Part 8A: Repair and the economic test
The Valuation Office's technical manual for the rating of business (non-domestic) property.
1.1 The statutory repair assumption as set out in paragraph 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. This is covered in Part 8B of this manual.
1.2 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.
1.3 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
Paragraph 8A was also inserted in 1999 to ensure that the repairing assumption not only applies when a Valuation Officer is compiling a list but also when any alterations are made during the life of rating list.
(8A) For the purposes of this paragraph the state of repair of a hereditament at any time relevant for the purposes of a list shall be assumed to be the state of repair in which, under sub-paragraph (1) above, it is assumed to be immediately before the assumed tenancy begins.
1.4 In determining rateable value the legislation requires a valuation at the antecedent valuation date (AVD) on the statutory basis but taking into account particular stated physical circumstances as they are on the compilation day or, where the rateable value (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. Read more in Part 4 of this manual.
1.5 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 ADV. 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).
2.1 The following is the general approach to the operation of the repair assumption. 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:
- is the hereditament in a state of reasonable repair?
- 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’
- would a reasonable landlord consider the repairs to be uneconomic? — ‘the economic question’
2.2 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.
2.3 At the outset, a number of points are to be noted:
- inherent to the notion of repair is disrepair, for example deterioration from some previous physical condition
- what needs to be considered is whether it would be economically reasonable to restore the hereditament to a former state
- 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
- 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.
State of reasonable repair
2.4 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.
2.5 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) paragraph 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.
2.6 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, for example, 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.
2.7 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.
2.8 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) paragraph 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.
2.9 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 (UT) 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 paragraphs 36-39, commented:
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.
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.
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.
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.
2.10 In the Upper Tribunal decision of Carey Group v Ricketts (VO), the Upper Tribunal referred to the Canary Wharf decision in paragraph 39. And stated:
The only case to which we were referred in which Monk has been applied was the Tribunal’s decision in Jackson (VO) v Canary Wharf Ltd [2019] UKUT 136 (LC), which concerned office premises undergoing reconstruction which had been stripped back to a shell condition and which were awaiting agreement with a new tenant before they would be fitted out. There was no doubt that, by reason of their undergoing redevelopment, the premises were incapable of beneficial occupation, and that was enough to dispose of the appeal on the basis that they were not a hereditament….
Valuation Officers will likely come across proposals or appeals which request a property is deleted from the list due to being incapable of beneficial occupation, that of itself is not sufficient and the repair assumption may still apply (see paragraph 5 below). It is important to note that the Supreme Court in Monk decided the property was incapable of beneficial occupation due to it undergoing a scheme of reconstruction or redevelopment. The Canary Wharf decision followed the Monk decision by deciding the offices were incapable of beneficial occupation by reason of their undergoing redevelopment.
3.1 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’.
3.2 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 for example, when it was in a state of reasonable repair.
3.3 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.
3.4 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
3.5 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. Reference: [Thomas and Davies v. Denly (VO) [2014]].(http://www.bailii.org/uk/cases/UKUT/LC/2014/146.html)
3.6 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.
3.7 There is useful commentary in the Carey Group v Mr A Ricketts (VO) Upper Tribunal decision about what can be considered when approaching cases, which refer to the repairing assumption in the Schedule 6 of the LGFA 1988. In particular paragraph 43 refers to a Court of Appeal decision which gives a helpful summary of the common law principles on the meaning of an obligation to repair. This is derived from Landlord and Tenant law:
For an up to date summary of the common law principles on the meaning of an obligation to repair, reference can be made to London Borough of Hounslow v Waaler [2017] EWCA Civ 45 at paragraph [14], where Lewison LJ identified a number of propositions about the meaning of ‘repair’ as it applies between landlord and tenant:
I do not believe that the following propositions are controversial in the context of contractual liability:
i) The concept of repair takes as its starting point the proposition that that which is to be repaired is in a physical condition worse than that in which it was at some earlier time: Quick v Taff-Ely BC [1986] QB 809.
ii) Where the deterioration is the product of an inherent defect in the design or construction of the building the carrying out of works to eradicate that defect may be repair: Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1980] QB 12.
iii) Prophylactic measures taken to avoid the recurrence of the deterioration may also be repair: Ravenseft Properties Ltd v Davstone (Holdings) Ltd at 22, McDougall v Easington DC (1989) 58 P & CR 201, 206.
iv) In principle where there is a choice of methods of carrying out repair, the choice is that of the covenantor provided that the choice is a reasonable one: Plough Investments Ltd v Manchester CC [1989] 1 EGLR 244.
v) At common law there is no bright line division between what is a repairand what is an improvement: McDougall v Easington DC at 207.
vi) The use of better materials or the carrying out of additional work required by building regulations or in order to conform with good practice does not preclude works from being works of repair: Postel Properties Ltd v Boots the Chemist [1996] 2 EGLR 60.
vii) Where a defect in a building needs to be rectified, the scheme of works carried out to rectify it may be partly repair and partly improvement: Wates v Rowland [1952] 2 QB 12.
3.8 The facts in the Carey Group UT decision were outlined at paragraph 3:
- This appeal concerns office premises (the Property) on the lower floors of a newly constructed building which, it is agreed, were incapable of beneficial occupation between March 2020 and April 2021. The cause of that condition was not, as it had been in Monk, a programme of works undertaken by the owner of the building. Instead, the premises were rendered unoccupiable when water penetrated the basement through a joint in the exterior wall and ponded beneath the raised office floor, creating damp conditions in which mould and fungi flourished, giving rise to an unacceptable hazard to health. The problem was solved, and the hereditament returned to use, by remedial work to seal the joint.
3.9 The works to repair the joint causing the water penetration were relatively minor in duration and cost. The UT decided that at paragraph 76:
For these reasons we are satisfied that the repair assumption requires that the Property be valued on the basis that, at the material day, damage to the basement which had been caused by the ingress of water had been repaired and that the repair included sealing the joint between the basement floor and the adjoining wall so that it no longer allowed the entry of water into the premises.
3.10 The Carey Group decision articulates the reasonable repair assumption very well, and regardless of the cause of the damage, the repair works were not considered so unreasonable that the hypothetical landlord would not do them. So, the offices had to be treated as if the repair work had been completed the UT dismissed the appeal.
4.1 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 paragraph 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.
4.2 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.
4.3 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
- doing no work
The question is not whether the repair work would be done but whether it could be done economically.
4.4 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 paragraph 5.3 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.
4.5 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.
4.6 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 Valuation Tribunal 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.
4.7 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 £55,000 per annum, 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.
4.8 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 Valuation Office 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.
4.9 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
4.10 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. If it was judged not economically reasonable to repair the first floor and the basement then these should be valued as they are, but 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).
4.11 Reasonable repair may mean that an element is replaced rather than repaired as it may not be economic to repair certain elements for example, it is often more economic to replace a defective window with a new window. The replacement can be with a modern equivalent and does not have to be a like with like replacement. For example, an old single glazed wooden window can be assumed to be replaced by a modern double glazed window.
4.12 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. Reference: Thomas and Davies v. Denly (VO) [2014].
4.13 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. 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.
5.1 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.
5.2 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.
5.3 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 paragraph 4, above, and it may be appropriate to delete the entry from the list. See paragraph 8 below.
6.1 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.
7.1 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.
7.2 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.
7.3 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, for example, stairs, lifts, access, lighting on stairs, etc.
7.4 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.
7.5 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.
7.6 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.
7.7 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.
8.1 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.
8.2 The valuer needs to consider the physical factors listed in Schedule 6 paragraph 2(7) as they are on the Material Day but envisaged as at the AVD. Where 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 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 material change of circumstances (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 or nil valuation.
8.3 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. 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. The reason for the £0 valuation is the hereditament still exists however it has no value.