SVM113020 - The Statutory Open Market: General Comments on the Statutory Hypothesis

The case of IRC v Gray [1994] STC 360 contains an authoritative re-statement of the statutory hypothesis. In that case, Hoffman LJ said:

“Certain things are necessarily entailed by the statutory hypothesis. The property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale. The question is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date… ..the theme which runs through the authorities is that we assume that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper enquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually play no part in the calculation. The enquiry will often focus upon what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened.”

Both the Lands Tribunal findings in this case and Hoffman L J’s judgment emphasise that, in establishing the open market value, regard must be had to the real prevailing circumstances - in this case, that the two minor partners were not particularly young, had other interests and thus would be likely to fall in with a surrender of the tenancies.

The case of Walton v Commissioners of Inland Revenue [1996] STC 68 emphasised again that the statutory open market price should have regard to the actual circumstances prevailing at the date of valuation. Gibson LJ referred to the Gray case above in which it was confirmed that the willing buyer:

“reflects reality in that he embodies whatever was actually the demand for that property at that time…….the open market does not require…..that the landlord should be hypothetical….. the statute requires one to assume a sale but it should be assumed to take place in the real world…….it is not necessary for the operation of the statutory hypothesis of a sale in the open market of an interest in a tenancy that the landlord should be treated as a hypothetical person, and it is a question of fact……whether the attributes of the actual landlord would be taken into account in the market.”

This case is important in that it provides confirmation that while the “sale in the open market” is a hypothetical one it must have regard to the actual circumstances and facts.

Additional Guidance: SVM150000