Part 8: Disrepair and Works of Redevelopment/Reconstruction Practice Note 1- Rating (Valuation) Act 1999
The Valuation Office Agency's (VOA) technical manual for the rating of business (non-domestic) property.
1.1 This practice note has been amended following the decisions of the Court of Appeal and Supreme Court in Newbigin (VO) v Monk [2017] UKSC 14 and of the Upper Tribunal (Lands Chamber) in Jackson (VO) v Canary Wharf Limited [2019] UKUT 136 (LC) and replaces the previous practice note in its entirety.
Further commentary has been added following the later decision of the Upper Tribunal in Colour Weddings v Roberts (VO) and the decision of the President of the Valuation Tribunal in Aviva Investors v Bunyan (VO).
2.1 The Local Government Finance Act 1988 (‘the 1988 Act’) requires non-domestic property in England and Wales to be valued for rating purposes on a number of assumptions, including that:
"immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic”.
2.2 This practice note addresses how this assumption operates, in the light of Newbigin (VO) v Monk and of the Upper Tribunal (Lands Chamber) in Jackson (VO) v Canary Wharf Limited [2019] UKUT 136 (LC). In short, the statutory repair assumption as set out in para. 2(1) of Schedule 6 to the Local Government Finance Act 1988 generally operates as set out in the Court of Appeal’s judgment in Monk; there is, however, an exception for those hereditaments that are incapable of beneficial occupation because they are undergoing redevelopment, as held in the subsequent Supreme Court judgment.
2.3 The Supreme Court decided that the application of the repairing assumption was not appropriate for a building undergoing reconstruction and which was consequently incapable of beneficial occupation. The ‘prior question’ which has to be answered has two limbs:
(i) whether the ‘damage’ that has occurred is indicative of a scheme of reconstruction (which includes significant refurbishment/refitting in addition to complete demolition and new building), and, if so
(ii) has that damage rendered the hereditament incapable of beneficial occupation?
This Practice Note addresses both the general position, and the redevelopment exception.
3.1 The 1988 Act as amended by the Rating (Valuation) Act 1999 (‘the 1999 Act’) sets out, in Schedule 6, how properties are to be valued for rating.
3.2 Following the 1999 Act, paragraph 2(1) of Schedule 6 to the 1988 Act reads:
"The rateable value of a non-domestic hereditament none of which consists of domestic property and none of which is exempt from local non-domestic rating 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 these three assumptions:
the first assumption is that the tenancy begins on the day by reference to which the determination is to be made;
the second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic;
the third assumption is that the tenant undertakes to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command the rent mentioned above."
3.3 In determining rateable value the legislation requires a valuation at the AVD on the statutory basis but taking into account particular stated physical circumstances as they are on the compilation day or, where the RV is being determined with a view to making an alteration to a list, the Material Day. The physical circumstances are set out in Schedule 6 sub-paragraph 2(7) and are to be taken to be as they are assumed to be on the compilation or Material Day, as appropriate (see RM Section 2 Part 4.
3.4 Schedule 6 sub-paragraph 2(8A) makes it clear that the state of the hereditament at any time relevant for the purposes of a list shall be the assumed state of repair under sub-paragraph 2(1). The first assumption simply explains the hypothetical tenancy begins on the antecedent valuation date (‘AVD’). The effect of the second assumption is to override the actual situation at the compilation date or Material Day and replace it with an assumption of reasonable repair (subject, as further explained below, to the question of whether the hereditament is undergoing reconstruction).
4.1 The Supreme Court decided that the application of the repairing assumption was not appropriate for a building undergoing reconstruction and which was consequently incapable of beneficial occupation. The prior question which has to be answered is whether the ‘damage’ that has occurred is indicative of a scheme of reconstruction (which includes significant refurbishment/refitting in addition to complete demolition and new building). Where it is accepted that these works have rendered the hereditament, as a whole, incapable of beneficial occupation then it ceases to be a hereditament and the repairing assumption for valuation purposes cannot be applied.
4.2 In Jackson (VO) v Canary Wharf Limited the Upper Tribunal decided that a modern office building which was stripped out as part of a periodic refurbishment between tenancies did fall within the definition of being a building undergoing reconstruction to which the prior question applied. Although the Tribunal said, at para. 37, that
"…The VO’s acceptance in this case that the appeal property is not capable of beneficial occupation is therefore the beginning and end of the appeal….”,
the Tribunal went on to consider the facts in relation to the Canary Wharf building and concluded that, based on the background, the parties’ acceptance that it was not capable of beneficial occupation in its state at the Material Day and the evidence of the landlord’s or market’s normal practice of stripping out between tenants, the application of the Supreme Court test showed that it was undergoing reconstruction.
4.3 Although in Monk the Supreme Court concluded that it was a ‘…useful practice…’ to keep an entry in the rating list in respect of a building which is not a hereditament, this is not now considered to be the proper approach and qualifying list entries should be deleted from the list rather than simply reduced to £1 or £nil RV.
5.1 The following is the general approach to the operation of the repair assumption. However, where it is accepted that the hereditament in question is undergoing redevelopment, the guidance that follows from paragraph 8 below is to be adopted.
As per the lead judgment of Lewison LJ in Newbigin (VO) v Monk [2015] EWCA Civ 78 to operate the statutory assumption, the following questions arise:
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Is the hereditament in a state of reasonable repair?
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If not, can the works which are required to put the property into a state of reasonable repair properly be described as ‘repairs’? (‘the repair question’), and
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Would a reasonable landlord consider the repairs to be uneconomic? (‘the economic question’)
5.2 If the answer to question 1 is that the hereditament is already in a state of reasonable repair, then there is nothing to be assumed, and the hereditament can be valued in its actual state. If it is not in such a state, however, then it must be assumed to be in such a state providing the works which would be required to put the property into reasonable repair can properly be described as ‘repairs’, and providing such works are not uneconomic.
5.3 At the outset, five points are to be noted.
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The assumption relates to the whole hereditament and not its component parts. So the complete re-installation of an electrical system may still be repair even if that system had been completely removed.
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Inherent to the notion of repair is disrepair, i.e. deterioration from some previous physical condition.
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What needs to be considered is whether it would be economically reasonable to restore the hereditament to a former state.
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A hereditament that is incapable of beneficial occupation in its actual state still falls to be valued according to the statutory approach, if the works required to enable occupation fall within the definition of ‘repair’ and providing that it is not a building undergoing redevelopment.
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Whether a building is undergoing redevelopment is to be determined having regard to all the circumstances of the case and no single qualifying test is to be applied.
Valuers should use their professional judgement within the parameters set out in this guidance and the examples in Appendix 1 to this Practice Note.
a) State of reasonable repair
5.4 The question of whether the hereditament is in a state of reasonable repair will fall to be answered in light of the state of the hereditament on the compilation or Material Day, as appropriate.
5.5 The valuation officer must begin by asking whether the hereditament in its actual state is in a condition such as to make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it: Proudfoot v Hart (1890) 25 QBD 42, Monk (CA) para. 24. The starting point is an objective assessment of the likely mode or category of the former occupation which, although not determinative, may be indicated by the description in the list.
5.6 The valuer must consider the hereditament in the physical state in which it existed at the Material Day. It follows that where a property is deliberately damaged with a view to reducing or avoiding rate liability, (i.e. so-called ‘constructive vandalism’ or ‘soft-stripping’), the factual position and approach to valuation should be regarded in the same way as for any other cause of damage.
5.7 For example, if the sanitary ware or lighting has been removed so as to render the property incapable of beneficial occupation and it appears objectively that this is not part of a redevelopment scheme, then the property is simply damaged and in need of repair and the repair assumptions apply in the normal manner.
5.8 However, where that damage is part of a redevelopment scheme (which includes substantial refurbishment or a comprehensive repair scheme, regard must be had to the ‘prior question’ of whether the hereditament is incapable of beneficial occupation. In Monk (SC) para. 20, Lord Hodge said:
"…the assumption of reasonable repair at the outset of the hypothetical tenancy (‘the repair assumption’), is not addressing the question of whether the premises were capable of beneficial occupation, which, in the context of a building undergoing redevelopment, is a logically prior question”.
5.9 The distinction between a scheme of redevelopment and works that fell within the repairing assumption has been explored in the decision of the Upper Tribunal in Colour Weddings v Roberts (VO) RA-12-2018. In this case an industrial property was being converted into a wedding venue. The UT member at paras 36-39, commented:
"36. Stage 1, scheduled to take place between 20 January 2015 and 20 February 2015, comprised fixing a crack to the wall, bricking in windows, replacing a shutter door and fitting a new entrance door. In my judgment the property was capable of beneficial occupation throughout that period.
37. Stage 2 involved making a wooden frame around the inside one of the buildings, to be insulated and lined with plasterboard. This work was said in the schedule to have taken place between 23 February 2015 and 1 April 2015. [The ratepayer] submitted a photograph showing this stud work, prior to it being insulated and lined. I am not persuaded that the property would have been incapable of beneficial occupation while the partitioning was being installed. The wooden frame was around the inner perimeter of only one of the buildings but would not in my view render it unoccupiable.
38. Stage 3 involved the construction of seven customer toilets and a ‘bridal suite’, plumbing work, drainage work, central heating and something described as ‘involution’. It was shown as having taken place between 6 April and 15 May 2015. Stage 4 involved plastering the entire interior of the building, between 30 May and 15 July 2015. Stage 5 involved making a wooden ceiling frame and ceiling, between 15 July and 15 September 2015. The remaining 15 stages were to take place up to February 2017.
39. On the evidence available to me, I consider that the property had already become incapable of beneficial occupation some time before that date. Doing the best I can with the evidence, in my judgment the correct date falls within during stage 3 – the construction of customer toilets, a bridal suite, drainage and central heating would have involved sufficiently extensive work to make the occupation of any part of the building impossible."
End of lease works to industrial/warehouse premises:
5.10 A similar approach was adopted by the Valuation Tribunal for England President in Aviva Investors v Bunyan (VO) concerning an industrial unit that was having end of lease light refurbishment works that were largely met by the outgoing tenant’s dilapidations payment. The works involved:
- Installation of fencing externally to form yard
- Roof cleaning and localised repairs
- External cleaning and removal of signs
- Clean and redecoration of warehouse
- Clean of warehouse floor
- New LED lights to warehouse
- Removal of tenant’s partitions to offices
- Repairs and redecoration to offices
- New floor coverings to offices
- New LED lights to offices
- New sanitaryware and duct panels/vanity units to WCs
- New floor finishes and mirrors to WCs
- New LED lights to WCs
- Replacement of kitchen units and floor finishes
- Service of heating system
- Service of comfort cooling
- Electrical tests
5.11 The President commented at paras 57-59 of his decision:
"57. I found it significant that the warehouse area of the building which it was agreed comprised around 88% of the accommodation was only subject to minor repairs. It was not stripped back like the situation in Monk and Canary Wharf. In both of the latter cases, the properties were stripped back, so they could not be occupied for use as offices. In contrast, the warehouse area at the appeal property was capable of beneficial occupation. As previously explained, the vacation of the tenant would not have any impact upon the valuation of this area and any minor repairing issues that could easily be remedied fell to be disregarded, as it had to assumed that the landlord would do the necessary repairs before re-letting it.
58.Nevertheless, Mr Wilcox still argued that the warehouse area was incapable of beneficial occupation because without any kitchenette or toilet facilities, you would not be able to have any people working there. I rejected this argument because it was possible for toilet and kitchen areas to be stripped back and replaced whilst the tenants remained in occupation and making use of the warehouse. Normally such replacement works would take a short period of time, maybe a fortnight or a month at most. Even if I accept the appellants’ contention that the toilets and the kitchenette areas were stripped back for a period just over two months, that does not justify a deletion of the whole assessment because the hereditament continues to exist.
59.The lack of any toilet facilities was not as Mr Wilcox would have me to believe justification for deleting the whole assessment. Whilst I accept that a warehouse without any staff toilets would have a lower rental value, in comparison to one with those facilities, the property was not incapable of being used for storage. Its mode or category of use remained a warehouse with or without toilets. The facts in this appeal were different to those in Monk and Canary Wharf where it was accepted that no part of the premises was capable of beneficial use as offices. The lesson from Monk was that if the premises were stripped out you could not value what was not there. In this case, the Warehouse area remained intact. I therefore upheld the Valuation Officer’s argument that Mr Wilcox was creatively attempting to push the boundaries too far. In my opinion, whilst a well argued and interesting proposition, it would be a nonsensical situation if in order a secure a deletion of the list entry or a nominal assessment, all the owner had to do on the vacation of a tenant was to remove the toilet facilities."
5.12 It should be noted that the appellant in this case sought a deletion of the assessment. In his decision, the VT President, at Para 60 (below), suggested that had they requested a reduction on the basis of a Material Change of Circumstances, then he may have adjusted the valuation for individual parts that were rendered incapable of beneficial occupation whilst the works were ongoing.
"60.Had the challenge that ultimately gave rise to this appeal been made on the grounds of a material change of circumstances and had the appellants satisfied the evidential burden of proof by providing factual evidence which confirmed when the stripping out works took place and when the new units were installed, I would have given consideration to whether it was appropriate to reduce the assessment to reflect the fact that a minor part of the property 21 was temporarily incapable of beneficial use. However, as the challenge sought a deletion of the whole assessment, this course of action was not open to me."
End of lease works to Offices and Shops:
5.13 In many instances leases will require, often at the landlord’s discretion, that the tenant’s fit out is removed and the premises are returned to Category A (Offices) or shell (Shops) ready for the subsequent tenant to refit to their requirements.
5.14 In respect of offices, following the guidance in Monk, Canary Wharf and having regard to the findings in Aviva, it is likely that a strip back to Cat A will render the premises as a whole incapable of beneficial occupation as it will remove key elements required for beneficial occupation (small electrics, welfare facilities, partitioning). In these circumstances the assessment may be deleted pending reconstruction/refitting works to bring it back into assessment.
5.15 With regard to shops, the removal of tenant’s fittings is often less extensive and relates to the internal shop fittings of a particular occupier. Each case must be considered on its facts but if the staff welfare facilities remain then the shop unit may be regarded as ready for occupation by a new tenant and requiring only the installation of their non-rateable fit out or minor alterations.
5.16 Where it is clear that the damage or disrepair is not part of a scheme of reconstruction (whether or not it renders the hereditament incapable of beneficial occupation), the statutory repairing assumptions should be applied.
b) The Repair Question
5.17 If the hereditament is not in a state of reasonable repair, then the next question is whether the works which are required to put the property into a state of reasonable repair can properly be described as ‘repairs’.
5.18 Disrepair being the converse of repair, a state of disrepair connotes a deterioration from some previous condition. Therefore, to determine what works are required to put the property into a state of repair, it is necessary to compare the hereditament in its actual state with its previous state (i.e. when it was in a state of reasonable repair).
5.19 That is not to say, however, that the works to put it into a state of repair need necessarily be such as to put the hereditament into exactly the same state as it historically had been in. The concept of ‘repair’ is broad enough to allow some alterations which may result in differences to the historic state. For example, in Monk, the Court of Appeal applied the test identified by Buckley LJ in Lurcott v Wakely [1911] 1 KB 905 namely:
"Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion."
5.20 It should be noted that this test – whether the alterations went to the whole or substantially the whole of the structure or only to a subsidiary part – is not the only test of repair. In Monk, the Court of Appeal noted that in McDougall v Easington District Council (1989) 58 P & CR 201, three different tests emerged from the cases which could be applied separately or concurrently as the nature of the case requires:
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whether the alterations went to the whole or substantially the whole of the structure or only to a subsidiary part
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whether the effect of the alterations was to produce a building of a wholly different character than that which had been let
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what was the cost of the works in relation to the previous value of the building, and what was their effect on the value and lifespan of the building
5.21 Therefore works may fall within the repairing assumption even if it would mean that an element is replaced rather than repaired (for example, it may be more economic to replace a defective window with a new window) and/or where the works involve a degree of improvement (for example, if repairs to lighting included such improvement as was necessary to comply with Building Regulations or other legislation) [ref: Thomas and Davies v. Denly (VO) [2014]]
5.22 It is important to recognise that repairing to a state of reasonable repair does not require the assumed state to be identical to some historic state: some improvement, for example, is possible within the concept of ‘repair’ cf. Morcom v Campbell-Johnson [1956] 1 QB 106. Likewise, some changes to a property may not be relevant to valuation as a hereditament at all, such as some non-structural changes, or the insertion or removal of elements of plant and machinery to be excluded from the valuation of the hereditament under the Valuation for Rating (Plant and Machinery) (England) Regulations 2000.
c) The economic question
5.23 Only if the repairs would be considered economic can one assume the state of reasonable repair that they would produce. The cost of repairs and the hypothetical landlord’s attitude to undertaking repairs is to be considered as at the AVD, because neither the landlord’s attitude nor the economic situation are mentioned matters in para. 2(7) of Schedule 6. The question of what is economic for a landlord will vary from situation to situation. What is likely to be economic for a building in one town may not be economic for an identical building in another town where rents are lower. It is fundamentally an economic test based on the hypothetical landlord’s likely assessment of what will be the economically reasonable option to pursue. The question is not whether the repair work would actually be done (and so the necessary repair is not to be considered as against some other option) but rather whether it could be done economically – in which case, it will be assumed to be done.
5.24 Conversely, where repair is considered to be uneconomic the hereditament should be valued rebus sic stantibus in disrepair. In that scenario, the effective date for that valuation to take effect will be the date when the hereditament first reached the state when it was in sufficient disrepair to justify the reduced valuation.
5.25 The principle of rebus sic stantibus means the hypothetical landlord does not have the option of changing the hereditament by, for example, demolition and rebuilding. What may be the real world best option of future total redevelopment of the site is not open to the hypothetical landlord: the choice is between:
- repairing (if it is an economic proposition at the AVD)
- doing some repair or
- doing no work.
The question is not whether the repair work would be done but whether it could be done economically.
5.26 In the case of Thomas and Davies v. Denly (VO) [2014] 515 the Upper Tribunal was content to accept it was economically reasonable for repairs to be undertaken where the present value of the hereditament assuming repairs were undertaken significantly exceeded the value in disrepair (see 5.30, below). In essence the question of whether repairs would be economic is a comparison of likely future rental income flow against the cost of repairs, as the cases discussed below demonstrate.
5.27 Cost of repairs and the hypothetical landlord’s attitude to undertaking repairs is to be considered as at the AVD. The physical state of the property is imagined brought back to the AVD and consideration given to what would have been economically reasonable then.
5.28 The origin of the economic reasonableness test lies in the case of Saunders v. Maltby [1976] 19 RRC 33 where Lord Denning said that the hypothetical landlord would not do all repairs but only those that were economically reasonable. This case and a number of old domestic rating cases examined the question in the context of valuation to the former Gross Value (which assumed a landlord’s repairing liability). More recently, a Valuation Tribunal gave useful guidance in Princes St Ltd (Ipswich) v Bond (VO) [2002] RA 212. In that case the VT took the view that any reasonable landlord would look at the local property market, consider the location of the premises, the likelihood of finding a tenant for the actual property, the likely length of any lease, whether further tenants were likely and from these answers determine over what period the landlord would be prepared to spread repair costs. For a prime property in a buoyant market it could foresee a long period of occupation and, as a consequence, amortisation could be expected to be over a similar period. For a very poor property, where similar properties were vacant, only a year might be expected.
5.29 In Princes Street, evidence was given that the likely letting was for a 10 year lease with a five year break clause. The tribunal considered, having regard to the state of the market at the antecedent valuation date, a likely landlord would amortise the cost of repairs over a five year period to the first break clause. Amortising the repair cost figure gave £55,000pa, after making an allowance for contingencies. This was the same as the total rateable value. On this basis there was nil profit to the landlord in undertaking the repairs for the first five years. The valuation tribunal noted, however, that there was no evidence to suggest the property would definitely not let after five years. A landlord who by his very nature is in the business of taking risks to make a profit would take this risk. Therefore the costs could not be said in the mind of the hypothetical landlord to be uneconomic. The rateable values were confirmed.
5.30 The same approach was broadly followed in Thomas and Davies v Denly (VO) [2014] RA 515 in the Upper Tribunal. In this case the Upper Tribunal examined whether works of repair to a car showroom would be economic. The VO adopted a similar approach to the Ipswich case preparing three calculations showing the present value of the landlord’s interest assuming no repair works were carried out and with varying levels of rent reduction to reflect the lack of repair. These were compared to the likely rent if repairs were done but deducting from the capitalised rent the likely cost of repairs. Comparing the valuations the Tribunal considered the hypothetical landlord would have regarded the repairs as economic. The repair works represented 5.65 YP on the rent.
5.31 The situation in Thomas and Davies was perhaps slightly unusual in the premises still had a rental value, albeit for a few years only, even if no repairs were done. Nonetheless the effective comparison is the same:
Rent assuming no repairs are done –
X YP % for y years
Rent assuming repairs are done –
X YP % for z years, less cost of repairs
5.32 It may be economically reasonable to undertake repair works to some part of the hereditament but not to all parts. For example it may be economically reasonable to repair the roof and the ground floor of a shop but not the dilapidated first floor and damp basement to the shop. However, the subject of the repair test is the whole hereditament and not it’s various parts. It is not correct to apply the test of what is economically reasonable separately to each individual component or part of the hereditament, e.g. a particular window, a floor or an air conditioning system without considering the whole. The question is whether, in the context of the whole hereditament, it is economically reasonable to envisage the repair work being undertaken. In the example, if it was judged not economically reasonable to repair the first floor and the basement then these should be valued as they are, whereas as the repairs to the ground floor and roof are judged economically reasonable these should be assumed to be repaired. As the landlord would not do all of the repairs, the landlord would, instead, accept a lower rent for the premises consistent with only having repaired part of the hereditament (see Marshall v. Ebdon (VO) 1979 RA 238).
5.33 Reasonable repair may mean that an element is replaced rather than repaired as it may not be economic to repair certain elements e.g. it is often more economic to replace a defective window with a new window.
5.34 Some repairs may well include an element of improvement and any works would be expected to comply with Building Regulations and any other construction based legislation in force at the time of the AVD. Ref: [Thomas and Davies v. Denly (VO) [2014]
5.35 Where the valuer has decided that the property is beyond economic repair then they should value the property in its actual state at the Material Day. This may result in a value of £0 RV or a value between £0 and its former full RV if parts of the property remain usable (see para 5.32 above). In circumstances justifying a nil value, the primary description should be amended to, for example, ‘Workshop and premises (beyond economic repair)’. Only when the hereditament is demolished or undergoing a scheme of reconstruction should the assessment be deleted.
6.1 Works may be underway in the hereditament at the Material Day. However, the approach remains the same whether repair works are actually underway or not, even though there may sometimes be difficult questions of fact to determine.
6.2 Works underway may be minor repair works or other works that do not render the property incapable of beneficial occupation. If the works are repair works then they are deemed to have already been done – providing they are economically reasonable - on the same basis as if they were repairs needing to be undertaken and not yet commenced (Civil Aviation Authority v Langford (VO) and Camden BC [1980] RA 369]). It follows that no allowance to reflect the ongoing repair works should be made if it is economically reasonable for them to be done by the hypothetical landlord as at the AVD.
6.3 However, where a hereditament is rendered incapable of beneficial occupation by the commencement of repair works affecting substantially the whole hereditament the approach is to apply the ‘prior question’ described at 4, above, and it may be appropriate to delete the entry from the list - see also para. 8 below.
7.1 There is no exceptional treatment of buildings damaged by fire, bomb, storm or flood. The statutory assumption applies irrespective of the reasons why a hereditament is in a particular state, and the steps identified above are to be followed in the normal way.
8.1 Works of Redevelopment/Reconstruction
The Court of Appeal judgment in Monk saw no difference between the situation where a hereditament was in disrepair through the actions of time, use or accidental or deliberate damage and the situation where a programme of redevelopment or reconstruction works was underway. The Supreme Court rejected this, considering that the Court of Appeal ‘went too far’ in interpreting the 1999 Act as completely displacing the ‘reality principle’ where the hereditament was ‘undergoing redevelopment.’
8.2 The Supreme Court examined a series of rating cases and found case law
"distinguished between a mere lack of repair, which did not affect rateable value because of the hypothetical landlord’s obligation to repair, and redevelopment works which made a building uninhabitable.” (Monk, para. 17).
8.3 The Supreme Court identified a ‘logically prior question’ that needed to be asked when a building was undergoing redevelopment: requiring the valuation officer to ascertain whether the premises were ‘undergoing reconstruction rather than simply being in a state of disrepair’. If so, the premises may be incapable of beneficial occupation and cease to be a hereditament.
8.4 It considered the repairing assumption applied to matters affecting the physical state of the hereditament but not the mode or category of occupation. The implication appears to be that the repairing assumption cannot apply where there is no mode or category of occupation due to the premises being under reconstruction.
8.5 The first question must always therefore be – is the hereditament undergoing a programme of redevelopment/reconstruction?
9.1 The differentiation between the ‘ordinary’ situation of disrepair and when there is a programme of works of redevelopment means it is essential to identify whether there is, or is not, a programme of works of redevelopment (such term to include a substantial refurbishment or a comprehensive repair scheme that renders the hereditament, as a whole, incapable of beneficial occupation). The Supreme Court identified that this had to be ‘assessed objectively’ and that the subjective intentions of the freehold owner are not relevant. It is for the valuer to make a judgment, based on objective evidence, about whether the building is undergoing redevelopment. In the light of the UTLC decision in Jackson (VO) v Canary Wharf Limited, this judgment must reflect a range of evidence about the circumstances and it is not conclusive that no specific plans to refit or reconstruct the building have been drawn up.
9.2 The easiest situation to consider is when, on inspection, it is found on the ground that the hereditament is being changed, perhaps converted to something different at the Material Day, e.g. offices to flats; being significantly improved; extended so the existing accommodation cannot be used or the boundaries of the existing hereditament(s) are being changed.
9.3 The phrases used by the Supreme Court - ‘redevelopment works,’ ‘undergoing reconstruction,’ in a ‘process of redevelopment’ or undergoing ‘radical alterations, whether or not they are structural’- indicate that what it considered constituted a programme of works of redevelopment was not simply redecoration, basic refurbishment or the sort of works an existing tenant might choose, or be obligated, to do during the course of a lease. The prior question which has to be answered is whether the ‘damage’ that has occurred is indicative of a scheme of reconstruction (which includes significant refurbishment/refitting in addition to complete demolition and new building).
9.4 When VO’s are satisfied a property is undergoing a programme/scheme of works which renders it incapable of beneficial occupation, the correct action is to delete the hereditament from the list. The former practice of reducing the rateable value to £1 or £nil is no longer considered appropriate, or useful, as the Courts have ruled that such properties undergoing a programme of works are no longer a hereditament.
9.5 On completion of the works , and following the appeal in Aviva v Whitby (VO) RA/3/2011, the hereditament should only be brought into the list if it is 100% complete and ready for occupation, is actually occupied or the billing authority has served a completion notice.
9.6 Even if the extent of the new hereditament is the same as the former list entry, the RV as a result of the changed character and/or use will need to be determined by evidence from comparable properties of similar character and use in the locality. For example where the level of value may have been £100/m2 pre-works, reflecting the absence of air conditioning and lift, and comparable properties in the locality with air conditioning and lifts may be at £120/m2 then on completion of the works the subject property would fall to be assessed in accordance with the new character created by the improvements at a similar value. It will usually be the case that if the works will result in an increase in the £/m2 used for the RV on their completion then the works probably go beyond minor refurbishment and are creating something materially different.
9.7 A programme of reconstruction may include stripping out what was there before. The work undertaken by the building contractors in both stripping out what was there before and the new work will constitute the programme. Mere stripping out on its own does not of itself constitute or evidence a programme of reconstruction but rather simple damage, putting the hereditament in a state of disrepair. However, it is clear from Jackson v Canary Wharf Limited that it is not a requirement for the reconstruction phase to be explicitly planned, and as long as it is tolerably clear that the hereditament is being redeveloped/reconstructed then it may be deleted.
9.8 If the stripping out is not preparatory work to a subsequent reconstruction project then it should be treated as mere disrepair.
9.9 The Supreme Court appeared content to examine all the facts surrounding the case in deciding whether there was a programme of works of redevelopment. This included not just the actual physical position on the ground but also facts such as whether any building contract had been agreed, the existence of an approved planning consent or building control application etc. At first sight this appears contrary to the statutory valuation scheme which requires certain matters which are broadly physical in nature (Schedule 6 para. 2(7) matters) to be taken as at the Material Day and the other matters at the AVD. However, the Supreme Court ruled that deciding whether or not there is a programme of works is a prior question to be answered before considering valuation. The limitations of the valuation assumptions do not apply until this is decided and therefore all facts can be objectively considered. The subjective intentions of the actual owner are not to be considered as determinative, although as in Jackson v Canary Wharf, they may be indicative of the existence of a programme of reconstruction. If the property is in a location where the behaviour of that sector of the market is objectively ascertainable and it is common practice to periodically fully refurbish buildings, then it would seem that this can properly be taken into account.
9.10 A project of demolition, if objectively evidenced that it is a project of demolition and not simply some stripping out with the vague expectation of future demolition, is similar to a programme of redevelopment works.
Works to a building assessed in parts
9.11 Where an owner is substantially refurbishing and altering an existing building assessed in parts, each hereditament should be considered individually and the prior question, as well as the test of what would be economically reasonable applied to the hereditaments individually not collectively. If not actively part of the scheme and simply damaged or in disrepair and it is economically reasonable to undertake repairs then the subject hereditament will be deemed to be in repair. However, the other parts should be viewed as they actually are at the Material Day. This may have a detrimental effect on the value of the hereditament being considered in the same way as other external MCCs. The effect may vary over time and require successive amendments to the rating list to reflect a significant change in disability.
10.1 Where a programme of works of redevelopment is underway for only part of a hereditament similar considerations will apply. It is always a question of fact and degree whether what is being done can be described as repair or whether in fact a scheme of reconstruction is taking place.
10.2 Reconstruction works to a significant part of a hereditament (a wing or floor of offices for example) will result in the boundaries of the hereditament changing in the same way as a whole hereditament undergoing reconstruction works ceases to be a hereditament if it is incapable of beneficial occupation as a result of the works. As the part is outside the hereditament, consideration can be given to applying an allowance for disturbance on an ‘external building works’ basis reflecting the ‘real world’ presence of the builders, e.g. dust and noise; as well as consideration of how the physical state of those parts affects the whole and this may or may not be value significant. If the work is, say, to only one floor of an office block, unless this is the reception floor it is unlikely having one floor out of use will damage the value of the remaining floors.
10.3 However, if, for example, access is prevented through the main reception due to works to install a glass atrium and lift; this may affect the value of the occupation of the remainder provided that, under the principle of rebus sic stantibus, the part is physically unusable. Each case must be judged on its merits. Any reduction in value for the loss of the part undergoing alterations will reflect the hypothetical rental bid for the hereditament reflecting the works going on around it.
10.4 It is not likely that works to only a small part of a hereditament (room by room redecoration or upgrading works for example) will alter the boundaries of a hereditament and may be works that a tenant may do during the course of a tenancy with no effect on the rental bid. It is unlikely to meet the conditions of the prior question and render the hereditament, as a whole, incapable of beneficial occupation. The ratepayer may wish to apply for temporary partial relief from the billing authority under S44A of the LGFA 1988.
10.5 Where the boundary(ies) of the hereditament are reviewed, care must be taken to properly identify the remaining hereditament(s) and to value them appropriately having regard to the reduced areas.
11.1 Works external to the hereditament are not covered by the provisions of the 1999 Act and no assumptions in respect of these can therefore be imported by virtue of the provisions of this Act. The condition of areas external to the hereditament should generally be considered as they actually are at the Material Day.
11.2 However, Woodfall’s ‘Landlord and Tenant’ states that
"where the landlord retains in his possession and control something ancillary to the premises demised, such as a roof or staircase, the maintenance of which in proper repair is necessary for the protection of the demised premises or the safe enjoyment of them by the tenant, the landlord is under an obligation to take reasonable care that the premises retained in his occupation are not in such a condition as to cause damage to the tenant or the premises demised”.
11.3 It follows that there is an implied obligation on the landlord to ensure that the property demised is not adversely affected by other parts of the building retained within the landlord’s control. This approach reflects the reality of the real world and would place a repairing obligation on the landlord in respect of certain common parts which are required for the safe enjoyment of the hereditament including maintaining reasonable access to the property even though it may not be in the landlord’s control, e.g. stairs, lifts, access, lighting on stairs, etc.
11.4 There will be many services in multi-occupied buildings which are provided by the actual landlord which are essential to the satisfactory occupation of the hereditament. It is reasonable to assume that they will also be available to the hypothetical tenant, for payment of a service charge, to the extent that they exist from time to time. It can be inferred that the hypothetical landlord will need to maintain the supply. As with other physical matters in the locality, they should be taken to be as they are on the Material Day, but with the real prospect that they will be maintained within the landlord’s control. For example, in Murphy (VO) v Courtney plc [1999] RA 1, repair works were required to the air conditioning in both the hereditament and the central plant room. The Lands Tribunal Member accepted that the tenant would expect the works to the central plant to be completed by the landlord as a condition of the grant of the hypothetical tenancy and such costs would not be recoverable as part of the service charge.
11.5 The rating hypothesis makes no assumption about who is landlord of other hereditaments and so it may be that the landlord of other floors in a building or on an estate development is different from that of the hereditament being considered. Nonetheless, it is reasonable to infer there will be mutually binding covenants between the landlords to ensure necessary access and services are maintained to the benefit of all as this would be the situation in the real world.
11.6 The cost of ongoing maintenance of central plant, including provisions for eventual replacement, are matters which are usually included in service charges. Any such liability may be reflected in a tenant’s rental bid.
11.7 Works to other hereditaments or to the common parts of the building containing the hereditament being considered do not fall under the repairing assumption of the hypothetical tenancy. They represent real world physical changes in the locality and should be considered as being as they are at the Material Day. Their likelihood of completion is also something to be taken into account as they are not subject to the rebus sic stantibus rule.
12.1 The effective date for a rating list alteration is usually found by looking back from the Material Day to the earliest date that those circumstances first arose. In some cases the Material Day and effective date are the same.
12.2 The valuer needs to consider the physical factors listed in Schedule 6 para. 2(7) as they are on the Material Day but envisaged as at the AVD. If it is considered the hereditament is incapable of beneficial occupation and therefore has ceased to exist, the Material Day will be the day those circumstances first arose and the effective date will, subject to any other restrictions, be the same day. Where instead the hereditament is in a state of disrepair which is uneconomic to repair a reduced (even potentially to nil) valuation based on those facts on the Material Day (the day the proposal was served on the VO in Wales or for a 2010 list in England, or the ‘Check’ confirmation date for 2017 proposal) will need to be carried out. The effective date will need to be determined having regard to all the circumstances, including any subsequent intervening further MCC. For disrepair this will usually be the date when the hereditament first reached the state when it was in sufficient disrepair to justify the reduced/nil valuation.
12.3 As with demolitions, to ensure ratepayers are not paying empty rates longer than necessary, even though a refund will be made, VOs should endeavour to make early decisions whilst having regard to the need to properly establish the nature and extent of the works being undertaken at the Material Day.
12.4 It should be noted that where VOs take early action to delete an entry on the grounds that stripping out works constitute the commencement of a scheme of conversion/reconstruction or demolition, but this is subsequently found not to be the case and the works therefore are merely soft stripping or damage to the hereditament, then the entry can be reinstated at its original level with effect from the date of the original deletion.
12.5 If the programme of works has not commenced, then the hereditament is by definition not subject to such a programme of works, will not be incapable of beneficial occupation for that reason, and the assessment in the rating list should remain unaltered, subject to the usual tests of demand and economic repair.
Hereditaments undergoing redevelopment:
13.1 The Supreme Court in Monk regarded the retention of a nominal figure in the rating list rather than deletion as a ‘useful practice’ (paras. 22 and 31), notwithstanding that the basis of their decision was that a building undergoing redevelopment and incapable of beneficial occupation is not a hereditament. In the light of that reasoning, and subsequently that of the Upper Tribunal in Canary Wharf, valuation officers should adopt the orthodox approach of deleting such entries in line with the law. There is no benefit in continuing with the previous practice endorsed by the Supreme Court and which was followed because the VOA understood that, even if it had a nil value, the hereditament continued to exist and consequently should be shown in the list.
13.2 In instances where a £0 RV has remained in the list for a building undergoing redevelopment and that development is now complete, the £0 RV entries should be deleted from the date the £0 RV applied and new entries inserted in the list from the date of completion (noting the strict requirements in para 13.4 below). This is to emphasise that the ‘increase’ in RV to reflect the new building is not caught by Reg 14(7) and date of schedule increases.
13.3 In other cases where the ongoing works may result in a decrease in the rateable value of the hereditament and/or a change in its description; the hereditament should remain in the rating list until it is evidenced that it has ceased to exist, as detailed in Rating Manual: Section 2: Part 2 - The Hereditament. 13.4 Reinstatement of a list entry may be necessary following completion of the works. When doing so, consideration should be given to the principles in Rating Manual: Section 2 Part 3. Notably, following the Upper Tribunal decision in Aviva v Whitby (VO) RA/3/2011, it is important that the hereditament is 100% complete and ready for occupation, is actually occupied or a completion notice has been served before a new entry is made in the Rating List.
Hereditaments in disrepair where repairs are uneconomic:
13.5 Where elements of a hereditament are uneconomic to repair then they should be valued in their actual state. This may extend to the whole hereditament or parts (see para 5.32 above). If the whole premises are unusable in this state then a value of £0 RV will be appropriate and the description should be altered to, for example, ‘Workshop and premises (beyond economic repair)’. If only parts of a hereditament are uneconomic to repair these should be noted in the valuation line entries and a value ascribed to the remainder that remains capable of occupation.