies (‘enforcing authorities’) now have a duty to enforce fire safety in non-domestic premises.  The following hyperlinks provide full details of the Order and supplementary guidance documents.

 Fire safety law and guidance

Guidance note 1:Enforcement

The FSO applies to all non-domestic premises in England and Wales, including the common parts of blocks of flats and houses in multiple occupation (HMOs). 

The purpose of the FSO was to simplify fire safety legislation and reduce the number of enforcing authorities that people and businesses have to deal with. The FSO abolished the requirement for properties to have a fire certificate and replaced it with a duty on a ‘responsible person’ (usually the owner, occupier or employer) to carry out a risk assessment and implement appropriate measures to minimise the risk to life and property from fire; and to keep the assessment up to date by maintaining a fire management plan.

There are likely to be a range of prevention and protection measures possible in individual premises dependant on the type of occupation and number of people requiring access.  The FSO allows the responsible person to decide which would be most appropriate in the light of the premises and those who may be within the premises at any one time.  

Unlike the previous ‘fire certificate’ regulations, which were attached to the property itself, the new ‘self assessment’ system means the fire assessment is based on the type of occupancy and will therefore vary from business to business.  For example an industrial unit occupied by a fireworks manufacturer will have a different fire risk assessment to that of a vehicle repair workshop.

Equally, a four storey block of offices in multiple occupations will have separate fire assessments for each occupation, varying dependant on the circumstances on the ground e.g. lift availability, if the lift is not fire proof then the first floor and above will require an alternative means of escape, such as a staircase. 

The Building Regulations 2006 came into operation in April 2007, replacing and consolidating earlier regulations and revisions.  Within the regulations are a number of approved documents that seek to provide practical guidance to developers of property in respect to the requirements of Schedule 1 to and regulation 7 of the Building Regulations 2006 for England and Wales.

3.1 Approved document B - Fire Safety

The detailed guidance contained in document B is to enable developers and responsible persons to ensure their properties are compliant with the necessary fire and safety requirements for the use of the building in accordance with the FSO.  Designs that are in accordance with approved document B will be compliant, however deviations from this are permitted if it is shown that compliance is met using the variations.

Therefore providing the fire safety measures are adequate to mitigate the potential risk, it is for the responsible person to decide which to adopt from the range of available options.

Fire and Rescue Authorities are required under the FSO to audit business premises within their local areas to ensure compliance with the requirements of the FSO and that adequate fire safety measures are in place. In addition, authorities have a duty to provide fire safety advice when requested. In delivering their audit and enforcement duties, Fire and Rescue Authorities are expected to act openly and in proportion to the identified risk, and wherever possible, to allow the responsible person a reasonable timeframe in which to implement any fire safety improvement.

In cases where a serious risk exists and is not being managed, Fire and Rescue Authorities have a statutory duty to enforce compliance with the FSO. A brief synopsis of the enforcement process is given below.

4.0       The enforcement process

4.1          Alterations notice

An alterations notice may be served under article 29 of the Order. The Fire and Rescue Authorities must consider measures that are proportionate and reasonable to address the particular risks they find at the premises. If the risk is not immediate or high, they can agree with the occupier an appropriate time period to make the necessary improvements.  An alterations notice specifies the matters which in the authorities opinion, constitute a risk to relevant persons or may constitute such a risk if a change is made to the premises or the use to which they are put.

The responsible person may manage the risk by adopting measures detailed in Building Regulations 2006 Approved document B - Fire Safety, or other measures proven to address the risks identified.  If the recommended improvements are not made within the agreed time, or if the fire and rescue service finds a serious fire risk that the occupier is not managing, they have a legal responsibility to make sure the law is complied with.

An alterations notice served may be withdrawn at any time and, for the purposes of article 29, the notice is deemed to be in force until such time as it is withdrawn or cancelled by the court under article 35(2), the appeals process.  Nothing in this article prevents an enforcing authority from serving an enforcement notice or a prohibition notice in respect of the premises.

4.2          Application for determination by the Secretary of State

Where improvement of fire precautions is agreed, but the action to be taken is disputed the parties may agree to approach the Secretary of State, for determination under article 36 of the Order. A decision will be issued within four months of all documents being submitted stating what fire precautions need to be put in place. Once the decision has been issued, the Secretary of State has no further jurisdiction in the case.  Any matters that follow should be referred back to the enforcing authority.

If the fire and rescue service think a determination might cause a delay which would put people’s safety at an unacceptable risk, they can decide not to seek a determination and require enforcement. In this case, the only recourse for the occupier is to appeal the enforcement order to the courts.

4.3          Enforcement notice

If an alterations notice is not complied with then the next step is for the fire and rescue service to serve an enforcement notice, under article 30 of the Order, which means the occupier has to make specific improvements in a specific timescale.

An enforcement notice may be challenged in a magistrates’ court by appeal which must be made within 21 days of receipt of the enforcement notice.  Penalty for non compliance is detailed in Article 32 of the order as (a) on summary conviction to a fine not exceeding the statutory maximum; or (b) on conviction on indictment, to a fine, or to imprisonment for a term not exceeding two years, or to both.

4.4          Prohibition notices

Under article 31 of the Order where the enforcing authority is of the opinion that use of premises involves or will involve a risk to relevant persons so serious that use of the premises ought to be prohibited or restricted, the authority may serve on the responsible person or any other person mentioned in article 5(3) a prohibition notice.

A prohibition notice will state that the use to which the prohibition notice relates is prohibited or restricted to such extent as may be specified in the notice until the specified matters have been remedied.

A prohibition or restriction contained in a prohibition notice takes effect immediately it is served if the enforcing authority is of the opinion, and so states in the notice, that the risk of serious personal injury is or, as the case may be, will be imminent, and in any other case takes effect at the end of the period specified in the prohibition notice. 

Penalty for non compliance is detailed in Article 32 of the order as (a) on summary conviction to a fine not exceeding the statutory maximum; or (b) on conviction on indictment, to a fine, or to imprisonment for a term not exceeding two years, or to both.

4.5          The appeals process

Article 35 details the appeals process:

1) A person on whom an alterations notice, an enforcement notice, a prohibition notice or a notice given by the fire and rescue authority under article 37 (fire-fighters’ switches for luminous tube signs) is served may, within 21 days from the day on which the notice is served, appeal to the court.

2) On an appeal under this article the court may either cancel or affirm the notice, and if it affirms it, may do so either in its original form or with such modifications as the court may in the circumstances think fit.

3) Where an appeal is brought against an alterations notice or an enforcement notice, the bringing of the appeal has the effect of suspending the operation of the notice until the appeal is finally disposed of or, if the appeal is withdrawn, until the withdrawal of the appeal.

4) Where an appeal is brought against a prohibition notice, the bringing of the appeal does not have the effect of suspending the operation of the notice, unless, on the application of the appellant, the court so directs (and then only from the giving of the direction).

5) In this article ‘the court’ means a magistrates’ court.

6) The procedure for an appeal under paragraph (1) is by way of complaint for an order, and —

a) the Magistrates’ Courts Act 1980 applies to the proceedings; and

b) the making of the complaint is deemed to be the bringing of the appeal

7) A person aggrieved by an order made by a magistrates’ court on determining a complaint under this Order may appeal to the Crown Court; and for the avoidance of doubt, an enforcing authority may be a person aggrieved for the purposes of this paragraph.

5.0       Summary

In summary, statutory restrictions such as a prohibition notice preventing occupation of the whole or part of the hereditament may be taken account of in the valuation but only to the extent that it would influence the hypothetical landlord & tenant in determining the rent.  Private and. or personal obligations and restrictions under the fire regulations are to be disregarded as outside the rating hypothesis.

Appendix 4: 1995 Revaluation Valuation of Space where a Supply/Demand Imbalance exists at AVD

It is clear that, for at least some classes and in some areas, VOs have the involved task of identifying the appropriate levels of value for the 1995 Rating List in market conditions at the valuation date which are rarely encountered.  This Practice Note seeks to investigate the ‘ground rules’, outline the options available, and identify the appropriate approach in such circumstances.  In paras 1-6 it considers the problem in detail in its constituent parts, and sets out the policy for the 1995 revaluation.

1.         The problem

In some areas the development boom of the late 1980s, in combination with the change in the economic climate in the early 1990s, have led to an oversupply of space by comparison with that required by occupiers.  The result is that significant parts of the stock lie vacant while some comparable space is fully occupied.  An added complication lies in the variety of rental and other evidence available.  Many of the current occupiers are locked into long term agreements, with upward only rent reviews at passing levels agreed in better market conditions.  Some reviews have been operated, others not.  Contrast an analysis of these with those of new lettings, frequently surrounded by incentives and shrouded in confidentiality clauses, which can show a significantly lower level.

The questions which arise are:-

Should we apply differing levels of value to the vacant and occupied space? 

Which evidence is to be preferred?

Can a hereditament which is occupied, and for which a rent is being paid sensibly appear in the Rating List with a nominal or nil value?

In seeking these answers other, more fundamental, questions have arisen:

Are similar properties in the locality to be assumed to be available, and if so, on real world terms or only from year to year?

Is it right to assume that there is a hypothetical tenant notwithstanding seeming evidence that all potential occupiers already have their requirements satisfied?

Should the hypothetical landlord also be assumed to be the owner of the adjacent units if in the real world that is the pattern of ownership, and can this influence the level of value?

Given that the legislation envisages a letting, should regard be had to the ‘empty rate’ provisions faced by some landlords in the real world?

What adjustment, if any, should be made to account for differences in circumstances between the AVD and compilation date of the rating list?

2.         The Legislative Framework

Section 41(1) & (2) of LGFA 1988 requires VOs to compile a new rating list on 1 April 1995.  The basis of the RVs to be included is determined by Sch.6.  The Secretary of State has specified 1 April 1993 as the date by reference to which the RV is to be determined (SI 1992/1643).  Sch.6.2(5) requires that the matters mentioned in 2(7) are nevertheless to be taken as they are assumed to be on 1 April 1995.

3.         Basic Principles Investigated

3.1          Tenure in the locality

There is a natural tendency in valuations for rating to prefer reality to hypothesis, an approach reinforced many times in judicial pronouncements.  The hereditament is real.  The landlord, tenant, tenancy and rent of that hereditament are all hypothetical.  But what of matters in the locality?  Being primarily physical, those matters mentioned in Sch. 6.2(7) (d) & (e), to be taken at the compilation or material day, must be real.  The use and occupation of other premises in the locality must therefore be taken as they were at the relevant date.

The tenure of other properties in the locality, and all the other factors, are to be taken as at 1/4/93, but are they real or to be assumed displaced by the hypothesis?

It cannot be justifiable to prefer an assumption to reality unless it is absolutely necessary so to do.  The courts have on several occasions had cause to reflect on this subject, most notably in Humber Ltd v Jones (VO) 1960 RIT 293 .  Willmer LJ took the matter as far as anyone, before or since (see ‘Ryde’ now E254), but as the commentary at the time records, it is not absolutely clear whether his assertion of the annual tenancy being the only form available to everybody else, referred to a letting of the hereditament or all properties in the locality.  Nevertheless in noting the agreement that the hypothetical terms would be so unattractive in the real world that ‘no sane manufacturer’ would offer a rent, and finding no error of law (he said) there must be a strong presumption in favour of the latter interpretation and that all properties might thereby be assumed to be available from time to time on the terms of the hypothetical tenancy.  No contradictory authorities have been identified.  It is clearly open to VOs to argue such a line, if necessary, but it seems likely to succeed only where it can be justified by the need to avoid an unwanted conclusion (eg Humber).

The learned editors of Ryde on Rating and CT suggest that the above approach is unsound on two grounds.  That it would weaken the evidential value of actual rents and that the contractor’s basis assumes the possibility of an alternative form of tenure.  Although it must be admitted a possibility, it is felt unlikely that the Lands Tribunal will allow the first consideration to disturb its reliance on actual rents without some better evidence to replace it.  Members have resisted arguments based on suggested dissimilarities between the real and hypothetical worlds sufficient to negate reliance on evidence from the former in valuations in the latter.  The second ground is contrary to CEO policy on the proper approach to the contractor’s basis. 

The preference will therefore be for tenure in the locality to be taken as it exists in the real world whether at AVD or the material day if changes have occurred between those dates.  The extent to which this restricts or facilitates demand is a matter for judgment but the outcome would naturally be reflected in rents paid for new lettings rather than renewals of leases.

3.2          Occupation (or vacancy) in the hereditament and locality

An approach which took the pattern of tenure in the locality as it exists in reality might be argued to lead to a different level of value being attributed to hereditaments which are otherwise identical, purely on the grounds of vacancy or occupation, as the case may be.  If, as a matter of fact, all tenants’ space requirements are satisfied by their current long-term occupations from where is the perceived demand for any vacant property to come?  It could be argued that the need to achieve consistency of vacant/occupied hereditaments requires the assumption that a hypothetical tenant exists.  To some extent this would mirror the Landlord & Tenant world, where rent review clauses frequently contain a specific assumption that a willing tenant exists.  Such an assumption would however fly in the face of the logic of the LT decisions in Lambeth LBC v English Property Corporation & Shepherd (VO) 1980 RA 297 and Sheil (VO) v Borg-Warner Ltd 1985 RA 36.  In both cases it was accepted without question that mere occupation/vacancy cannot be a valid reason for differing values but in each it was found that, because of the specific circumstances, there were no potential tenants willing to take the hereditament and use it to its full potential.  Because the assumption of an additional potential tenant is likely to prove unsustainable, it will be necessary to fall back on the possibility that one of the occupiers of other ‘broadly identical’ hereditaments is the likely hypothetical tenant.  This will mean taking account of the differing physical attributes and locations of properties in order to judge the rent at which they would attract a tenant.

The extent of normal market fluidity underlies the rental evidence from new lettings but may be at variance with evidence derived from rent reviews.  It is more straightforward to propose the direct connection between open market rents and RVs in a hypothetical world with tenure in the locality taken as it exists.  An assumption that all properties will become available from time to time on a tenancy from year to year, admits the possibility of a greater fluidity of occupation.  When valuing each hereditament, deemed vacant and to let, it would be possible to envisage latent demand from occupiers of similar properties freed from any contractual tie which binds them to their current premises.  The advantage of such an approach lies in the ability to defeat arguments for nominal assessments on vacant properties, based on ‘no letting at any price’ evidence, where there is a body of occupiers contentedly occupying broadly identical premises.

Whichever basis is followed arguments for differing assessments founded solely on occupation/vacancy of the hereditament must be strongly resisted.  Similarly the hypothesis must not be permitted to extend to a departure from reliance on the rental evidence.

3.3          The hypothetical landlord

In obiter in M&S Leamington Spa v Sanderson (VO) 1992 RA 63 the member reinforced earlier decisions (eg. Coppin (VO) v East Midlands Airport Joint Committee CA 1991 RA 449) in asserting that “it cannot be assumed in the rating hypothesis that there is necessarily only one landlord for the whole development nor can it be assumed that there is necessarily a separate landlord for each hereditament …….  However, the further one strays from reality the less certain is the whole foundation upon which assessments are based.”  There is clearly significant scope for variations in ownership between these two extremes.  The overriding suggestion seems to be that, as in other circumstances, departures from reality should be at the minimum level needed to produce consistent values.  It may be necessary to assume that the hypothetical landlord is not the actual landlord to distance the former from the latter’s letting policy if it is influenced by the ownership of adjoining premises (S & P Jackson (Manchester) Ltd v Hill (VO) 1980 RA 195).  This factor will only be of relevance if the hypothetical landlord is likely to pursue a policy on rents at variance with that of the actual landlord.

The most common instances are shopping centres and industrial estates.  If a landlord pursues a policy of keeping property vacant rather than reducing the asking rent, his/her success will probably depend on the level of competition in the area.  If, as a matter of fact, there is significant competition from other owners it is unlikely that such a policy will achieve any increased level of rent, which will hopefully be demonstrable by rental evidence.  On the other hand, if the landowner enjoys a virtual monopoly, any additional rent secured by limiting the supply may be in doubt once the monopoly is broken by the introduction of the hypothetical landlord.

In some areas of significant oversupply and high value landlords of commercial premises were faced at the AVD with the knowledge that if they failed to achieve a letting they would face a considerable empty-rate liability.  This, it is argued, will have influenced them to accept a lower rent than might otherwise have been agreed.  Although the hypothesis assumes a letting to take place, effectively removing any liability of the hypothetical landlord for empty-rates, it would be unsound practice to disregard their effect.  The landlords of all other similar vacant properties, with whom competition can be envisaged, would be similarly motivated.  It is therefore highly unlikely that any higher value could be achieved, and the assertion presupposes a tenant could be found who would be willing to pay a higher rent.

Many landlords in some of the oversupplied markets were faced with severe financial difficulties.  If present, by a similar logic, their influence on the market cannot be ignored, although the hypothetical landlord need not be assumed to be in such difficulties.  Rents of properties where clearly the wish of the landlord was to escape an empty-rate liability, almost at any price, should be treated with caution and the assessments of such properties should be comparable to the assessments of similar properties.

3.4 Nil or nominal rateable value?

In Black v Oliver (VO) 1978 RA 117 the Court of Appeal reviewed the authorities as to whether it could be correct, as a matter of law, to assess an occupied hereditament at £0 rateable value.

Browne LJ held that “if a tribunal of fact comes to the conclusion that if………. no one would give any rent for the hereditament, there is in my judgement, no reason in law why it should not find a NIL value.”  In reviewing British Transport Commission v Hingley (VO) (The Grimsby Docks case) he went on to add “in my judgement, that case is an authority which supports what I think is the right answer in principle, namely that there is no reason in law why in proper circumstances there should not be nil value though the actual occupier is in beneficial occupation.”  The suggestion that the case be distinguished because the docks had been valued on the profits basis was rejected.

It seems clear therefore that there is no legal bar on entering a nil value in the rating list, but how should we define ‘in proper circumstances’.  It must be recognised that Black v Oliver was an exceptional case.  The LT found that for personal reasons Black would wish to continue living at the property and paying a rent, but that the hypothetical tenant would not.  It is unlikely that such powerful personal reasons could be identified in the non-domestic world.  The normal non-domestic premise might be stated as “beneficial occupation implies valuable occupation”, but if there is positive evidence that the value at the AVD is NIL then depending on the weight of that evidence that value cannot be ruled out.  Nevertheless presentationally it may still be preferable if very nominal values are included in the list.  In proper circumstances can therefore be defined as being where there is reliable evidence that NIL is the value of the hereditament even though it is occupied.

4.         Reliability of Rents

Rents agreed in the open market will naturally reflect the interaction of supply and demand at the date they were agreed.  Changes in these factors and the underlying economic circumstances will occur over time and impact on the rents agreed in the market.  In a rapidly changing economic and market climate the further the effective date departs from the AVD the less reliable will it be as a guide to absolute value at that time.  Nevertheless it may provide an insight into the rental effect of MCCs providing these can be isolated from other economic trends.

RM : Vol.4 Section 5 Practice Note 1 Para 17 identifies the normally accepted ranking of rental evidence in the order:

New lettings

Lease Renewals

Rent Reviews

Generally those rents agreed between the parties are felt to be more reliable than those determined by an expert, the Courts or an arbitrator.  In normal market conditions there is frequently an adequate supply of new letting, renewal and review evidence to permit a judgement to be made of the correct level of value.  However as at 1/4/93 there may be a scarcity of the first, and such as it is will sometimes be at odds with the remainder.  Where, on analysis, the differences cannot be reconciled the level of assessment adopted will depend on a consideration of the rates which most closely conform to the statutory basis outlined above.

The levels of rent apparently flowing from operated upwards only reviews may show only a marginal increase over the rent previously passing.  Agents may attempt to discredit such evidence arguing that it is tantamount to no increase and that the difference did not justify reference to arbitration.  Equally it may be open to experts to show that the rent review surveyors relied on an imperfect knowledge of the market evidence because of confidentiality clauses.  Such clauses are most likely to occur in markets where landlords hold multiple interests.  Resistance to the latter arguments might be fairly based on the assertion that as that evidence was known at the AVD only by the parties to the transaction it would be unreasonable to assume that the hypothetical landlord and tenant had the same knowledge.

Ultimately the levels of value to be applied will depend on the weight to be attached to the range of evidence, and there can be no hard and fast rules as to which type is more reliable.  Suffice to say that all evidence must be subjected to the most rigorous scrutiny.

5.         The state of the locality at 1/4/93 and 1/4/95

Rating Circs 64 & 96 embody current VO policy on the detailed principles to be applied when valuing properties affected by MCCs.  It is vital to differentiate between cause and effect.  All MCCs and their economic consequences are to be taken at the compilation date (thereafter the material day).  Any economic changes not flowing from MCCs are to be ignored although physical manifestations as a result at the later date will still have to be considered.

It is possible to envisage circumstances where a supply/demand imbalance at AVD will thereafter be influenced by a reducing supply (eg redevelopment) and/or increased levels of occupation by the compilation/material day.  Whilst both are factors which are properly to be taken into account the latter is unlikely to impact on rental levels once separated from any underlying economic change which has caused it.

The state of all properties in the locality is relevant.  There may be a proportion which at the material day are incomplete.  The likelihood (or otherwise) of their being completed is a factor to be taken at the AVD.

6.         A practical approach

When attempting to quantify the effect (if any) of oversupply at the AVD the following steps are recommended:

a) Identify the type of property for which there is an imbalance between demand and supply.  For this purpose ‘type’ must be closely defined.  It may be restricted to a specific location (eg shops in a new or existing development) or a type of property defined by reference to a combination of permitted use, location, age, condition, quality and size.  VO or BA boundaries will not restrict a consideration of the location.\ It will be necessary to look at the respective physical state ie. type of structure, accommodation layout and state of repair of the vacant and occupied properties to identify any material differences.

b) Consider whether this imbalance resulted at AVD in a substantial stock of accommodation of the type in question standing vacant and to let?  Any space reserved for future occupation or held vacant pending redevelopment should be left out of account, but space not being actively marketed because of the state of the market must be included.

c) Assess the prospect as at the AVD of foreseeable changes to either supply or demand which might influence the imbalance.  For example the certain prospect of a comprehensive redevelopment might be expected to significantly reduce the supply of a type.  Conversely the imminent completion of a new development might equally be expected to increase supply of that space.

d) Conclude whether there was a market in the type at issue at the AVD.  In deciding consider:

i) Are units of the type occupied other than for historic reasons?  What evidence is there that occupation is only for historic reasons?  Is there any real current demand?

ii) Are units of the type being offered on the market, if so on what terms and is this the rent to be expected or near to it?\ In considering whether there may or may not be demand valuers should reflect on how long a building of the type in question might reasonably be expected to remain on the market before a tenant is found.  In some cases landlords might be content to wait months, if not years, and evidence of no letting at the advertised rent does not mean that there would be no demand at any rent.

iii) Has any new letting of the type taken place around or since the AVD?

iv) Where transactions have taken place showing a positive value does this represent the value to be expected?  It will be necessary to identify any factors, post AVD, which affect value but which are not be taken at the compilation/material day.

v) Where transactions have taken place at very low or negative values, have they been abnormally influenced by external factors, such as the circumstances of an individual landlord, the strength of the tenants covenant or the letting being for a short term.

vi) Have any rent reviews been settled for the type at or around AVD showing positive values?  Is there any evidence to suggest that these could be impugned.

e) Consider any MCCs which have occurred by the compilation/material day and assess whether they have an impact on the appropriate RV.

7.         A possible outcome in a typical locality

7.1          Modern Offices

In many areas of speculative development at the AVD there will be a stock of newly erected offices some of which is vacant (and has been for some time).  Most of the vacant buildings will only have been finished to ‘shell and core’ leaving the final fitting to be done by, and to suit, the ingoing tenant.  If an incomplete building is subject to a completion notice the assumption that the building is complete will only be of relevance when valuing that property.  All other properties in the locality are assumed to be in their physical state at the material day.  It would be unusual in the extreme to find no evidence of any demand for the buildings, at the very least in the form of occupation of similar offices.  There will almost certainly be a positive value.  The difficulty will lie in quantifying that value.  Many of the incomplete buildings are likely to be available to let, albeit with various incentives offered.  RM4:5 PN1 (Sections 10 and 11) provides advice on the recommended treatment of incentives and improvements.  Because deals struck in the open market will reflect the balance of supply and demand at a particular date such evidence close to the AVD will be influential.  The drafting of the lease provisions (especially the treatment of improvements on review) will be crucial in determining the period over which to amortise improvements.  The effects of incentives and improvements will to some extent be counter-balancing.  The actual level of value adopted will depend on the range of evidence but is likely to provide a ceiling on the value of older and poorer quality offices.

7.2          Post-war and 1960’s offices

These are likely to encompass a wide variety of buildings in terms of quality both as originally constructed and as subsequently refurbished to a greater or lesser extent.  There will also probably be a wide range of condition dependant on the extent to which the buildings have been maintained.  In areas where occupiers requirements have progressed it is possible that at least some of these buildings, probably the most basic, may be obsolete in their state at the AVD.  To reach this conclusion there would have to be no significant evidence of demand for offices of a similar quality and location in the form either of lettings or continued beneficial occupation.  In making these judgements it will be essential to assess the evidence differentiating by location, quality, condition and size.  It is possible therefore that a wide range of value conclusions may be drawn for offices within this broad category.  Unless there is persuasive evidence of nil or negative rental value (eg. the letting was in those terms) it would be exceptional for occupied buildings to be included in the rating list at £0 rateable value, since the normal expectation is that beneficial occupation will translate into a positive value.  Those categories of vacant offices for which there is no evidence of demand should remain in the list for so long as they remain capable of beneficial occupation.

This type of accommodation is the most prone to redevelopment and if this prospect is reflected in either the term available on the rent, or both, it should be ignored, (see Burley (VO) v A & W Birch Ltd 1959 LT 52 RIT 576.)

8.         Conclusion

An interpretation of the relevant legislation which results in differences in value of otherwise identical buildings based purely on vacancy or occupation is unsupportable. 

It is not possible to draw hard and fast conclusions on which rental evidence will prove the more reliable in any given set of circumstances.  Nevertheless there may be reasons why, in a falling market overhung with surplus space, new letting evidence, properly analysed, may be preferred.  It will continue to be essential to focus on the physical condition of buildings and identify all facets of the transaction.  All assessments must remain firmly based on the rental evidence.