JUDGMENT
Telereal Trillium (Respondent) v Hewitt (Valuation
Officer) (Appellant)
before
Lord Reed, Deputy President
Lord Carnwath
Lady Black
Lord Lloyd-Jones
Lord Briggs
JUDGMENT GIVEN ON
15 May 2019
Heard on 21 February 2019
Appellant Respondent
Hui Ling McCarthy QC Richard Glover QC
Hugh Flanagan Cain Ormondroyd
(Instructed by HMRC
Solicitor’s Office
(London)
)
(Instructed by DLA Piper
UK LLP (Sheffield)
)
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LORD CARNWATH: (with whom Lord Reed and Lord Lloyd-Jones agree)
Introduction
1. The issue in the appeal is the correct approach to determination of the rateable
value of an office building (“Mexford House”), in circumstances where the evidence
showed at the relevant time a general demand in the area for comparable office
buildings, but no actual tenant willing to pay a positive price for the building itself.
2. I can conveniently take the factual background from Henderson LJ’s
judgment in the Court of Appeal: [2018] 1 WLR 3463, para 2.
“Mexford House is a substantial three-storey block of offices
in the North Shore area of Blackpool. It was purpose-built in
1971, and was occupied continuously as Government offices
from 1972, in part by the Department of Work and Pensions
(‘the DWP’) and in part by the Commissioners for Her
Majesty’s Revenue and Customs (‘HMRC’). By the material
date, however, the property was vacant. Both HMRC (on 29
February 2008) and the DWP (on 13 March 2008) had given
notice of their intention to vacate the property, and it was
formally handed back to the lessor on 31 March 2009. It is
uncertain when the process of vacating the premises was finally
complete, but there is no dispute that the property was empty
by 1 April 2010, that being the date on which the 2010 nondomestic rating list for the area of Blackpool Borough Council
first came into force by virtue of section 41(2) of the Local
Government Finance Act 1988 (‘the 1988 Act’).”
3. The valuation was made for the purposes of the new rating list, which came
into force on 1 April 2010 (“the material date”). But the rateable value had to be
determined by reference to the “antecedent valuation date” (or “AVD”) two years
earlier, that is 1 April 2008: 1988 Act Schedule 6 paragraph 2(3), Rating Lists
(Valuation Date) (England) Order 2008 (SI 2008/216) article 2.
4. The rateable value initially entered by the valuation officer with effect from
1 April 2010 was £490,000. This reflected his view that there were in the area other
office buildings of similar age and quality, occupied by public sector tenants at rents
of the same order. As became common ground in the course of the appeal, the most
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closely comparable was Hesketh House in Fleetwood, a building of 8,403 square
metres built in 1966. That had been assessed for rating purposes at £59 per square
metre, which was taken also as the basis for the valuation officer’s final valuation
before the Upper Tribunal at £370,000 (see below).
Basic principles
5. The basis of the valuation is set by paragraph 2 of Schedule 6 to the 1988
Act, which provided:
“(1) The rateable value of a non-domestic hereditament … shall
be taken to be an amount equal to the rent at which it is
estimated the hereditament might reasonably be expected to let
from year to year … [on certain assumptions, including] …
(a) … that the tenancy begins on the day by
reference to which the determination is to be made …”
6. Although the valuation was at the AVD, paragraph 2(5) of Schedule 6
provided that certain matters, listed in paragraph 2(7), were to be “taken to be as
they are assumed to be” on the “material date” (1 April 2010). Those matters
include:
“(a) matters affecting the physical state or physical
enjoyment of the hereditament,
(b) the mode or category of occupation of the hereditament,
…
(d) 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 none the less
physically manifest there, and
(e) the use or occupation of other premises situated in the
locality of the hereditament.”
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7. The underlying principle is not in doubt. The valuation must be based on an
estimate of the rent at which the hereditament “might reasonably be expected to let
from year to year …”. In short, the valuer must imagine a hypothetical negotiation
between a willing landlord and a willing tenant and arrive at the rent which best
represents the resulting compromise:
“You must assume a landlord willing to let, and a tenant willing
to take by the year; and having done so, you must get in the
best way you can at the rent which, under an agreement brought
about by the compromise of the conflicting interests of the man
who wants to receive as much as he can and the man who wants
to pay as little as he can, would be arrived at under such
circumstances.” (Smith v The Churchwardens and Overseers of
the Poor of the Parish of Birmingham (1888) 22 QBD 211, 219
per Wills J)
In similar terms in Robinson Bros (Brewers) Ltd v Houghton and Chester-le-Street
Assessment Committee [1937] KB 445, 470, Scott LJ said:
“The rent to be ascertained is the figure at which the
hypothetical landlord and tenant would, in the opinion of the
valuer or the tribunal, come to terms as a result of bargaining
for that hereditament, in the light of competition or its absence
in both demand and supply, as a result of ‘the higgling of the
market’. I call this the true rent because it corresponds to real
value.”
8. More contentious is how to apply those principles in a case where there is no
evidence of actual demand for the particular property, by which to conduct this
hypothetical exercise. I shall return to the authorities in more detail, having outlined
the course of the proceedings below.
The proceedings below
The Upper Tribunal
The hearing
9. The Valuation Tribunal for England having reduced the rateable value to £1,
the valuation officer appealed to the Upper Tribunal, before which the matter was
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dealt with by way of a full re-hearing on fact and law. Both sides were then
represented by the same counsel as have since appeared before the Court of Appeal
and this court: Ms Hui Ling McCarthy QC (as she has since become) for the
valuation officer, and Mr Richard Glover QC for Telereal. Expert evidence was
presented to the tribunal in the form of written statements by Mr Hewitt himself, and
Mr Baldwin for Telereal.
10. On the first day of the hearing (28 April 2016), Mr Hewitt gave evidence and
was cross-examined. The tribunal summarised his evidence (UT paras 19-30). In his
view, the building was “not obsolete either in a functional or in a locational sense”
for reasons he explained. That Telereal had shared that opinion, he said, was shown
by the fact that in 2002 they had taken a reversionary lease to run from September
2014 to March 2018, and that on the September 2007 rent review their own surveyor
had put the rent at £341,000. However, in the course of his cross-examination, as
the tribunal recorded, he accepted –
“… that as at the AVD he could not identify in the real world
any person who would put in a bid for a tenancy of Mexford
House on the statutory terms; that there was no demand for
such accommodation from the private sector; and that all public
sector demands as at the AVD were being met by the
occupation of other premises which the public sector already
enjoyed. He accepted the opinion expressed by Mr Baldwin
[Telereal’s surveyor] in paragraph 11.1 of Mr Baldwin’s first
report, namely that ‘vacant and to let’ at the AVD there would
be no demand for Mexford House.” (UT para 24)
11. On the other hand, he pointed to the fact that “there did exist at the AVD
demand for other (occupied) properties which were comparable to Mexford House”.
He maintained his view that a substantial rateable value was appropriate, for reasons
he explained:
“Leaving aside any detailed comparisons (some favourable
some unfavourable) between Mexford House on the one hand
and Hesketh House and the other comparables on the other
hand, [Mr Hewitt] expressed the view that there was a quantity
of broadly comparable office accommodation which was in
beneficial occupation and for which substantial rents were paid
at the AVD. He said that the fact that as at the AVD there was
in the real world no demand for Mexford House (because all
the demand had been absorbed in the other comparable
properties) was not because of any intrinsic lack of merit (or
obsolescence) in Mexford House as compared with these other
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properties but because Mexford House could be considered as
‘unlucky’ not to have occupants in beneficial occupation when
comparable office premises did have occupants in beneficial
occupation.” (UT para 29)
On this basis, his final assessment of the rateable value of Mexford House was
£370,000.
12. Following the completion of Mr Hewitt’s evidence, counsel for both parties
informed the tribunal of their view that, in the light of his evidence, the issue
between them could be decided “as a matter of law upon an agreed basis of fact”
(UT para 31). No other evidence was heard; in particular, Mr Baldwin was not called
or cross-examined. Following legal argument the hearing concluded, but the tribunal
directed that the agreed position should be reduced to writing.
13. Accordingly, on 3 May 2016 the parties lodged an agreed statement (“the
Joint Position Paper” or “JPP”) in the following terms:
“1. The parties are content that the issue can be decided as
a point of law.
2. The respondent [Telereal] contends that the correct
approach requires the valuer to consider whether, had the
subject hereditament been on the market at the AVD (1 April
2008), anybody would have been prepared to occupy the
property and pay a positive price.
3. The parties agree that had the subject hereditament been
on the market at the AVD (1 April 2008), nobody in the real
world would have been prepared to occupy the property and
pay a positive price. Thus, if the correct approach under the
rating hypothesis is as formulated in para 2 above, the appeal
should be dismissed and the decision of the [VTE] confirmed.
4. The [Valuation Officer] accepts that there was nobody
in the real world who would be prepared to pay or bid a positive
price for Mexford House at 1 April 2008.
5. If, however, the correct approach is, as the [Valuation
Officer] contends, that (notwithstanding the absence of
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anybody who would be prepared to pay or bid a positive price
for Mexford House at 1 April 2008), the rating hypothesis:
(a) requires the existence of a hypothetical tenant to
be assumed and;
(b) requires the rateable value to be assessed by
reference to the ‘general demand’ as evidenced by the
occupation of other office properties with similar
characteristics,
then the parties agree that the appeal should be allowed and the
[rateable value] determined at £370,000.
6. The respondent accepts the proposition at 5(a) but does
not accept the proposition at 5(b).
7. If the [Valuation Officer] is right, [his rateable value] of
£370k is confirmed.
8. If the respondent is right, the respondent’s [rateable
value] of £1 is confirmed.”
Footnotes to paragraphs 2 and 3 noted that the factors in paragraph 2(7) of Schedule
6 were to be taken as they were at 1 April 2010.
14. As the Court of Appeal observed (paras 25-26), the tribunal seems to have
gone out of its way to make sure that the basis of the agreement was not in doubt. It
commented on the state of the evidence at that point:
“We have received Mr Hewitt’s evidence which has been
cross-examined before us. We have received Mr Baldwin’s
written evidence but he did not give any oral evidence and
hence was not offered for cross examination. We pointed out
that if we proceeded as invited we could not properly resolve
any dispute of fact in so far as such was revealed in the
evidence before us. The parties were both content with this
position and considered that, in the light of the factual
agreements contained in the Joint Position Paper, there was no
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need for any such resolution of disputed matters save for the
point of law which they had identified.” (para 33)
15. It also mentioned the kind of factual matters on which (absent agreement) it
would have expected to be addressed: including “what steps were taken when and
by whom to let Mexford House upon what terms”; and whether Mexford House
could have been let at a much lower rent, for example if the DWP or HMRC might
have chosen to consolidate there “on the hypothetical statutory terms at such a very
much lower rent”. It was told that these points did not need to be investigated, since
the valuation officer “did not seek to argue that in the real world Mexford House
could at the AVD have been let at a positive price” (UT paras 34-35). On the other
side it was confirmed by Mr Glover for Trillium that it was unnecessary to explore
differences between the comparables and Mexford House since –
“… it was accepted that if, as a matter of principle, the rateable
value of Mexford House was to be assessed by reference to the
‘general demand’ as evidenced by the occupation of other
office properties with similar characteristics, then the
respondent accepted that £59 per square metre was correct.”
(para 36)
The tribunal’s reasoning
16. I would pay tribute to the tribunal’s judgment, which is a painstaking review
of the relevant principles, and their application to the present case on the limited
basis permitted by the JPP. For present purposes it is unnecessary to set it out in full.
The tribunal had conducted a detailed review of a number of authorities, to which I
will need to return in more detail later in this judgment. It started its “discussion” by
stating two propositions derived from that review (paras 96-97):
“It must be assumed that a hypothetical landlord and a
hypothetical tenant will agree terms for such a letting. It is not
permissible to conclude that no bidder can be found to take the
tenancy.”
“It is well established that the basic question to ask is: is the
occupation (ie the occupation under the hypothetical tenancy)
such as to be of value? A valuation for rating purposes is based
upon the concept of the value of the occupation.”
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As indicated by cross-references to earlier paragraphs, the latter proposition was
derived from various authorities, starting with London County Council v Church
Wardens and Overseers of the Poor of the Parish of Erith in the County of Kent
[1893] AC 562 (the “Erith case”); the former more specifically from Hoare
(Valuation Officer) v National Trust [1998] RA 391, 422 per Sir Richard Scott VC.
17. The core of the tribunal’s reasoning comes in the following paragraphs:
“102. Having regard to the Joint Position Paper we are not
concerned with any detailed comparisons between Mexford
House on the one hand and Hesketh House and other
comparables on the other hand. We proceed on the basis that as
at the AVD there existed several broadly comparable office
premises which were beneficially occupied and for which
substantial rents were being paid. 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.
103. It is necessary to consider the hypothetical negotiations
for the tenancy on the statutory terms between the hypothetical
landlord and the hypothetical tenant in circumstances where the
hereditament was not intrinsically valueless and where
comparable premises were being beneficially occupied at
substantial rents. In such circumstances we do not consider a
hypothetical landlord and hypothetical tenant, each acting
prudently and making the best use it could of its bargaining
position, would agree upon a rent of £1.
104. We consider the flaw in the respondent’s argument to be
as follows. The respondent correctly accepts that it is not open
to it to say that no hypothetical tenant would be prepared to
take any tenancy at all. The respondent accepts that there has
to be a tenancy granted on the statutory terms between the
hypothetical landlord and the hypothetical tenant after
negotiations. However, the respondent then (incorrectly in our
view) attributes to the hypothetical tenant a characteristic
which is not justified, namely the characteristic of not wanting
the tenancy at all. The respondent seeks to justify this by saying
that in the open market as a matter of fact no-one would have
been prepared to pay any positive price for Mexford House. We
consider that it is only permissible to attribute this
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characteristic to the hypothetical tenant where the hereditament
is intrinsically valueless (struck with sterility) or where the
responsibilities are such that no beneficial occupation is
possible in a commercial sense. It is impermissible to attribute
this characteristic to the hypothetical tenant when the premises
are capable of beneficial occupation and where comparable
premises are beneficially occupied at substantial rents.
105. Mexford House was capable of beneficial occupation as
at the AVD. It was in fact still occupied (anyhow partially) at
that date. The property has its drawbacks having regard to its
age of construction and parking provision and location but is
deemed to be in repair in accordance with the statutory
provisions. It is necessary to ask the question identified in [the
Erith case] namely whether the occupation (ie occupation
under the hypothetical tenancy) be such as to be of value? We
conclude that the only answer that can be given to that question
is: yes, the occupation is such as to be of value.
106. Once that answer is reached we conclude it is impossible
to find that the yearly tenancy on the statutory terms would be
granted in return for a nominal rent. Instead we conclude that
the tenancy would be granted at a rent which was more than a
nominal rent and which was a rent which represented the value
of the occupation. This rent would be negotiated between the
hypothetical tenant and the hypothetical landlord by reference
to the ‘general demand’ for such properties as evidenced by the
occupation of other office properties with similar
characteristics. Having regard to the Joint Position Paper it is
not appropriate for us (or indeed open to us) to examine how
such negotiations would go and whether the hypothetical tenant
might be able to agree a rent at less than £370,000.”
18. The tribunal accordingly fixed the rateable value at the agreed figure of
£370,000. Permission to appeal was granted by the tribunal itself on 3 August 2016
in the following terms:
“The appeal raises an issue of principle which is likely to recur
in connection with substantial vacant buildings with significant
rateable values. Where the evidence shows that there is no
demand to occupy a hereditament which is capable of
occupation, does the rating hypothesis require the valuer to
assume demand that does not in reality exist?”
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The Court of Appeal
19. Telereal appealed to the Court of Appeal, which allowed the appeal and
restored the VTE’s assessment. Giving the sole judgment, Henderson LJ reviewed
the authorities. He cited in particular (at paras 34-35) the judgment of Hoffmann LJ
in Inland Revenue Comrs v Gray [1994] STC 360, for the proposition that
“[a]lthough the yearly letting is hypothetical, the open market in which it is assumed
to take place is real”, adding the comment:
“It can be seen, therefore, that the hypothetical purchaser, or in
the present context the hypothetical lessee, ‘embodies whatever
was actually the demand for that property at the relevant time’,
and that the valuation is a ‘retrospective exercise in
probabilities, wholly derived from the real world.”
20. He referred also (para 36) to Hoare v National Trust [1998] RA 391 in which
the Court of Appeal, overturning the decision of the Lands Tribunal, had ascribed
only a nominal rateable value to two historic houses (Petworth House and Castle
Drogo) owned by the National Trust. The court had emphasised “the need to depart
from reality no further than the statutory hypothesis requires”: that is “the principle
of reality” in the words of Peter Gibson LJ. He added:
“Peter Gibson LJ did not need to consider the more extreme
position where, as in the present case, there was no potential
bidder for the hypothetical lease; but the logic of the reality
principle would appear to dictate that, in such circumstances,
no hypothetical lease at a positive rent could have been
concluded.”
21. In the light of the principles established by the authorities, he saw “no real
doubt about the answer in the present case”:
“On the agreed factual basis that nobody in the real world
would have been prepared to occupy Mexford House at the
AVD and to pay a positive price for doing so, it is in my
judgment impossible to say that there was any actual demand
in the market for such occupation. In the absence of any actual
demand, there is no principle of law which requires such
demand to be assumed. The only relevant assumption inherent
in the rating hypothesis is that an agreement will be reached
between the notional lessor and the notional lessee, but this
requirement is satisfied by assuming a letting at a nominal rent.
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It would be contrary to the reality principle, and to the repeated
emphasis in the authorities on the need to examine the actual
balance between supply and demand in the real market, if the
requirement to assume a concluded letting were elevated into a
requirement to assume such a letting at a substantial rent which
nobody in the real world would ever have been willing to pay.
The existence of any such supposed principle of law would also
be impossible to reconcile with the cases which show that, in
an appropriate factual context, application of the rating
hypothesis to premises which are capable of beneficial
occupation can nevertheless yield a rateable value of nil or a
nominal amount.” (para 41)
22. He acknowledged the existence of “broadly comparable office properties …
occupied by public sector tenants at rents comparable to that for which Mr Hewitt
contended”. However, there was “no surplus public sector demand” which would
have enabled Mexford House to be re-let; in other words “the relevant market was
saturated” (para 42). Ms McCarthy’s arguments glossed over “the critical point …
the saturation of the relevant market and the absence of any potential tenants in the
real world for Mexford House”. He added:
“In a saturated market, there is still a proper basis for a
substantial rateable value while the existing tenant remains in
occupation and pays a substantial rent for the hereditament; but
that situation changes once the property becomes vacant,
because there is no longer a potential tenant available to take it
on the statutory terms required by the rating hypothesis.” (para
43)
23. He identified four respects in which the Upper Tribunal had erred (paras 46-
50):
“First, the Upper Tribunal were wrongly influenced by
passages in the speech of Lord Herschell LC in [the Erith case]
which were directed to the logically prior question of whether
the premises were in rateable occupation at all, which is not in
issue in the present case, rather than by the guidance given by
Lord Herschell LC about the rating hypothesis itself at p 588
…”
“Secondly, although the Upper Tribunal quoted at length from
the judgment of Hoffmann LJ in Inland Revenue Comrs v Gray,
… their actual reasoning appears to be inconsistent with the
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concept of the actual open market described by Hoffmann LJ
…”
“Thirdly, at para 102, the Upper Tribunal considered that the
public sector occupiers of the comparable premises, if not
already accommodated in them, would have been able to enjoy
beneficial occupation of Mexford House, and to find such
occupation ‘of substantial value’. That may have been so, but
the actual position was that the other public sector tenants were
already accommodated elsewhere, and they would not have
been available as potential tenants for Mexford House on the
actual market which existed at the relevant time. Furthermore,
the effect of paragraphs 2(5) and (7) of Schedule 6 to the 1988
Act is that the valuer must assume that all the comparable
properties were occupied and used on the material date by their
existing tenants.”
“Fourthly, the Upper Tribunal appear to have taken the view
that a nominal rateable value is only permissible in law where
the hereditament is either intrinsically valueless (‘struck with
sterility’) or where the tenant’s responsibilities are so onerous
that no beneficial occupation of the property is possible in a
commercial sense. … I can find no warrant for treating these
categories as exhaustive, or as precluding the same conclusion
in a case where the evidence drawn from the market is that there
was no tenant who would pay a positive rent for the relevant
hereditament.”
The issues in the appeal
24. The main issue in the appeal, as in the Upper Tribunal and the Court of
Appeal, is narrowly constrained by the terms of the JPP. It is common ground that
at the AVD “nobody in the real world would have been prepared to occupy the
property and pay a positive price”, but that the “rating hypothesis” requires “the
existence of a hypothetical tenant to be assumed”. The question is whether, against
that agreed legal and factual background, the same hypothesis –
“… requires the rateable value to be assessed by reference to
the ‘general demand’ as evidenced by the occupation of other
office properties with similar characteristics.”
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If the answer is yes, it is agreed that the correct rateable value was £370,000; if no,
£1.
25. The submissions of the parties in this court largely repeat their submissions
below, and are sufficiently indicated by the two judgments reviewed above.
However, it is convenient at this point to deal with one possible difference between
their respective interpretations of the JPP.
26. In his written submissions, Mr Glover commented on the apparently
conflicting views of the two valuers on the issue of “obsolescence”. As he explained,
the view of his witness, Mr Baldwin, was that given the size, age and location of
Mexford House and “the clear evidence that the market had moved away from
offices of that size, age and location”, the hereditament had “reached the end of its
economic life” and was “economically obsolete”. In support he took us to parts of
Mr Baldwin’s written evidence (paragraphs 11.4-11.5) where he had spoken of the
public sector being “in the process of downsizing their estate in the Fylde”, with the
result that –
“second hand office complexes dating from the 1960s and
1970s that became empty between 2000 and 2014 were either
• Demolished …;
• completely refurbished or redeveloped … or
• remained empty pending lease expiry.”
He put Mexford House in the last category.
27. Mr Glover noted the apparently contrasting view of Mr Hewitt that Mexford
House was “still physically capable of use as offices and had a general specification
not too dissimilar from occupied buildings”, and that it was neither “functionally”
nor “locationally” obsolete. Mr Glover suggested that these uses of the term
“obsolete” were not mutually contradictory:
“The qualifying adjective is critical. It was not a necessary part
of the ratepayer’s case to show that Mr Hewitt’s propositions
were wrong; so he was not cross-examined on them. Similarly,
after the agreement of the JPP, counsel for the valuation officer
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did not feel the need to challenge Mr. Baldwin on his
proposition.” (written submissions para 17)
28. This submission, in my view, runs up against a difficulty inherent in the JPP
itself. The bare agreement that “nobody in the real world” would have been prepared
to pay “a positive price” to occupy the building tells one nothing about the reasons
for that position. Mr Glover’s summary highlights what in my view was a significant
difference between the explanations given by the two valuers. Had Mr Baldwin been
called as a witness, his alternative valuation of £1 would have been explored. The
tribunal would no doubt have wished to examine the hypothetical possibilities
mentioned in its judgment. There would also have been room for cross-examination
on the comparison with the valuation proposed by Telereal’s surveyor on the rent
review. As it was, those differences were necessarily left unresolved.
29. The tribunal recorded the valuation officer’s view that the property was not
“obsolescent” in either sense, and that the lack of demand was due simply to “all
public sector demands” being met by other properties; or as he put it later “because
all the demand had been absorbed in the other comparable properties … not because
of any intrinsic lack of merit (or obsolescence) …”. That was the limited context of
his agreement with Mr Baldwin’s paragraph 11.1. (see paras 10-11 above, citing UT
paras 24 and 29). His acceptance of the proposition in that paragraph cannot be read
as extending to the matters set out in the following paragraphs of Mr Baldwin’s
evidence. Apart from mentioning his report, the tribunal made no further reference
to Mr Baldwin’s evidence, on this or any other issue. That was entirely
understandable in view of the terms of the JPP.
30. As far as concerned the submissions as recorded by the tribunal, the same
limited view of Mr Hewitt’s concession was repeated and relied on in Ms
McCarthy’s submissions (UT para 71). On the other side, there was no indication in
Mr Glover’s submissions (UT paras 82ff) that the issue of “obsolescence”, or Mr
Baldwin’s views on it, formed any part of his case on behalf of Telereal following
the JPP. Similarly, as has been seen (para 21 above), the Court of Appeal’s judgment
proceeded on the basis that the lack of a tenant was due, not to “obsolescence” in
any sense, but “saturation” of the relevant market.
31. In this court, in my view, we must take the JPP as it stands. We cannot look
beyond it to evidence which was not referred to by the tribunal, nor attempt to
resolve issues which were by agreement left unresolved. However, that does not
mean that the JPP has to be looked at in a vacuum. In so far as there are differences
as to its interpretation we are entitled to look at the context in which it was arrived
at, and the state of the evidence as recorded by the tribunal at that time. That
includes, but does not go beyond, the agreement arrived at in the course of Mr
Hewitt’s cross-examination.
Page 16
The authorities
General principles
32. The tribunal took it as established by the authorities, first that –
“It must be assumed that a hypothetical landlord and a
hypothetical tenant will agree terms for such a letting. It is not
permissible to conclude that no bidder can be found to take the
tenancy.” (para 96)
and secondly that –
“… the basic question to ask is: is the occupation (ie the
occupation under the hypothetical tenancy) such as to be of
value? A valuation for rating purposes is based upon the
concept of the value of the occupation.” (para 97)
As indicated by their cross-references, the first proposition was derived from Hoare
v National Trust [1998] RA 391, 422 per Sir Richard Scott VC (see UT para 62);
the second from a number of authorities, including the Erith case, but perhaps most
clearly stated in Poplar Metropolitan Borough Assessment Committee v Roberts
(“Poplar”) [1922] 2 AC 93 HL (UT paras 48). I will need to look in more detail at
the National Trust case, which was relied on by the Court of Appeal, and also by Mr
Glover in submissions. It is convenient to refer first to the Poplar case, which
provides an authoritative and, I believe, uncontentious statement of the general
approach.
33. The Poplar case concerned the rating of a tied house (including living
accommodation) which was subject to statutory rent control, with the effect that the
maximum recoverable rent was less than the value entered in the valuation list. The
ratepayer appealed on the basis that the figure should be reduced to the maximum
rent so recoverable. The House of Lords dismissed the appeal. It is sufficient for
present purposes to refer to Lord Parmoor’s discussion of some of “the fundamental
principles which permeate the whole system of our rating law” (pp 118ff). As he
explained actual rents agreed between tenant and landlord are not the test of value
for rating purposes, this being one aspect of the “fundamental principle of equality”:
“It has long been recognized, as a matter of principle in rating
law, that to make actual rentals the basis of rateable value
Page 17
would contravene the fundamental principle of equality, both
between the rate contributions from individual ratepayers, and
between the totals of rate contributions levied in different
contributory rating areas. In effect the result would be to make
the amount on which the occupier of property is liable to pay
rates dependent in many cases on the contractual relationship
between a particular landlord and tenant, whereas it is
dependent in all cases on a statutory direction applicable on the
same principle to all hereditaments, and intended to insure
equality of treatment as between the occupiers of rateable
property and the rating authority.” (p 119)
As he acknowledged, it could be “notoriously difficult” in some instances to
ascertain the correct figure, but the duty of the assessment committee was –
“… in all cases, to ascertain for this purpose as accurately as
may be, the value of the beneficial or profitable occupation of
the particular property, and then to make the statutory
deductions.”
For that purpose account should be taken of “all that can reasonably influence the
judgment of an intending occupier” (p 120).
34. The underlying principle of equality (or the “common yardstick”, in Ms
McCarthy’s words) was stated in similar terms more recently by Lord Pearce:
“Rating seeks a standard by which every hereditament in this
country can be measured in relation to every other
hereditament. It is not seeking to establish the true value of any
particular hereditament, but rather its value in comparison with
the respective values of the rest. Out of various possible
standards of comparison it has chosen the annual letting value
… So one must assume a hypothetical letting (which in many
cases would never in fact occur) in order to do the best one can
to form some estimate of what value should be attributed to a
hereditament on the universal standard, namely a letting ‘from
year to year’…” (Dawkins (VO) v Ash Brothers and Heaton Ltd
[1969] 2 AC 366, 381-388)
35. It is right also to note the necessary qualification to that principle stated by
Scrutton LJ in a familiar passage in the Ladies Hosiery case [1932] 2 KB 679.
Having referred to the “vital principle” that the valuation should be “fair and equal”
Page 18
as between “different classes of hereditaments, and as between different
hereditaments in the same class”, he added:
“but in my view there is a third important qualification, that the
assessing authority should not sacrifice correctness to ensure
uniformity, but, if possible, obtain uniformity by correcting
inaccuracies rather than by making an inaccurate assessment in
order to secure uniform error.” (Ladies Hosiery and Underwear
Ltd v West Middlesex Assessment Committee [1932] 2 KB 679,
688)
The Erith case
36. For the application of these principles to a case where there was no general
market for the use in question, the tribunal relied on the Erith case [1893] AC 562,
from which it extracted the proposition that in such a case “the true test is whether
the occupation is of value”, contrasting the case where the land was “struck with
sterility in any and everybody’s hands” (para 43). The Court of Appeal thought that
in this respect the tribunal had been wrongly influenced by passages directed to the
“logically prior question whether the premises were in rateable occupation at all …”
(see para 23 above). In my view that criticism is misplaced. To understand why, it
is necessary therefore to look in a little more detail at the case and its factual context.
37. The Erith case concerned pumping stations and other installations occupied
by the LCC, as part of the metropolitan sewerage system. The appeal proceeded by
case-stated on the basis that the net rateable value was fixed at £10,000 subject to
resolution of the question of law identified in the case. It was agreed that, as used
by the LCC they were incapable of yielding a profit; that if they had been in private
ownership, the LCC would have been prepared to pay a rent sufficient to support
the rateable value as fixed; but if disconnected from that system and “in the hands
of a tenant applied to any other use” the rateable value should be £2,143 (p 565).
The principal questions before the House were, first, whether they were rateable at
all, and secondly, if so, whether for the purpose of assessing rateable value the LCC
was to be considered as a possible hypothetical tenant. Both questions were
answered in the affirmative.
38. In the leading speech Lord Herschell LC dealt first with the authorities on the
issue of rateability, concluding that the relevant law was “in a most unsatisfactory
condition”. However the decision of the House in Jersey v Mersey Docks (1865) 11
HLC 443, “mark[ing] an epoch in the law of rating”, had “exploded” the basis of
some of the early authorities, by determining that “the circumstance that land is held
by a public body for public purposes does not affect its rateability”; land is “rateable
whenever its occupation is of value” (pp 584-585).
Page 19
39. Having dealt with the issue of rateability, he turned then to consider that of
assessment: “upon what principle the assessment ought to be made, and what
considerations are proper to be taken into account”, questions which in his mind
were “involved in much greater difficulty” (p 586). Having referred to the statutory
definition of rateable value, designed for “uniformity in the assessment of rateable
property in the metropolis” (p 587) he said:
“It has never been doubted that the rent which is actually being
paid by the occupier does not necessarily indicate what is the
rent which a tenant might reasonably be expected to pay, or that
an owner who is in occupation, and who may not be willing to
let on any terms, is none the less rateable. The tenant described
by the statute has always been spoken of by the court as ‘the
hypothetical tenant’. Whether the premises are in the
occupation of the owner or not, the question to be answered is:
Supposing they were vacant and to let, what rent might
reasonably be expected to be obtained for them?” (p 588)
40. It was in this context that (at pp 590-592) he discussed the use in some of the
earlier authorities of the expression “struck with sterility”. For example, in R v
School Board for London (1886) 17 QBD 738, 942 (concerning rateability of a
school), Bowen LJ had said:
“If land is by law struck with sterility when in any and
everybody’s hands, so that no profit can be derived from the
occupation of it, it cannot be rated to the relief of the poor. But
if the school-house is not used by this school board for any
profitable purpose, it by no means follows that the site of it
must be sterile in every other person’s hands.”
Lord Herschell commented:
“Now, if land is ‘struck with sterility in any and everybody’s
hands’, whether by law or by its inherent condition, so that its
occupation is, and would be, of no value to any one, I should
quite agree that it cannot be rated to the relief of the poor. But
I must demur to the view that the question whether profit (by
which I understand is meant pecuniary profit) can be derived
from the occupation by the occupier is a criterion which
determines whether the premises are rateable, and at what
amount they should be assessed; and I do not think that a
building in the hands of a school board is incapable of being
beneficially occupied by them, and is not so occupied because
Page 20
they are prohibited from deriving pecuniary profit from its
use.”
He cited with approval the words of Fry LJ, in the same case (at 17 QBD, p 770):
“The term ‘sterility’ has been introduced into the cases
because, as a general rule, a profit is produced; but it does not
by any means follow that because there is no profit there is no
value …”
and commented:
“I think the learned judge here points to the true test; whether
the occupation be such as to be of value … and I have already
said that the possibility of making a pecuniary profit is not in
my opinion the test whether the occupation is of value.” (p 591)
41. It is clear in my view from a review of the speech as a whole that Lord
Herschell was seeking to clarify the principles not only of rateability but also of
assessment. The rateable value in his case was directly dependent on whether the
LCC could be considered as a hypothetical tenant, since it was only on that basis
that it would be appropriate to take account of the use of the pumping stations as
part of the metropolitan sewerage system, rather than as a detached installation in
private hands. As has been seen, they were the respective bases of the agreed
alternative valuations.
42. Accordingly, with respect, Henderson LJ was wrong to criticise the tribunal’s
reliance on passages from this speech as directed solely to the issue of rateability.
That may be true of its first reference (UT para 39) to his statement that land is
rateable “whenever its occupation is of value”. However the tribunal went on to cite
passages specifically directed to the issue of assessment, including the contrast with
land “struck with sterility” and Lord Herschell’s adoption of Fry LJ’s “true test”,
that is “whether the occupation is of value”. Indeed, in this as in other early
authorities, the considerations relevant to rateability and valuation may often
overlap (see eg Mersey Docks and Harbour Board v Birkenhead Union Assessment
Committee [1901] AC 175, 184-185 per Lord Davey).
Page 21
The Court of Appeal authorities
43. I turn first to Hoare v National Trust [1998] RA 391, on which both parties
relied. As already noted this case concerned the assessment of rateable value of two
historic houses (Petworth House and Castle Drogo) owned by the National Trust. I
can conveniently adopt the present tribunal’s summary of the issue (UT para 62):
“The National Trust had produced figures to show that no
profits could be made from the properties. They argued
therefore that no hypothetical tenant would be prepared to offer
any rent for them and that their rateable value was therefore nil.
The Lands Tribunal broadly accepted that no profit could be
made from the properties, but held that an overbid would be
made by the National Trust, who could be treated as a
hypothetical tenant, to reflect the great historical and cultural
values of the houses notwithstanding that there was no money
to be made out of being a tenant of them. The Tribunal
calculated the amount of the rent by taking 3% of the gross
receipts at each property.”
The Court of Appeal disagreed holding that a hypothetical tenant (whether regarded
as the National Trust itself, or, as Sir Richard Scott V-C thought preferable, “a
hypothetical person standing in as a hypothetical National Trust”) would not “have
been prepared to make any overbid”.
44. As the tribunal noted at para 62, the court had “recognised that the statutory
formula demands that the hypothetical negotiations for the yearly tenancy should be
successful”. It cited the words to that effect of the Vice-Chancellor (p 422):
“If only one potential bidder has been identified, a conclusion
that the bidder would not be willing to take the yearly tenancy
is not one that is permissible. The statutory formula insists that
the tenancy is taken up.”
noting that the other judgments (of Schiemann and Peter Gibson LJJ) were to similar
effect.
45. As to the substance of the decision the tribunal cited the leading judgment of
Schiemann LJ, but it might also have referred to the concurring judgment of the
Vice-Chancellor where the critical point is to my mind expressed most clearly:
Page 22
“The question for the Tribunal was not, in my judgment, what
annual rent the National Trust would have been willing to pay
for the two properties, but what rent a hypothetical organisation
whose purposes were the preservation of historic houses and
whose resources were adequate for taking on these properties
would have been prepared to pay. The answer to this question
would have to take into account in respect of each property the
net annual receipts that could be obtained from a reasonable
exploitation of the property’s potential and the annual
expenditure that would have to be undertaken in the
maintenance, repair and general preservation of the property. It
is, in my opinion, important to notice that the statutory formula,
unlike its predecessor in section 19 of the General Rate Act
1967, places the burden of repair and maintenance on the
hypothetical tenant. Each of the properties with which we are
concerned appears to require an annual expenditure on repair
and maintenance which would leave the hypothetical tenant
heavily out of pocket.
The facts as found by the Tribunal, regarding the annual
receipts that might be obtained from each property and the
annual expenditure currently being spent on the maintenance
and repair of each property, make it quite unreal, in my
judgment, to suppose that the hypothetical tenant would be
prepared to pay any rent at all. The hypothetical tenant, the
hypothetical National Trust, would be accepting the obligation
to meet a considerable annual deficit. Why should any
hypothetical tenant be willing to add to that deficit by paying a
positive rent? Why would not the hypothetical landlord be
willing to grant the yearly tenancy at a nil rent in order to
escape the annual deficit resulting from the cost of keeping the
property in repair?” (pp 23-24)
46. The tribunal saw that case as exemplifying the proposition that a nil value
may be appropriate where occupation of the hereditament may be beneficial in the
physical sense but –
“where the responsibilities of a tenancy are so great as to result
in the occupation being burdensome rather than beneficial in
the commercial sense.” (UT para 99)
I agree.
Page 23
47. Henderson LJ thought this decision supported the opposite conclusion to that
reached by the tribunal. He referred (para 37) to Schiemann LJ’s observation that
the hypothetical landlord would be faced with a situation where “there are no other
bidders for the tenancy”, pointing as he said “to a nominal hypothetical rent”.
Henderson LJ thought that the same conclusion “would seem to follow, a fortiori, if
there were no potential bidder for the tenancy in the real world”. However, that
ignores the different context of Schiemann LJ’s observation. The lack of alternative
bidders in that case was the consequence of the inherently burdensome nature of the
property. Unlike the present case, there were no other comparable properties let at
substantial rents.
48. For similar reasons I do not consider that any assistance is to be gained from
an earlier Court of Appeal authority to which Henderson LJ referred (para 38):
Tomlinson v Plymouth Argyle Football Co Ltd (1960) 175 EG 1023. That concerned
the respondent’s football ground, for which the Football Club was the sole potential
tenant. Henderson LJ cited Pearce LJ’s warning against assuming hypothetical
tenants for the hereditament “if there is in respect of that particular hereditament no
reasonable possibility of such tenants existing”. However, that again was in the
context that the absence of an alternative tenant was due, not to a surplus of similar
properties in the market, but to the particular quality of the property and the heavy
cost of maintenance (see p 703).
49. Finally I should refer to the passage in Hoffmann LJ’s judgment in Inland
Revenue Comrs v Gray [1994] STC 360, on which Henderson LJ placed some
reliance. That concerned a different statutory regime, relating to the valuation of an
estate for the purposes of capital transfer tax under the Finance Act 1975. Section
38 of that Act required the value at any time of any property to be taken as “the price
which the property might reasonably be expected to fetch if sold in the open market
at that time”. The court’s reliance on this authority was perhaps more understandable
if, as Henderson LJ recorded (para 33), the parties were in agreement that the open
market to be assumed under that section was “materially identical to the open market
posited by the rating hypothesis”.
50. However, in my view the comparison was potentially misleading. I note that
in Hoare v National Trust, Peter Gibson LJ mentioned this case as raising a “similar
requirement of a hypothetical transaction” (p 18). That may be true, but it is only
part of the story. There are at least two important differences. First, section 38 was
expressly concerned with an imaginary sale in the “open market”; the 1988 Act calls
simply for an estimate of the rent “reasonably (to be) expected”, without any
reference in terms to a “market” (although such language can be found in some of
the cases: eg “the higgling of the market” – para 7 above). More importantly, the
1984 Act was concerned with the valuation of a single asset for capital transfer tax.
There is no necessary comparison with any other properties or assets. By contrast,
as has been seen, the purpose of rating assessment is much wider. It is to achieve a
Page 24
fair standard for comparable properties across the country as a whole. It is
unnecessary to decide whether every part of Hoffmann LJ’s analysis was accurate
in the statutory context to which it was directed. In the present context, however, in
so far as it suggests that the identification of the hypothetical tenant is limited by
“whatever was the actual demand for that property at the relevant time”, it is my
view inconsistent with the statutory test, and the authorities to which I have referred.
Lands Tribunal cases
51. Of more direct relevance, as the tribunal rightly held, were two decisions of
highly experienced surveyor members of the Lands Tribunal, which were not
mentioned by the Court of Appeal. They were Lambeth London Borough v English
Property Corpn Ltd and Shepherd (Valuation Officer) [1980] RA 279 LT (Mr J H
Emlyn Jones FRICS) (see UT paras 55-57); and Shiel (Valuation Officer) v BorgWarner Ltd [1985] RA 36 LT (C R Mallett FRICS) (UT paras 58-60). They
addressed directly the distinction depending on whether the lack of a tenant was
attributable to an inherent characteristic of the property, or to a surplus in the market
of comparable properties for which there was a general demand.
52. The Lambeth case concerned the annual value for rating of a warehouse
(Bridge House) which had been purpose-built in 1933 with seven storeys but was
unoccupied at the relevant date. The ratepayers argued that at the relevant date the
warehouse had outlived its use and was unsuitable for warehousing purposes; that a
tenant could have been found at the relevant date who would make use of the ground
floor and some limited use of the first floor, but that the upper parts would have been
surplus to requirements. The rating authority argued that the building could be let in
the open market as a multi-storey warehouse. The tribunal accepted that the evidence
supported the tenant’s assessment of the potential use of the building, and that there
was no demand for multi-storey use or other valuable uses of the upper floors.
53. The tribunal made clear that this conclusion did not depend on the fact that
the upper parts of the building were unoccupied at the time:
“I accept the argument put forward by the appellant rating
authority that the mere fact that premises are unoccupied does
not of itself justify a lesser value than that applicable to similar
premises which are occupied. As counsel for the rating
authority expressed it, in a parade of shops where one shop
remains unoccupied one would expect to find similar values
applicable to all shops possessing similar characteristics. I
think in principle that must be right, but that presupposes that
the hereditaments are broadly identical …” (p 313)
Page 25
The member went on to explain why the other properties relied on by the authority
were not truly comparable.
54. This passage was applied by the Lands Tribunal in the second case, Shiel.
The case concerned a large factory which was no longer required by the original
occupiers and which was empty because an alternative occupier had yet to be found.
The valuation court had reduced the assessment of rateable value to £50,000, but the
Valuation Officer had appealed to the Lands Tribunal arguing for a figure of
£200,000. The appeal failed. Citing the Lambeth case, the member accepted that
“the mere fact that premises are unoccupied does not of itself justify a lesser value
than that applicable to similar premises which are occupied”, and referred again to
the example of a parade of shops where one shop remains unoccupied (p 43).
However, he accepted the ratepayer’s case on the evidence that the appeal premises
in their existing state had “reached the end of their economic life”, and that their
future use “appears to depend upon the creation of a hereditament, or hereditaments,
different from the existing”. As he put it, “in rating terms the premises have ceased
to have any value” (p 45).
55. I would respectfully endorse the distinction drawn in those decisions between
a property which is unoccupied merely because of a surplus between supply and
demand in the market, and a property which has “reached the end of its economic
life”. I did not understand Mr Glover to argue otherwise.
56. I may add that this is not an unfamiliar issue in rating practice, nor necessarily
an easy one to resolve. Ms McCarthy referred to us to the Valuation Office Agency’s
document, “Rating Manual section 3: valuation principles”, issued in May 2017.
Section 5, headed “No demand – obsolescence” states that:
“5.1 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.”
Having noted that this issue is to be considered by reference to the AVD subject to
the statutory exceptions taken at “the material date”, it draws attention (para 5.4) to
the possible difficulty for valuation officers “in judging whether a property is
actually obsolete or simply has not (yet) let”. It lists a number of relevant
considerations, including:
– was the property occupied at AVD? This is primary
evidence of demand
Page 26
– 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.”
57. The accuracy in law of that guidance is not of course before us in this case.
In so far as it clearly relies on the approach of the Lands Tribunal in the two cases I
have mentioned, it does not appear contentious. It does however usefully highlight
the issues of fact which may become relevant in drawing the distinction in particular
cases, but which, by agreement, the tribunal in the present case was not required to
resolve.
58. This important distinction seems with respect to have been overlooked by
Henderson LJ when he said:
“In a saturated market, there is still a proper basis for a
substantial rateable value while the existing tenant remains in
occupation and pays a substantial rent for the hereditament; but
that situation changes once the property becomes vacant,
because there is no longer a potential tenant available to take it
on the statutory terms required by the rating hypothesis.” (para
43)
Whether the hereditament is occupied or unoccupied, or an actual tenant has been
identified, at the relevant date is not critical. Even in a “saturated” market the rating
hypothesis assumes a willing tenant, and by implication one who is sufficiently
interested to enter into negotiations to agree a rent on the statutory basis. As to the
level of that rent, there is no reason why, in the absence of other material evidence,
it should not be assessed by reference to “general demand” derived from
“occupation of other office properties with similar characteristics”.
59. Finally, for completeness I should mention Henderson LJ’s reliance for
support of his approach on the requirement in paragraph 2(7)(e) of Schedule 6 to
assume that “all the comparable properties were occupied and used on the material
date by their existing tenants”. As I understand it, he saw this as relevant to the
extent that:
Page 27
“the other public sector tenants were already accommodated
elsewhere, and they would not have been available as potential
tenants for Mexford House on the actual market which existed
at the relevant time.” (para 49)
60. Ms McCarthy criticises this use of paragraph 2(7)(e) as broadening its scope
in a way which is incompatible with its purpose in the statutory scheme. As she
submits, it is not dealing with the issue of demand in the hypothetical market, but is
an aspect of the rebus sic stantibus principle, which requires physical condition and
use to be taken as at the material day, both in respect of the hereditament itself and
the locality: “the actual conditions affecting the hereditament at the time when the
valuation is made” (see the cases reviewed by Lord Hodge in S J & J Monk (a firm)
v Newbigin [2017] 1 WLR 851, paras 12ff). I did not understand Mr Glover seriously
to quarrel with that submission. However, as he rightly said, this point was not
essential to the Court of Appeal’s reasoning.
61. For these reasons I would allow the appeal and restore the decision of the
Upper Tribunal.
LORD BRIGGS: (dissenting) (with whom Lady Black agrees)
62. I would have dismissed the appeal. This is not because I differ from Lord
Carnwath upon any aspect of the applicable legal principles. It is only because I have
come to a different conclusion about the meaning and consequences of the highly
artificial agreement about the facts made between the parties before the Upper
Tribunal (“UT”), as set out in the JPP. This was that, although there was sufficient
general demand for comparable properties in the locality to justify a substantial
rateable value for them (para 5), there was nonetheless nobody in the real world who
would be prepared to pay or bid a positive price for Mexford House as at the AVD
(paras 3 and 4). The UT was in no doubt about the artificiality of that agreement
about the facts. As they said (at paras 34(b) and 103-104), in the real world the
existence of comparable properties at substantial rents would ordinarily have
compelled an examination of the question whether one or more of the tenants in
those properties would have been prepared to re-locate to the subject property at a
lower, but still more than nominal, rent.
63. The JPP also required the UT to make a rather unreal choice between two
supposedly conflicting principles of law, namely (i) that the valuer is only required
to consider whether, had the subject hereditament been on the market at the AVD,
anybody would have been prepared to pay a positive price, with a nil rateable value
if not, or (ii) that, even if nobody would be prepared to pay a positive price, the
rateable value is nonetheless to be assessed by reference to the ‘general demand’ as
evidenced by the occupation of other properties with similar characteristics (para
Page 28
5(b)). It was, mercifully, common ground that, as a matter of law, the rating
hypothesis required the existence of a hypothetical tenant to be assumed (paras 5(a)
and 6). It is an unreal choice because, in the real world, the existence of evidence of
general demand for comparable properties in the relevant locality will almost
invariably lead to the conclusion that there will be someone prepared to pay at least
some more than nominal rent for the subject property, even if actually (rather than
merely hypothetically) vacant as at the AVD.
64. I would summarise the legal principles applicable to the present unusual
problem as follows. I do so briefly because I do not believe that they are in dispute,
although I will expand upon them in due course:
a. In following the express statutory requirement to identify the “rent at
which it is estimated the hereditament might reasonably be expected to let
from year to year” as at the AVD, the valuer is required to make a real world
assessment of the demand in the market for a letting of the subject premises,
departing from the real world only when the rating hypothesis compels the
valuer to do so: Hoare v National Trust; Tomlinson v Plymouth Argyle.
b. The rating hypothesis does require a hypothetical tenant to be
assumed, willing to negotiate for a yearly tenancy, but this does not require
it to be assumed that the tenant will pay more than a nominal rent. The
concept of the hypothetical tenant prepared to pay only a nominal rent is the
safety valve by which the necessary hypothesis that there is such a tenant is
reconciled with a real world in which there may be, in fact, no demand for a
letting of the property at all: Hoare v National Trust.
c. The requirement to abide by the principle of equality does entail the
same principles being applied to each property in the rating list, but not
uniformity of outcome, where the evidence (or, I would interpolate,
agreement about the facts) demonstrates otherwise: the Poplar and Ladies
Hosiery cases.
65. The ordinary approach of the valuer is to look at reliable evidence of rentals
agreed for comparable properties (if there are any), and then to adjust them (or
discount their evidential weight) by reference to relevant differences between the
comparable and the subject properties. Those differences may typically be
locational, or physical, and the passage of time between the date when a rental was
agreed for a comparable and the AVD may require further adjustment or discount,
where for example there has been a general movement in the market between the
two dates.
Page 29
66. Thus the fact that a particular rent is still being paid for the comparable
property as at the AVD may be of limited value if, for example, it was negotiated
some time previously but is being paid (as it usually is) under a lease for a term of
years, from which it would be impossible for the tenant to escape without payment
of a prohibitive surrender premium. In valuers’ language, the comparable is simply
over-rented. It does not necessarily mean that there is demand even for the
comparable property as at the AVD at the then passing rent, or at any particular rent,
or even in some extreme cases at more than a nominal rent. If there has been a fall
in the market since the rent for the comparable property was freely agreed, (ie
otherwise than at an upward-only rent review in a lease without a tenant’s break
clause) then the fact that the agreed rent is still being paid tells you little about the
continuing market for the comparable property as at the AVD.
67. All these factors are then input into the assessment of the demand (if any) for
a yearly letting of the subject property as at the AVD. They are not in any way part
of some separate analysis of general demand which may in some way trump an
evidence-based or agreed conclusion that there is in fact no real world demand at all
for the subject property at more than a nominal rent. In the overwhelming majority
of cases a conclusion that there is demand for comparable properties which may be
described as general will be sufficient evidence to prove to a reasonable valuer that
there is some demand for the subject property at a more than nominal rent, if only
because there will usually be a level of discounted rent which will be likely to tempt
the tenant of an occupied comparable property to re-locate, if free to do so without
paying a prohibitive surrender premium. That is why the mere fact that the subject
property is vacant at the AVD (eg in a row of identical properties all the rest of
which are occupied) does not mean that the vacant property has only a nominal
rental value. Demand for a letting of a particular property is not normally a binary,
yes or no, question. The real question is, demand at what rent?
68. In the present case the parties solemnly agreed that, even though there was
general demand for comparable properties at a substantial rent, nonetheless
(however improbably) there was no real world demand at all for a letting of the
subject property as at the AVD, at anything more than a nominal rent. That is in my
view what the phrase “nobody in the real world who would be prepared to pay or
bid a positive price” actually means. This is also how the UT understood the JPP, as
is apparent from the way in which, at the respondent’s invitation, the UT defined the
appealable issue of law. They said:
“Where the evidence shows that there is no demand to occupy
a hereditament which is capable of occupation, does the rating
hypothesis require the valuer to assume demand that does not
in reality exist (my italics).”
Page 30
69. The appellant tried long and hard in this court to submit that this was not what
the JPP meant. It was submitted that all it meant was that the parties were unable to
identify an actual tenant who would be prepared to take a tenancy on the AVD itself.
But the UT was best placed to construe it, since it was agreed in the middle of a
contested hearing in which they had read all the relevant evidence, and heard part of
it cross-examined. A reading of that evidence confirms the UT’s interpretation,
although a transcript of the cross examination of Mr Hewitt was sadly lacking. As
both the UT and Lord Carnwath explain, it followed a cross examination of Mr
Hewitt in which he had, flatly contrary to his written evidence, agreed with
paragraph 11.1 of Mr Baldwin’s expert report, which stated:
“The findings described in previous sections of this statement
lead to the unequivocal conclusion that as ‘vacant and to let’ at
the AVD, there would be no demand for Mexford House (my
italics).”
This paragraph followed a detailed examination of the market, the relevant
comparables (including Hesketh House) and the reasons why, notwithstanding its
locational and physical similarity, a tenant would not be found in the real world for
Mexford House at more than a nominal rent. A primary reason for Mr Baldwin’s
conclusion appears to have been that there had been a significant recent contraction
in the requirement for office space in the locality on the part of the only
(governmental) tenants likely to find it suitable for their needs, and that this
requirement was fully accommodated in other premises. He regarded Mexford
House as being economically obsolete.
70. The agreement recorded in the JPP was not merely that there was no evidence
to prove real world demand for a letting of Mexford House, but that the evidence
positively showed that there was none. This flowed naturally from the fact that
paragraph 11.1 of Mr Baldwin’s report (with which Mr Hewitt had agreed in cross
examination) was itself based on detailed evidence. I do not mean that the JPP
thereby amounted to an agreement about the reasons why there was no demand, but
it was an agreement made in the context of evidence, rather than in an evidential
vacuum. I therefore respectfully disagree with Lord Carnwath’s premise (in para 8)
that this is a type of case where there is merely no positive evidence of demand for
the particular property. In such a case, evidence about demand for comparable
properties (usually in the form of recently negotiated agreements) will be
compelling, and usually conclusive.
71. The UT’s answer to the problem that it had been agreed that the evidence
proved that there was no real world demand for a letting of Mexford House at more
than a nominal rent was to conclude that the rating hypothesis required them to
conclude otherwise, by a departure from the real world and the substitution of an
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assumed demand for the subject property, derived purely from an assessment of
demand for the comparable properties. This appears from paras 100 to 106 of their
carefully reasoned Decision. In their view the statutory requirement to assume a
hypothetical tenant meant that, provided only that the premises were capable of
beneficial occupation, taking into account the burdens of upkeep, it had to be
assumed that the tenant would be prepared to pay more than a nominal rent,
regardless of real world evidence or, as in this case, agreement to the contrary.
72. I can find nothing in the authorities which supports this legal analysis. In
short, it assumes a requirement to depart from the real world which is not justified
by the statutory scheme. All that the scheme requires is an assumption that
somebody would agree to take a yearly tenancy, but not necessarily at more than a
nominal rent. In a case where the valuer is not hamstrung by an improbable
agreement between the parties about the complete absence of demand (at more than
a nominal rent) the real world will easily provide an evidential basis for a conclusion
that the hypothetical tenant would pay something of substance, for all the reasons
which I have set out above.
73. Both the UT and Lord Carnwath rely upon a number of authorities in which
a distinction is made between properties which lack intrinsic value, where a nil
valuation may be justified, and those which have some intrinsic value to somebody,
which therefore command some more than nominal hypothetical rent. I broadly
agree with Lord Carnwath’s analysis of them, including where it departs from that
of the Court of Appeal. But in none of those cases was there a departure from a real
world assessment of rental value, nor does the reasoning in any of them justify doing
so in the present case.
74. In the Erith case, the outcome turned on a real world conclusion that, if it
needed to rent the pumping station from a private owner, a hypothetical LCC would
be prepared to pay a substantial rent because it would be able to connect the pumping
station with its sewage system, even though, viewed on its own, the pumping station
could not be operated at a profit. The phrase “struck with sterility” was not being
approved as a label for an exclusive class of case within which, alone, a nil rental
value could be assessed. Rather, this important case is supportive of the requirement
to assess demand, as far as possible, on a real world basis, rather than to depart from
it. Lord Herschell’s conclusion that the use of the subject premises would be of value
(even if not on its own profitable) was a stepping stone to a conclusion that, in the
real world, there was demand for the pumping station at a more than a nominal rent.
It was not a licence to depart from the real world assessment of demand required by
the statute, in a case where it is proved or (as here) agreed that there was no demand
at more than a nominal rent.
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75. I agree with Lord Carnwath that Hoare v National Trust was not a case in
which there were comparable properties let at a substantial rent. In the absence of
comparables the Court of Appeal therefore had to conduct a real world assessment
of the economics of being a tenant of each of the stately homes in question, which
proved that the hypothetical tenant would only pay a nominal rent. It contains a
trenchant statement of the need not to depart from the real world further than the
rating hypothesis compels (per Schiemann LJ at p 381). The Court of Appeal
overruled the Lands Tribunal precisely because it departed from the real world,
under the mis-apprehension that the law required it to assume some kind of overbid,
contrary to the facts. The case is a good example of the operation of the nominal
rent as the safety valve which accommodates the statutory requirement to assume a
willing tenant with the absence of any real world demand for the premises at more
than a nominal rent. It is powerful authority against, rather than for, the proposition
that where the evidence (or, as here, an agreement about the evidence) demonstrates
that there is no such demand, the law requires the valuer to depart from the real
world so as to create one which does not in reality exist.
76. It is in my view no answer to say of the Hoare case that there were no
comparables, or that the absence of demand was proved by reference to the
economics of running the two buildings. That is true, and those economics were the
real world reasons why there was nobody who would bid more than a nominal rent
for either property. In this case that conclusion is an agreed fact, and the reasons for
it do not therefore matter.
77. I would make the same observation about Tomlinson v Plymouth Argyle
Football Co Ltd. Pearce LJ’s warning against assuming hypothetical tenants where
there is no real possibility of such tenants existing may have been based upon real
world facts about the football ground, but it is a perfectly general and in my view
correct statement of the law. In this case the absence of any such possibility (ie
tenants prepared to pay more than a nominal rent) is an agreed fact, and the law does
not compel the valuer to go behind it, into the non-real world, merely because there
is some general demand for other comparable properties.
78. Again, I agree with Lord Carnwath that Inland Revenue Comrs v Gray is
about a different kind of statutory valuation, but rating valuation is surely no less
about an open market than the valuation of an estate for tax purposes. In my view
the concession recorded by Henderson LJ in the Court of Appeal that the two
valuation processes are substantially the same was rightly made. At p 372, speaking
generally, Hoffmann LJ said:
“The valuation is thus a retrospective exercise in probabilities,
wholly derived from the real world …”(my italics).
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Nor do I accept as a sufficient distinguishing characteristic the fact that rating
valuation seeks to value numerous properties as at the same date, whereas estate
valuation is a one-off. It would be no less unusual (and potentially unsatisfactory)
for identical houses in a terrace to receive hugely different values for IHT purposes
when their owners died at roughly the same time, than apparently comparable
properties in a rating list. But the statutory criterion in both cases is uniformity of
the principles applied, not uniformity of outcome. Where as here the parties actually
agree that, in fact, there is such a disparity in demand, the law does not require
recourse to some non real world principle to trump or remove it.
79. Turning to the Lands Tribunal cases, both Lambeth London Borough v
English Property Corpn Ltd and Shepherd (Valuation Officer) and Shiel (Valuation
Officer) v Borg-Warner Ltd exemplify the plainly correct proposition that the mere
fact that the subject property is unoccupied as at the AVD does not of itself mean
that there is no real world demand for it. Both make use of the familiar example of
the parade of shops, with one empty and the others in use. The conclusion that there
is nonetheless some demand for the empty shop is a reasonable conclusion of fact
which would be reached by most valuers, even in a saturated market where there
are, say, five comparable properties, demand for only four, and the subject property
is the only one which is vacant. But nothing in those cases suggests that where the
facts show or (as here) it is agreed, for whatever reason, that there is in truth no
demand at all for the empty shop, the law requires some notional general demand
for comparable properties to be substituted. The agreement in the JPP was not
merely that no hypothetical tenant could actually be identified as at the AVD, but
that there was no demand at all for Mexford House.
80. Nor does the passage in the Rating Manual, relied upon by Ms McCarthy and
quoted by Lord Carnwath at para 56, take the matter any further. Read as a whole,
all it advises is that general demand will usually be probative of specific demand for
the subject property, and that the valuer should not become too focussed upon the
subject property being vacant. It does not say that where the evidence (including that
of general demand) shows, or it is agreed, that there is nonetheless no demand at all
for the subject property, the general demand must be substituted for that evidence or
agreement. I am however cautious about the reliability of the advice that occupation
of the subject property as at the AVD is “primary” evidence of demand. It may well
be prima facie evidence, but the continuing occupation may be attributable to a
reason other than demand, such as the existence of a lease for a term of years from
which the tenant has no economical means of escape.
81. I am, like Lord Carnwath, puzzled by the view of the Court of Appeal about
the effect of a property becoming vacant in a saturated market. As noted above, the
fact that there is a tenant in a property paying a substantial rent may not be reliable
evidence for open market demand for it, and certainly not at the then current rent, if
the market has become saturated only after that rent was agreed, and the tenant has
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no economic means of escape from the tenancy. But I can envisage a situation where
demand for a group of comparable properties has collapsed, and where the departure
of one of a very small number of potential tenants from one of them, due to its
reduced requirement for space of that type in the locality, renders the subject
property economically obsolete. Even then that would only exceptionally mean that
there was no demand for it at anything above a nominal rent, but that is what was
agreed as a fact in the present case.
82. The following familiar example illustrates the point. A shopping centre may
have a row of shops whose economic viability is entirely dependant upon the
presence of a nearby anchor tenant, such as a major supermarket or department store.
The anchor tenant leaves, and there is no prospect of another anchor tenant being
found. The row of shops will immediately become economically obsolete (ie no
longer viable to a hypothetical incoming tenant at more than a nominal rent), but
they will not all immediately fall vacant. For as long as leasehold terms continue,
their tenants may be locked in, and only able to leave at the end of their terms. The
row of shops will be subject to a lingering economic death. In such a case the
evidence that rent is still being paid for some of them will not justify the inference
that there is demand for those which have fallen vacant.
83. In conclusion the question of law for which the UT gave permission to appeal
in this case is: “Where the evidence shows that there is no demand to occupy a
hereditament which is capable of occupation, does the rating hypothesis require the
valuer to assume demand that does not in reality exist”. I would answer it in the
negative. It will be a very rare case indeed where the evidence really does show that
there is no demand at all for the subject property where there are comparables in the
locality let at substantial rents. But if that is what the evidence shows, or that is what
the parties have agreed, then the rating hypothesis does not require a departure from
that real world conclusion, merely because the subject property is in theory capable
of beneficial occupation.
