Shops and shopping centres
This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.
1.1 This section deals with the valuation of standard retail units, wherever or whatever their location and is intended to include those standard shops within Shopping Centres. This does not cover hereditaments such as large shops, department stores, superstores, large food stores, convenience stores or pharmacies within health centres.
Bulk class: shop
Primary description code: CS
List description: shop and premises
SCAT code: 249 and others
Suffix G (Generalist)
3.1 Regional Valuation Units are responsible for the survey and valuation of this class.
4.1 The framework for co-ordination is set out in Rating Manual: section 6 part 1: co-ordination.
4.2 Caseworkers have a responsibility to follow the advice given in the Rating Manual and not depart from any guidance provided by CCT.
There is no specific legal framework. In some instances the rental evidence may reflect the value of a planning consent for a specific use therefore it can be important to obtain details of the planning consent.
6.1 Standard shops should be measured to Net Internal Area (NIA)
6.2 The Zoning Method
6.2.1 Retail premises come in all shapes and sizes. Dividing a shop into standard zones is the way in which account can be taken of these differences when analysing rental evidence and valuing properties. It also allows differences in location to be analysed and valued. Zoning recognises that the most valuable part of the retail premises is towards the front of the property nearest the display window. Zoning will not be appropriate for all shops. For example large department stores Section 550: large Shops:and supermarkets Section 520a: hypermarkets and superstores - Rating Manual section 6 part 3: valuation of all property classes - Guidance - GOV.UK will not be zoned.
6.2.2 The zoning method is widely used within the property industry. A retail premises is divided into a number of zones. Usually, depending upon its depth, a retail property is divided into three zones A, B and C each usually of 6.1 meters in depth and any accommodation beyond Zone C is described as Remainder. There is a variation in depth of each zone within London.
6.2.3 Zone A is the first zone nearest the display window with the next 6.1 m being Zone B, the next 6.1 m being Zone C. Any further accommodation beyond zone C is the Remainder and this can be varied in depth. The zoned area will include any space created using nonstructural walls or partitions. This effectively means that nonstructural partitions are ignored when using the zoning method.
6.3 The following guidance must be followed when measuring retail property
6.3.1 Measurement- Internal widths should be taken from the block/brickwork or from the plaster surface. Internal linings such as stud frames and shop fittings should be ignored.
6.3.2 Non-structural frontages, the depth should be measured from the back of the pavement or forecourt (normally the building line).
6.3.3 Bay windows in the frontage should be measured separately.
6.3.4 Staircases, columns, piers, structural walls, escalators, lifts and other similar features should be accurately plotted on plans.
6.3.5 Non Structural walls in front of the first structural wall must be recorded including their position construction and thickness.
6.3.6 Toilets should be measured and shown accurately on the plan.
6.3.7 Forecourts, rear yards and outbuildings should be measured and noted on plans.
6.3.8 Reduced headroom beneath any mezzanine floor should be measured and the height recorded.
6.3.9 Outdoor retail areas should be measured and recorded separately on the plan.
6.3.10 Car parking spaces or area of the car park within the curtilage of the hereditament should be recorded.
6.3.11 Air conditioning – the area covered by the air conditioning should be recorded on the plan. Further advice on air-conditioning See Appendix 1 PN Air Conditioning In Shops
7.1 Surveys should be captured on the Rating Support Application (RSA) and plans and Inspection check sheets stored in the property folder of the Electronic Document Records Management (EDRM) system.
8.1 The rentals method is the method adopted for standard shops. Rents are analysed using the zoning method. This is where a retail premises is divided into a number of zones. Zone A is the first zone 6.1 m depth nearest the display window, the next 6.1 metres depth being Zone B and the next 6.1m depth being Zone C. Any area beyond Zone C is described the Remainder and will vary in depth. The value of each zone reduces by half as it gets further from the shop window. By way of example, if Zone A is worth £100 per m² Zone B would be worth £50 per m² Zone C would be worth £25 per m² and the Remainder would be worth £12.50 per m²
8.2 Rents of retail premises are often analysed In Terms of Zone A (ITZA). To calculate the ITZA the area of each zone behind Zone A reduces by half and the resulting area is divided into the rent to give a rent ITZA per m². In other words 100% of the area of Zone A is added to 50% of the area of Zone B which is added to 25% of the area of Zone C which is added to 12.5% of the area of Remainder. The total of these areas is the area of the property ITZA.
8.3 Where a hereditament has trading areas on more than one floor level or has non trading areas in the basement or upper floors consideration needs to be given to the value to be attributed to these areas when analysing a property in terms of Zone A. For example consideration should be given as to whether storage space in a shop meets the needs of modern retail in terms of size and accessibility this may influence the value of this area.
8.4 Value Significant Issues
8.4.1 The following issues should be considered when valuing retail properties and analysing retail property rents
8.4.2 Rent review transactions need to be considered carefully. The basis of the rent review should be investigated to determine whether the rent review is evidence of open market value. Indexed increases and turnover rents are becoming more common which may mean they are not reliable evidence of the open market value at the rent review date. Rent reviews settled at nil increase are unlikely to provide evidence of open market value.
8.4.3 Specification of the property when it was let. Is it a shell unit or fitted out. Does the rent review clause contain any assumptions regarding the fit out of the unit?
8.4.4 Non ground floor sales areas, the value is affected by the type and location of access. Different types of access, for example stairs, passenger escalators and lifts, and their different positions within the shop, should be considered in terms not only of the value of the floor served by the access but also having regard to the effect on the overall value of the shop. In any area where there is demand for non-ground floor sales the basis should in normal circumstances show an increase in the hereditament’s overall assessment. For example, the benefit of escalator access to upper floors should be greater than the loss in value of the floor space taken up by the escalators.
8.4.5 Return Frontages are often unique and care must be exercised when comparing evidence of one return frontage with another. In all cases local evidence should be scrutinised to assist in determining the method of treatment as well as the amount of variation in value.
8.4.6 Masked Areas care should be taken at both analysis and valuation stages to ascertain the extent to which any allowance for masked areas is justified. Factors to consider include the extent of the masking, the size of the sales area and the effect on layout. Any allowance for masking is best confined to the area affected and not expressed as a percentage against the whole.
8.4.7 Customer Toilets where customer toilets are provided as an additional facility over and above the usual staff toilets it would normally be expected that their provision would enhance the value of the shop and they should be included in the NIA and valued at the appropriate rate for their location within the retail area.
8.4.8 Partitions where these, are non-structural they should normally be ignored for zoning purposes although part of the rateable hereditament. In the majority of cases, for both analysis and valuation it will be appropriate to zone through non-structural partitions.
8.5 Allowances
8.5.1 Pioneering Allowances where a hereditament is in a development which is unfinished, some allowance may be justified until the physical environment improves. Where a hereditament is in a shopping development which has been completed but only a limited number of shops have been let, the non-occupation of the empty shops maybe a value significant factor but this depends on what the perception of the hypothetical tenant would have been as to future lettings at the Antecedent Valuation Date. Care must be taken to consider any changes in the economy which may have altered that perception since the Antecedent Valuation Date. It should be noted that where the number of void retail premises in a locality changes during the life of a Rating List and this is the result of changes in the economic circumstances after the Antecedent Valuation Date it is unlikely that any allowance would be justified and the change in the pattern of retail occupations would be reflected at the next Revaluation.
8.5.2 Material Change of Circumstances Prior to giving any allowance where there has been an MCC as defined in Schedule 6 para 2(7) of the Local Government Finance Act 1988 the following must be considered.
8.5.3 Was the property correctly assessed, prior to the MCC?
8.5.4 Is there evidence an MCC, has had an effect on the subject store? Trade information pre and post MCC must be requested to inform any decision of the impact of an MCC. Any reduction must be then based on comparable assessments and rents, not on a percentage of trade loss. It follows that because of this, there is no direct correlation between the percentage of trade loss from a particular MCC and a derived percentage reduction in rateable value.
8.5.5 Quantity Allowance in the majority of cases it is of course the very size of the hereditament that makes it attractive to a large space user. Any end allowance must take into account the unit price adopted for the Remainder Area and any ancillary space. These prices may already have taken into account factors which might otherwise justify a reduction for quantity and the utmost care is required to ensure that any allowances are not duplication. Any such allowance will need to be considered at each revaluation to ensure that rental evidence and rental evidence still support any such allowance
8.5.6 Shape Allowance in certain circumstances, the shape of the shop may be such that an allowance is warranted however care must be taken that there is no double counting as the zoning method may adequately reflect the shape of the shop or an allowance for masking applied to the affected area may be more appropriate than an end allowance for shape.
1. Market appraisal
1.1 Introduction
The term ‘air conditioning’ covers a variety of functions ranging from merely cooling and re-circulating air, to replacing, comfort heating and then fully conditioning it. This is achieved either by the use of cassettes or an air handling Unit (AHU) as part of a ducted air handling system (AHS).
Air conditioning in shops remains a common feature and designed properly will enhance the retail setting, providing a controlled environment. It will enhance and support the business of retailing, being conducive to staff and customer comfort.
1.2 The market for air conditioning systems
In recent years, the costs and design of air conditioning cassettes has allowed air conditioned retail space to be within the grasp of many retailers. Having said that, it is not yet a universal feature in shops. Corporate high street chains often have a ‘standard fit-out’ that means all shops in the portfolio have air conditioning or handling systems installed irrespective of location and the prevailing outside weather conditions. This results in a tendency for bespoke AHS being prevalent in prime retail locations. Cassette based systems feature in all types of retail premises. However, these systems become more difficult to install where the shops are larger or where there is limited access to outside space to expel the waste heat. Ducted systems lend themselves to larger premises, but there is no ‘hard and fast’ rule; in practice, a variety of systems are installed in a variety of premises.
1.3 Phasing out of R22 refrigerant
From 1 January 2015, the use of ‘recycled’ or ‘reclaimed’ Hydrochlorofluorocarbons (HCFCs), including the ozone-depleting refrigerant gas R22 (Sometimes referred to as ‘Freon’), was banned in refrigeration, heat pump and air conditioning (AC) systems. R22 is commonly used in AC systems pre-dating 2004 and so its ban is likely to have an effect on retailers with pre 2004 air-conditioning systems.
Following EU Regulation 2037/2000 on ozone depleting substances (ODS), R22 has not been legal for use in new AC equipment since 2004. Furthermore, since at least 2000, AC manufacturers and users knew about the impending bans on the use of ‘new’ (or ‘virgin’) R22 from 2000, and ‘recycled’ R22 from 2015.
In 2010, existing AC equipment became affected. The ODS Regulation imposed a ban in all EU Member States against the use of new R22 to maintain existing AC equipment. Since then only recycled R22 obtained from decommissioned AC equipment or reclaimed R22 can be used. Such recycled or reclaimed R22 is becoming increasingly scarce and expensive.
From 1 January 2015, AC systems are not able to be topped up with any R22, whether virgin, recycled or reclaimed.
There were three options for operators of such AC systems:
Option 1: Run the system with its existing R22 fluid until it fails. This is a ‘hope for the best’ solution, but might be a temptation for retailers with AC systems in older retail parks and retail warehouse locations,
Option 2: Replace the existing system with completely new AC equipment,
Option 3: Use an alternative modern refrigerant (Such as R410a ‘Puron’) to top them up. This will probably involve replacing parts of the existing AC system.
The occupier will have to consider the following when choosing which option:
- the age of the current AC system
- the efficiency of the system
- leakage problems
- whether alternative refrigerants are compatible
- cost
- efficiency and availability of modern refrigerants
- equipment manufacturers’ advice about using modern refrigerants
Arguably, having had a 15 year ‘lead-in’ to prepare for the ban, the retail rental market will have anticipated it. This, together with the fact that R22 has been phased out absolutely since 2015, means rents at and around the relevant dates for the 2023 Revaluation will have been agreed or determined fully reflecting the position. There may be some AC users who were ‘caught out’ when the R22 supplies became unavailable in 2015, but it is reasonable to suppose by AVD and the 2023 Material Day, retailers will have fully anticipated the change, taken action to prepare for it, and are fully compliant.
However, if at the material day the AC is not working because the R22 has run out and no modifications have been made to make the system work with another refrigerant, case workers may be faced with proposals to reduce the rateable value. Hypothetically speaking, the landlord is assumed to have provided the system and if it is a ‘repair’ issue, the AC is therefore deemed to be in good repair. If it is considered a renewal of the AC system is required, it is considered that the landlord would ordinarily consider it economic to make the expenditure based on the value of the hereditament.
In other words, a reduction in RV is not appropriate where an AC system is not operating due to the lack of availability of R22 refrigerant generally; neither is it appropriate if the system is not working due to refrigerant loss.
1.4 Value to occupier
It is often difficult to discern the impact of AC on the rents passing in retail. It is a feature of the overall tenant’s fitting out and, whilst it can probably be incorporated in a new fit out and therefore used by a subsequent occupier, it might just as easily be removed as part of any new fitting out.
However, care should be taken not to be persuaded by such a dismissive approach to previous occupiers’ ‘fitting out’. The AC is of value to the actual tenant, and the hypothetical tenant fresh on the scene not only wants the shop as it is, but he or she includes the actual tenant who does very much value the fitting out. In other words, it is of value to the occupier. It follows that it is of value to the hypothetical landlord.
The decision in Berry (VO) v Iceland Foods Ltd [2015] UTLC 0014 UC RA 201 provides some guidance on this point; the UT considered the value of a bespoke AHS fitted by the respondent. The decision should be considered in full and in context; however, at paragraph 122:
“The issue is therefore whether the parties to the hypothetical letting of the appeal property would agree a higher figure to reflect the presence of Iceland’s bespoke air handling system. We are satisfied that they would so the remaining question is how much higher a figure would they agree? Both parties must be assumed to be willing to transact for the premises including the system, but neither party can be assumed to have a whip hand. The notional landlord must be taken to appreciate that the system is too powerful to meet the needs of most tenants in the market for a retail warehouse, and who would be unlikely to be willing to pay more than the £4 per sqm at which they would value the more modest system which would satisfy their requirements. The prospective tenant who wished to trade in Iceland’s style (and there was evidence that Iceland was not the only such trader, although its direct competitors are relatively few in number) would realise that if it did not take these premises with a suitable air handling system already installed, it would be necessary for it to install its own system at a cost to it of £4,384 a year. In addition to that cost the hypothetical tenant would incur the time and inconvenience of fitting out, for which no rent free allowance can be assumed, and the likelihood that the system would have to be removed at the end of the term. In our view the landlord would be in the stronger negotiating position, and would argue that £4,325 was too low a figure to reflect the value and convenience of the existing system.”
2. Changes from the last practice note
There is no change in practical terms to the guidance provided in the previous (2017) practice note. This 2023 practice note provides valuation guidance on the treatment of air conditioning in shops for the 2023 Rating Lists. It outlines the steps to be taken when considering air conditioning systems and recommends using £7.00/m² over the area effectively air conditioned, where no better evidence or indicators of value are available.
3. Ratepayer discussions
There have been no ratepayer discussions.
4. Valuation scheme
4.1 Outline of valuation approach
In making an appropriate addition for air conditioning the recommended approach is:
- firstly, to seek rents which already include the value of air conditioning, either the rent on the subject property or comparable rents elsewhere
- to adjust and analyse such rents to quantify the effect of air conditioning on the rental market being considered, and if no answer is found
- secondly, to consider comparable assessment evidence, and this includes additions previously accepted or agreed in respect of similarly specified air conditioning systems
- thirdly, where no comparable rental or assessment evidence can be found, an addition generally will be appropriate, ideally calculated using the cost of providing the actual system installed in the subject property
- once the actual cost of provision, is established, this will be converted to an annual equivalent
- lastly, in the absence of any more reliable evidence, a backstop of £7.00/m² is recommended for this class of property and, however the addition is made
- to appreciate that the value of air conditioning is only one of several value significant factors affecting the hereditament, and as such, should not be treated as a separate issue
The above outline approach is in line with the decisions in:
Lotus & Delta v Culverwell (VO) LT [1976] RA 141
Edma (Jewellers) Ltd v Moore (VO) LT [1975] RA 343
Dorothy Perkins v Casey (VO) LT [1994] RA 391
Berry (VO) v Iceland Foods Limited [2015] UTLC 0014 (LC) RA 201
Those cases provide useful guidance on the hierarchy of evidence to be considered when seeking to quantify the value of improvements. Regard to cost should only be made as a last resort, in the absence of better, more direct, evidence of rental values.
For more information on the approach to improvements when making rental adjustments, refer to rating manual: section 4 part 1 - practice note 1 2023, Rental Adjustment, section 14 - Improvements.
4.2 Annual value of air conditioning systems
Wherever possible the Zone A adopted should be based on those rents which already include the value of air conditioning.
If reliable rental evidence is not available to show the value of air conditioning, and comparable assessment evidence is not available, the annual rental equivalent of these improvements will need to be found based on cost. For the 2023
Revaluation, an annual equivalent approach is considered to be the most appropriate.
The costs actually incurred by the retailer should be used wherever possible. However, it is acknowledged that the recommendation for VOs to amortise costs as part of a virtual rent approach to valuation in respect of air conditioning is not accepted by ratepayers and their advisors.
The Upper Tribunal in Berry (VO) v Iceland Foods Ltd [2015] UTLC 0014 (LC) RA 201 (at paragraphs 99 to 101) decided the statutory decapitalisation rate ought to be used and applied it to the costs to arrive at a decapitalised figure. The members went further and determined that the landlord would be in a stronger negotiating position and suggested the resultant figure would in all likelihood be higher. The ‘Berry’ decision places the use of the statutory decapitalisation rate in context, being one consideration in a series of steps to be taken to arrive at a reasonable uplift for the benefit of air conditioning systems in shops.
4.3 Approach in the absence of reliable Rental Evidence and actual costs
Where rental evidence or the costs actually incurred cannot be obtained, only a very general indication can be given as to the addition that should be made.
Bearing in mind that details of the actual system are not known, the type of system assumed for the purpose of ascertaining a price to be adopted comprises a cassette system providing heating/cooling of air with moisture removal and air circulation.
Generally, for a modern cassette system with the same specifications as detailed in paragraph 4.4 below, £7.00/m2 may be used as a ‘back-stop’. This figure is considered to produce a reasonable addition based on providing a system designed to effectively cover the retail space concerned; it does not necessarily take account of any overcapacity or over specification; nor does it necessarily reflect poor or under specified systems. It therefore produces an addition for a system that deals effectively with a particular retail space, expressed in £/m² terms.
To assist in making those 2023 valuations where no better indicators of value are forthcoming, it is recommended that, in the absence of any better indicators of value, the backstop figure of £7.00/m2 should be assigned to the RSA ‘AIR’RSA ‘AIR’ code in respect of the appropriate ‘Other Addition’ or ‘OA’ table.
4.4 Making adjustments to the backstop addition for AC in the absence of reliable Rental Evidence and actual costs
The majority of air conditioning installations, especially in prime and secondary locations, will be designed to a standard of specification to ensure the air volume in the target retail space is properly and adequately treated.
Whilst adjustments can be made to an addition for AC (based on the ‘back-stop’ figure), it is recognised that the more detail known about any particular system and its cost, the more likely an annual rental equivalent could be ascertained.
In practice, it may be known that specific systems on the ground are over specified for a given retail space, or alternatively may be under specified and only able to deal effectively with a proportion of the given retail space. In these cases, adjustments should be made depending on the details of the actual system concerned.
It is reasonable to assume that ducted systems will be bespoke and therefore properly specified to deal effectively with the given volume of air to be conditioned, especially considering that the figures in this section are used in the absence of anything better. Therefore, it is not envisaged that this type of system will be over specified or under specified and the whole area benefiting from the ducted system should be taken as air conditioned. However, it follows that the more the detail known about any particular system, the more likely an annual rental equivalent could be ascertained.
In addition, the way that some shops are used may have an effect, particularly where this involves heat-generating equipment. Each system is likely to have been designed to meet the individual property’s physical characteristics and the tenant’s occupational needs.
Therefore, in most cases it is anticipated the relevant amount of space benefiting from the system will be the area to which the ‘back-stop’ figure is applied.
However, it may be that the air conditioning system is either over or under specified for certain installations and adjustment to the area covered by the ‘back-stop’ figure may be required.
Whilst deciding not to use the ‘back-stop’ figure for the bespoke AHS fitted by the respondent, the decision in Berry (VO) v Iceland Foods Ltd [2015] UTLC 0014 UC RA 201 provides some guidance on its use for ‘conventional’ AC systems at paragraph 122:
“We are satisfied from the evidence that, had the appeal property contained a conventional air-handling or air-conditioning system rather than the bespoke system installed by Iceland, an addition… [based on the ‘back-stop’ figure] …would have been appropriate – settlements relating to other hereditaments in the same block show that this is the case. Whether or not those constitute a tone is, to our minds, largely irrelevant.”
4.4.1 Ducted systems
It is a reasonable assumption that ducted systems are specifically designed to treat the air in all areas of the retail unit benefiting from the system; if the amount being added for the benefit of air conditioning is challenged, there is no practicable alternative other than to ascertain the likely costs of installation, seeking expert help from building surveyors with experience of dealing with such systems. It is difficult to envisage the ‘effective area’ being reduced where ducted systems are installed.
4.4.2 Cassette based systems
Determining roughly whether a cassette based system is under or over specified presents certain challenges. The performance of cassette units vary depending upon the floor layout, ceiling height, obstruction to airflow caused by walls, shelving, curtains, etc. There may also be ductwork supplying fresh air as part of a cassette system.
It is reasonable to assume the system is adequate where it appears there is a good proliferation of ceiling cassettes. However, where the number of ceiling cassettes appears to be inadequate, or is stated to be so, it is possible to estimate a reduced ‘optimum area’ in terms of m² that would be expected to be conditioned. It is reasonable to adopt such an area when applying the figure provided in paragraph 4.3 above.
Where it is apparent or ascertained that the actual system is not capable of effectively conditioning all the relevant space, an appropriate ‘effective area’ can be adopted in the absence of a more reliable approach. For such a determination to be made, the output (in Kilowatt kW) of each cassette will need to be established. Once these are established, the table below provides a list of typical cassette outputs and their corresponding area they would be expected to condition.
Should there be any difficulty in determining the area in m² effectively conditioned, a full submission should be made to National Valuation Unit (NVU).
Where it is apparent the cassette system is under specified, and the number and output wattage of the cassettes is known, the following table can be used as a guide to seek to establish an area dealt with effectively by the system installed:
| Comparable matrix price from local industrial tone | Floor level indicator | Use code | Self-storage matrix price (£100 * 0.65) | Scale factor | Scale adjusted price £/m2 |
|---|---|---|---|---|---|
| £100 | GF | WHS | £65 | 1.00 | £65 |
| 01 | WHS | 0.85 | £55 | ||
| 02 | WHS | 0.54 | £35 | ||
| 03 | WHS | 0.39 | £25 | ||
| 04 | WHS | 0.39 | £25 |
*Surface or wall mounted only
Over specification of a system should not result in an ‘effective area’ being adopted that is greater than the actual area benefitting from the AC. Where the calculation shows the system to be adequate, but no more, then the back-stop figure should still be applied to the whole area. Where it is calculated that the ‘effective area’ is lower than the area supposedly benefitting from the air conditioning system, the ‘effective area’ can be substituted in the process of making an addition.
It is reiterated that once costs are ascertained in any particular case, adjustments should be made depending on the details of the actual systems concerned. However, it follows that the more the details known about any particular system, in particular the costs of installation, the more likely a specific virtual rent or annual equivalent could be ascertained as detailed above.
4.5 Large shops, departmental stores, hypermarkets, superstores and large food stores
Large shops, departments stores, hypermarkets and large food stores are outside the scope of this practice note. However, the practice in the landlord and tenant market in determining the rent of large shops, department stores, hypermarkets, superstores or large food stores is to make percentage adjustments for tenant’s improvements, when required. The value of air conditioning is included in these overall adjustments. When dealing with such hereditaments for rating purposes a similar approach should be adopted.
Large shops (and department stores) are covered in rating manual: section 6 part 3 - section 550a
Hypermarkets and superstores are covered in [rating manual: section 6 part 3 - section 520a]https://www.gov.uk/guidance/rating-manual-section-6-part-3-valuation-of-all-property-classes/section-520a-hypermarkets-and-superstores)
Large Food Stores are covered in rating manual: section 6 part 3 - Section 520b
1. Market Appraisal
1.1 Introduction
The term ‘air conditioning’ covers a variety of functions ranging from merely cooling and re-circulating air, to replacing, comfort heating and then fully conditioning it. This is achieved either by the use of cassettes or an air handling Unit (AHU) as part of a ducted air handling system (AHS).
Air conditioning in shops remains a common feature and designed properly will enhance the retail setting, providing a controlled environment. It will enhance and support the business of retailing, being conducive to staff and customer comfort.
1.2 The market for Air Conditioning Systems
In recent years, the costs and design of air conditioning cassettes has allowed air conditioned retail space to be within the grasp of many retailers. Having said that, it is not yet a universal feature in shops. Corporate high street chains often have a ‘policy’ that means all shops in the portfolio have air conditioning or handling systems installed irrespective of location and the prevailing outside weather conditions. This results in a tendency for bespoke AHS being prevalent in prime retail locations. Cassette based systems feature in all types of retail premises. However, these systems become more difficult to install where the shops are larger or where there is limited access to outside space to expel the waste heat. Ducted systems lend themselves to larger premises, but there is no ‘hard and fast’ rule; in practice, a variety of systems are installed in a variety of premises.
1.3 The Phasing Out of R22 Refrigerant
From 2015, it is illegal to put Hydrochlorofluorocarbons (HCFCs), including the ozone-depleting refrigerant gas R22, in refrigeration, heat pump and air conditioning (AC) systems. R22 is commonly used in AC systems pre-dating 2004 and so its ban is likely to have an effect on retailers with air-conditioning systems of that vintage.
Following EU Regulation 2037/2000 on ozone depleting substances (ODS), R22 has not been legal for use in new AC equipment since 2004.Since at least 2000, AC manufacturers and users have known about the impending bans of new (or ‘virgin’) R22 in 2000, and ‘recycled’ R22 in 2015.
In 2010, existing AC equipment became affected. The ODS Regulation imposed a ban in all EU Member States against the use of new R22 to maintain existing AC equipment. Since then only recycled R22 obtained from decommissioned AC equipment or reclaimed R22 can be used. Such recycled or reclaimed R22 is becoming increasingly scarce and expensive.
From 2015, AC systems will not be able to be topped up with any R22, whether virgin, recycled or reclaimed.
There will be three options for operators of such AC systems:
- Option 1: Run the system with its existing R22 fluid until it fails. This is a ‘hope for the best’ solution, but might be a temptation for retailers with AC systems in secondary or tertiary retail locations
- Option 2: Replace the existing system with completely new AC equipment
- Option 3: Use an alternative modern refrigerant to top them up. This may involve replacing parts of the existing AC system.
The occupier will have to consider the following when choosing which option: * the age of the current AC system; * the efficiency of the system; * leakage problems; * whether alternative refrigerants are compatible; * cost; * efficiency and availability of modern refrigerants, and * equipment manufacturers’ advice about using modern refrigerants.
Arguably, having had a 15 year ‘lead-in’ to prepare for this change, the retail rental market should have anticipated this change and rents will reflect any uncertainties at the relevant dates for the 2017 Revaluation. There will always be some AC users who are ‘caught out’ when the R22 supplies are no longer available, but it is reasonable to suppose retailers will have anticipated the change over the last 15 years and taken action to prepare for it.
However, if at the material day the AC is not working because the R22 has run out and no modifications have been made to make the system work with another refrigerant, case workers may be faced with proposals to reduce the rateable value. Hypothetically speaking, the landlord is assumed to have provided the system and if it is a ‘repair’ issue, the AC is therefore deemed to be in good repair. If it is considered a renewal of the AC system is required, it is considered that the landlord would ordinarily consider it economic to make the expenditure based on the value of the hereditament.
In other words, a reduction in RV is not appropriate where an AC system is not operating due to the lack of availability of R22 refrigerant generally; neither is it appropriate if the system is not working due to refrigerant loss.
1.4 Value to Occupier
It is often difficult to discern the impact of AC on the rents passing in retail. It is a feature of the overall tenant’s fitting out and, whilst it can probably be incorporated in a new fit out and therefore used by a subsequent occupier, it might just as easily be removed as part of any new fitting out.
However, care should be taken not to be persuaded by such a dismissive approach to previous occupiers’ ‘fitting out’. The AC is of value to the actual tenant, and the hypothetical tenant fresh on the scene not only wants the shop as it is, but he or she includes the actual tenant who does very much value the fitting out. In other words, it is of value to the occupier. It follows that it is of value to the hypothetical landlord.
The decision in Berry (VO) v Iceland Foods Ltd [2015] UT(LC) RA 201 provides some guidance on this point; the UT considered the value of a bespoke AHS fitted by Iceland. The decision should be considered in full and in context; however, at paragraph 122:
“The issue is therefore whether the parties to the hypothetical letting of the appeal property would agree a higher figure to reflect the presence of Iceland’s bespoke air handling system. We are satisfied that they would so the remaining question is how much higher a figure would they agree? Both parties must be assumed to be willing to transact for the premises including the system, but neither party can be assumed to have a whip hand. The notional landlord must be taken to appreciate that the system is too powerful to meet the needs of most tenants in the market for a retail warehouse, and who would be unlikely to be willing to pay more than the £4 per sqm at which they would value the more modest system which would satisfy their requirements. The prospective tenant who wished to trade in Iceland’s style (and there was evidence that Iceland was not the only such trader, although its direct competitors are relatively few in number) would realise that if it did not take these premises with a suitable air handling system already installed, it would be necessary for it to install its own system at a cost to it of £4,384 a year. In addition to that cost the hypothetical tenant would incur the time and inconvenience of fitting out, for which no rent free allowance can be assumed, and the likelihood that the system would have to be removed at the end of the term. In our view the landlord would be in the stronger negotiating position, and would argue that £4,325 was too low a figure to reflect the value and convenience of the existing system.”
2. Changes From The Last Practice Note
There is no change in practical terms to the guidance provided in the previous (2010) practice note. This practice note provides valuation guidance on the treatment of air conditioning in shops for the 2017 Rating Lists. It outlines the steps to be taken when considering air conditioning systems and recommends using £7.00/m² over the area effectively air conditioned should no better evidence or indicators of value be available.
3. Ratepayer Discussions
There have been no ratepayer discussions.
4. Valuation Scheme
4.1 Outline of Valuation Approach
In making an appropriate addition for air conditioning the recommended approach is:
- Firstly, to seek rents which already include the value of air conditioning, either the rent on the subject property or comparable rents elsewhere.
- Such rents should be analysed to quantify the effect of air conditioning on the rental market being considered.
- Comparable assessment evidence should be considered, and this includes additions previously accepted or agreed in respect of similarly specified air conditioning systems.
- Where no comparable rental or assessment evidence can be found, an addition generally will be appropriate, ideally calculated using the cost of providing the actual system installed in the subject property.
- Once the actual cost of provision is established, this will be converted to an annual equivalent.
- In the absence of any more reliable evidence, a backstop of £7.00/m² is recommended.
- The value of air conditioning is only one of several value significant factors affecting the hereditament, and as such, should not be treated as a separate issue.
For more information on the approach to rental adjustments and improvements, please refer to Section 4 - Part 1 Rental Adjustment Practice Note 1, 2017, Part 14 - Improvements.
4.2 Annual Value of Air Conditioning Systems
Wherever possible the Zone A adopted should be based on those rents which already include the value of air conditioning.
If reliable rental evidence is not available to show the value of air conditioning, and comparable assessment evidence is not available, the annual rental equivalent of these improvements will need to be found based on cost. For the 2017 Revaluation, an annual equivalent approach is considered to be the most appropriate.
The costs actually incurred by the retailer should be used wherever possible. However, it is acknowledged that the recommendation for VOs to amortise costs as part of a virtual rent approach to valuation in respect of air conditioning is not accepted by ratepayers and their advisors.
The Upper Tribunal in Berry (VO) v Iceland Foods Ltd [2015] UT(LC) RA 201 (at paragraphs 99 to 101) decided the statutory decapitalisation rate ought to be used and applied it to the costs to arrive at a decapitalised figure. The members went further and determined that the landlord would be in a stronger negotiating position and suggested the resultant figure would in all likelihood be higher. The Iceland decision places the use of the statutory decapitalisation rate in context, being one consideration in a series of steps to be taken to arrive at a reasonable uplift for the benefit of air conditioning systems in shops.
4.3 Approach in the Absence of Reliable Rental Evidence and Actual Costs
Where rental evidence or the costs actually incurred cannot be obtained, only a very general indication can be given as to the addition that should be made.
Bearing in mind that details of the actual system are not known, the type of system assumed for the purpose of ascertaining a price to be adopted comprises a cassette system providing heating/cooling of air with moisture removal and air circulation.
Generally, for a modern cassette system with the same specifications as detailed in paragraph 4.4 below, £7.00/m2 may be used as a ‘back-stop’. This figure is considered to produce a reasonable addition based on providing a system designed to effectively cover the retail space concerned; it does not necessarily take account of any overcapacity or over specification; nor does it necessarily reflect poor or under specified systems. It therefore produces an addition for a system that deals effectively with a particular retail space, expressed in £/m2 terms.
4.4 Making Adjustments to the backstop addition for AC in the Absence of Reliable Rental Evidence and Actual Costs
The majority of air conditioning installations, especially in prime and secondary locations, will be designed to a standard of specification to ensure the air volume in the target retail space is properly and adequately treated.
Whilst adjustments can be made to an addition for AC (based on the ‘back-stop’ figure), it is recognised that the more detail known about any particular system and its cost, the more likely an annual rental equivalent could be ascertained.
In practice, it may be known that specific systems on the ground are over specified for a given retail space, or alternatively may be under specified and only able to deal effectively with a proportion of the given retail space. In these cases, adjustments should be made depending on the details of the actual system concerned.
It is reasonable to assume that ducted systems will be bespoke and therefore properly specified to deal effectively with the given volume of air to be conditioned, especially considering that the figures in this section are used in the absence of anything better. Therefore, it is not envisaged that this type of system will be over specified or under specified and the whole area benefiting from the ducted system should be taken as air conditioned. However, it follows that the more the detail known about any particular system, the more likely an annual rental equivalent could be ascertained.
In addition, the way that some shops are used may have an effect, particularly where this involves heat-generating equipment. Each system is likely to have been designed to meet the individual property’s physical characteristics and the tenant’s occupational needs.
Therefore, in most cases it is anticipated the relevant amount of space benefitting from the system will be the area to which the ‘back-stop’ figure is applied.
However, it may be that the air conditioning system is either over or underspecified for certain installations and adjustment to the area covered by the ‘back-stop’ figure may be required.
4.4.1 Ducted Systems
It is a reasonable assumption that ducted systems are specifically designed to treat the air in all areas of the retail unit benefitting from the system; if the amount being added for the benefit of air conditioning is challenged, there is no practicable alternative other than to ascertain the likely costs of installation, seeking expert help from building surveyors with experience of dealing with such systems. It is difficult to envisage the ‘effective area’ being reduced where ducted systems are installed.
4.4.2 Cassette based Systems
Determining roughly whether a cassette based system is under or over specified presents certain challenges. The performance of cassette units vary depending upon the floor layout, ceiling height, obstruction to airflow caused by walls, shelving, curtains, etc. There may also be ductwork supplying fresh air as part of a cassette system.
It is reasonable to assume the system is adequate where it appears there is a good proliferation of ceiling cassettes. However, where the number of ceiling cassettes appears to be inadequate, or is stated to be so, it is possible to estimate a reduced ‘optimum area’ in terms of m² that would be expected to be conditioned. It is reasonable to adopt such an area when applying the figure provided in paragraph 4.3 above.
Where it is apparent or ascertained that the actual system is not capable of effectively conditioning all the relevant space, an appropriate ‘effective area’ can be adopted in the absence of a more reliable approach. For such a determination to be made, the output (in Kilowatt kW) of each cassette will need to be established. Once these are established, the table below provides a list of typical cassette outputs and their corresponding area they would be expected to condition.
Should there be any difficulty in determining the area in m² effectively conditioned, a full submission should be made to National Specialists Unit.
Where it is apparent the cassette system is under specified, and the number and output wattage of the cassettes is known, the following table can be used as a guide to seek to establish an area dealt with effectively by the system installed:
| Cassette Type and Wattage | Area Covered in m2 – up to | Cassette Type and Wattage | Area Covered in m2 – up to |
| 2.8 kW* | 20 | 8.8 kW | 60 |
| 3.5 kW* | 27 | 10 kW | 65 |
| 5 kW | 35 | 12 kW | 75 |
| 5.25 kW | 40 | 12.5 kW | 80 |
| 6 kW | 42 | 13 kW | 85 |
| 7 kW | 50 | 14 kW | 100 |
- Surface or wall mounted only.
Over specification of a system should not result in an ‘effective area’ being adopted that is greater than the actual area benefitting from the AC. Where the calculation shows the system to be adequate, but no more, then the back-stop figure should still be applied to the whole area. Where it is calculated that the ‘effective area’ is lower than the area supposedly benefitting from the air conditioning system, the ‘effective area’ can be substituted in the process of making an addition.
It is reiterated that once costs are ascertained in any particular case, adjustments should be made depending on the details of the actual systems concerned. However, it follows that the more the details known about any particular system, in particular the costs of installation, the more likely a specific virtual rent or annual equivalent could be ascertained as detailed above.
4.5 Large Shops, Departmental Stores, Hypermarkets and Superstores
Large shops, departments stores and hypermarkets are outside the scope of this practice note. However, the practice in the landlord and tenant market in determining the rent of large shops, department stores, hypermarkets or superstores is to make percentage adjustments for tenant’s improvements, when required. The value of air conditioning is included in these overall adjustments. When dealing with such hereditaments for rating purposes a similar approach should be adopted.
Large shops (and department stores) are covered in Rating Manual Section 6 - Part 3: Section 550. Hypermarkets and superstores are covered in Rating Manual Section 6 - Part 3 Section 520.
Summary
This Practice Note provides valuation guidance on the treatment of air conditioning in shops for the 2010 Rating Lists. It outlines the steps to be taken when considering air conditioning systems and, following the resolution by consent of an appeal to the Lands Tribunal in respect of an entry in a 2005 Rating List, recommends using £7.00/m² over the area effectively air conditioned should no better evidence or indicators of value be available.
1. Introduction
This Practice Note provides valuation guidance on the treatment of air conditioning in shops for the 2010 Rating Lists. The approach taken in the 2000 lists is helpful; therefore, for more detailed guidance, reference should be made to:
Rating Manual Section 6 part 3: Section 920: Shops and Shopping Centres: Practice Note 1 : 2000 : Revaluation 2000 : Air Conditioning in Shops
The framework for co-ordination is shown in Rating Manual Section 6 Part 1.
2. Description and Functions of Air Conditioning Systems
The term “air conditioning” covers a variety of functions ranging from merely cooling and re-circulating air, to replacing, comfort heating and then fully conditioning it. This is achieved either by the use of cassettes or a ducted system.
3. Rateability
For the 2010 Rating Revaluation the rateability of air conditioning systems arise under the Plant and Machinery Regulations 2000.
Air conditioning systems are rateable. Should it be argued that an air conditioning system in a shop is not rateable on these grounds, a full submission should be provided to CEO (Rating).
4. Outline of Valuation Approach
In valuing air conditioning the recommended approach is:
- Firstly, to seek rents which already include the value of air conditioning.
- Such rents should be analysed to quantify the effect of air conditioning on the rental market being considered.
- Where no comparable rental or assessment evidence can be found, an addition generally will be appropriate, ideally calculated using the cost of providing the actual system installed in the subject property.
- Once the actual cost of provision is established, this will be converted to an annual equivalent.
- A back-stop approach at £7.00/m² to the areas benefiting from AC is provided for use in the absence of any more reliable evidence.
- The value of air conditioning is only one of several value significant factors affecting the hereditament, and as such, should not be treated as a separate issue.
For more information on the Valuation Approach, please refer to Section 4 Part 1: Rental Adjustment Practice Note 1, 2010, Part 14 - Improvements.
5. Annual Value of Air Conditioning Systems
Wherever possible the Zone A tone should be based on those rents which already include the value of air conditioning.
If reliable rental evidence is not available to show the value of air conditioning, the annual rental equivalent of these improvements will need to be found based on cost. For the 2010 Revaluation, the virtual rent approach is considered to be the most appropriate.
The costs actually incurred by the retailer should be used wherever possible. However, it is acknowledged that the recommendation for VOs to amortise costs as part of a virtual rent approach in respect of air conditioning is not accepted by ratepayers and their advisors.
6. Approach in the Absence of Reliable Rental Evidence and Actual Costs
Where rental evidence or the costs actually incurred cannot be obtained, only a very general indication can be given as to the addition that should be made.
Bearing in mind that details of the actual system are not known, the type of system assumed for the purpose of ascertaining a price to be adopted comprises a cassette system providing heating/cooling of air with moisture removal and air circulation.
Generally, for a modern cassette system with the same specifications as detailed in paragraph 7 below, £7.00/m2 may be used. This figure is based on providing a system designed to effectively cover the retail space concerned; it does not take account of any overcapacity or over specification; nor does it reflect poor or under specified systems. It therefore gives the price for dealing effectively with a particular retail space, expressed in £/m² terms.
In practice, it may be known that specific systems on the ground are over specified for a given retail space, or alternatively may be under specified and only able to deal effectively with a proportion of the given retail space. In these cases, adjustments should be made depending on the details of the actual system concerned. However, it follows that the more the detail known about any particular system, the more likely a specific virtual rent could be ascertained as detailed in paragraphs 4 and 5 above.
It is reasonable to assume that ducted systems will be bespoke and therefore properly specified to deal effectively with the given volume of air to be conditioned, especially considering that the figures in this section are used in the absence of anything better. Therefore, it is not envisaged that this type of system will be over specified or under specified and the whole area benefiting from the ducted system should be taken as air conditioned.
This figure is intended merely as an indication but, as it flows from recent discussions with agents acting on behalf of a significant number of retailers with outstanding appeals on the issue of air conditioning, it is expected to be adopted in the absence of any better indicators of value in the majority of circumstances.
7. Determining the specification of the system
Where better evidence is not available recourse should be had to the figures in paragraph 6 above. The majority of air conditioning installations, especially in prime and secondary locations, will be designed to a standard of specification to ensure the air volume in the target retail space is properly and adequately treated.
In addition, the way that some shops are used may have an effect, particularly where this involves heat-generating equipment. Each system is likely to have been designed to meet the individual property’s physical characteristics and the tenant’s occupational needs.
Therefore, in most cases it is anticipated the relevant amount of space benefitting from the system will be the area to which the “back-stop” figure is applied.
However, it may be that the air conditioning system is either over or underspecified for certain installations and adjustment to the area covered by the back-stop figure may be required.
Ducted Systems
It is a reasonable assumption that ducted systems are specifically designed to treat the air in all areas of the retail unit benefitting from the system; if the amount being added for the benefit of air conditioning is challenged, there is no practicable alternative other than to ascertain the likely costs of installation, seeking expert help from building surveyors with experience of dealing with such systems. It is difficult to envisage the “effective area” being reduced where ducted systems are installed.
Cassette based Systems
Determining roughly whether a cassette based system is under or over specified presents certain challenges. The performance of cassette units vary depending upon the floor layout, ceiling height, obstruction to airflow caused by walls, shelving, curtains, etc.
It is reasonable to assume the system is adequate where it appears there is a good proliferation of ceiling cassettes. However, where the number of ceiling cassettes appears to be inadequate, or is stated to be so, it is possible to estimate a reduced “optimum area” in terms of m² that would be expected to be conditioned. It is reasonable to adopt such an area when applying the figures provided in paragraph 6 above.
Where it is apparent or ascertained that the actual system is not capable of effectively conditioning all the relevant space, an appropriate “effective area” can be adopted in the absence of a more reliable approach. For such a determination to be made, the output (in Kw) of each cassette will need to be established. Once these are established, the table below provides a list of typical cassette outputs and their corresponding area they would be expected to condition.
Should there be any difficulty in determining the area in m² effectively conditioned, a full submission should be made to CEO (Rating) following the usual protocols.
Where it is apparent the cassette system is under specified, and the number and output wattage of the cassettes is known, the following table can be used as a guide to seek to establish an area dealt with effectively by the system installed:
| Cassette Type and Wattage | Area Covered in m² – up to | Cassette Type and Wattage | Area Covered in m² – up to |
| 2.8Kw* | 20 | 8.8Kw | 60 |
| 3.5Kw* | 27 | 10Kw | 65 |
| 5Kw | 35 | 12Kw | 75 |
| 5.25Kw | 40 | 12.5Kw | 80 |
| 6Kw | 42 | 13Kw | 85 |
| 7Kw | 50 | 14Kw | 100 |
*Surface or wall mounted only
Over specification of a system should not result in an “effective area” being adopted that is greater than the actual area benefitting from the AC. Where the calculation shows the system to be adequate, but no more, then the back-stop figure should still be applied to the whole area. Where it is calculated that the “effective area” is lower than the area supposedly benefitting from the air conditioning system, the “effective area” can be substituted in the process of making an addition.
It is reiterated that once costs are ascertained in any particular case, adjustments should be made depending on the details of the actual systems concerned. However, it follows that the more the details known about any particular system, in particular the costs of installation, the more likely a specific virtual rent could be ascertained as detailed in paragraphs 5 and 6 above.
8. Large Shops, Departmental Stores, Hypermarkets and Superstores
The practice in the landlord and tenant market in determining the rent of Large Shops, Departmental Stores, Hypermarkets or Superstores is to make percentage adjustments for tenant’s improvements, when required. The value of air conditioning is included in these overall adjustments. When dealing with such hereditaments for rating purposes a similar approach should be adopted.