Rating Manual section 3: valuation principles

Part 2: material change of circumstances inclucing mode or category

The Valuation Office Agency's (VOA) technical manual for the rating of business (non-domestic) property.

1. Statutory provisions and regulations

1.1 A proposal for a reduction in assessment because of a “ material change of circumstances” can only be made under regulation 4 (1)(b) of the Non Domestic rating (Alteration of Lists and appeals)(England) Regulations 2009 SI 2268, or the equivalent in the NDR (Alteration of Lists and Appeals)(Wales) Regulations 2005 SI 758(W.63).

This states that a proposal may be made if:

The rateable value shown in the list for a hereditament is inaccurate by reason of a material change of circumstances which occurred on or after the day on which the list as compiled.

1.2 Broadly, for a proposal to be validly made on the grounds of a material change of circumstances it must;

a. be made at any time before the day on which the next list is compiled (Regulation 5(1) of 2009 SI2268)

b. include a statement of the nature of the change (Regulation 6(1)(e)(ii)), and

c. state the date on which the person making the proposal believes the change occurred (Regulation 6(1)(e)(ii)).

1.3 A material change of circumstances is defined by reference to those matters referred to in Para 2(7) of Schedule 6 (Regulation 3 of 2009 SI 2268) as well as any part of a hereditament ceasing to be, or needing to be included in a list . It does not include splits and mergers.

1.4 Inevitably these provisions will give rise to questions as to whether proposals have been validly made in certain circumstances and how to challenge them if they have not. Reference should be made to RM Section 7 Part 1

2. Validity - relevant criteria

2.1 Proposals that fail to comply with the factual requirements of the above Regulations should be treated as invalid. Examples would include:

a. failure to specify the material change of circumstances;

b. failure to specify the date on which the change was believed to have taken place;

c. failure to link the event in question to one of the matters specified in schedule 6 para 2(7) of the LGFA 1988

2.2 It should be noted that failure to correctly specify the exact date when the change took place does not necessarily render a proposal invalid. Regulation 6(1)(e)(ii) merely requires a statement of the date on which the maker of the proposal believes the change took place. In many cases a statement in this respect will be difficult to challenge.

2.3 The date should normally be the day, month and year but an indication of the month and year only is acceptable.

2.4 It may be difficult in some instances to determine the precise date on which a purported material change occurred. For example, where the material change is a building project, or road works in the locality, which has no effect on the property initially but gradually comes to do so. In such circumstances it is conceivable that there will be several successive material changes as the works progress and it should not be maintained that there is only one date which can be accepted, whether this is the day on which the works began or were completed.

2.5 More difficult questions of interpretation surround the phrase “material change of circumstances”. No quantitative test should be implied when considering a change in any of the matters mentioned in para 2(7) of Schedule 6 and even a minor change is “material” if it satisfies this definition. A detailed consideration of what comprises a material change of circumstances is provided in paragraphs 7-11 below

3. Consideration of validity on receipt of a proposal

3.1 General policy on the question of validity of proposals is dealt with in Rating Manual 2:2. The following paragraphs deal more specifically with proposals made on the grounds of material change of circumstances.

3.2 Reserved.

3.3 If there is a material deficiency, such as a failure to specify the material change or the date it took place, then an invalidity notice should be served. However, where it is considered that the deficiency lies in the purported material change itself the matter should be approached with some caution.

3.4 It is not generally a matter of validity where it is accepted that there is a material change of circumstances but the change has no effect on the value of the property. The proposal is valid but remains to be substantiated in valuation terms.

It could be argued that in the particular circumstances of a case the material change of circumstances is so remote in terms of its influence on the subject property that the maker of the proposal could not possibly believe that the change would have an effect on value. A challenge on these grounds will not be easily substantiated and Regulation 8(1) invalidity procedure should not normally be invoked unless there is good reason to believe that the proposal is vexatious or totally without foundation.

Failure to treat a proposal as invalid under Regulation 8(1) does not preclude the question of validity being raised at a later stage - eg on appeal to VT (Regulation 8(12)).

4. Scope of proposal

4.1 Once it is accepted or established that a proposal has been validly made, no attempt should be made to restrict consideration of the assessment to the precise grounds of the proposal alone.

Legal advice indicates that where, for instance, a proposal is made for a reduction on account of the demolition of part of a hereditament, the VT and Lands Tribunal are not precluded from examining the whole of the assessment on the remainder, notwithstanding that this could not have been challenged otherwise. Similarly, when considering a proposal for a temporary reduction in assessment it is necessary to check that the existing list entry is correct. If the entry is, for example, insufficient then any allowance for the temporary disability must be deducted from the correct entry.

However, if a proposal is made on the grounds of a MCC that is agreed not to be value significant, the maker of the proposal cannot seek a reduction on other grounds such as regulation 4(1)(a) or (c )

4.2 No doubt, proposals will be received which will test the interpretation of a “material change of circumstances” to the limits, often as a preliminary to the substantive issue, simply in order to establish a valid proposal.

All proposals must be considered on their merits and challenged whenever it is appropriate to do so but particular attention should be paid when there would appear to be clear abuse of the Regulations in this way.

5. Material Day

5.1 The Non Domestic Rating (Material Day for List Alterations) Regulations 1992 SI 556, as amended by the Non-Domestic (Material Day for List Alterations)(Amendment) (England) Regulation 2005 SI 658 makes no specific reference to “ material change of circumstances” so therefore regulation 3(7) will apply. That is, the material day for a proposal made on the grounds of an MCC will be the date of proposal, or if there is no proposal and the VO alters the list due to an MCC, then the material day will be the day on which circumstances giving rise to the alteration occurred.

5.2 This can cause particular problems in the case of a temporary change in one of the “matters” specified in para 2(7) of schedule 6 LGFA 1988 when a proposal has been served after that change is no longer present. In the case of a proposal that is served on the grounds of changes to the locality caused by road works that have ceased at the date of proposal, then no reduction can be given because at the material day no road works were in existence. Any proposal for a temporary MCC must therefore be served during the period when the change occurred.

5.3 For further information about the material day refer Rating Manual Section 2 Part 4

6. Effective dates

6.1 Regulation 14(2) the Non Domestic rating (Alteration of Lists and appeals)(England) Regulations 2009 SI 2268, or the equivalent in the NDR (Alteration of Lists and Appeals)(Wales) Regulations 2005 SI 758(W.63) provides that the effective date of a list alteration will generally be the date the circumstances arose that required the list to be altered, often referred to as the ‘Day of Event’

Rating Manual Section 2 Part 5 considers effective dates in greater depth and has a look up table at appendix 3

7. The definition of material change of circumstances

7.1 The definition of Material Changes of Circumstance (MCC) contained in Schedule 6 para 2(7) of the Local Government Finance Act 1988 has caused considerable difficulty in interpretation. It was enacted to restrict the effect of the Addis decision in the House of Lords (Clement (VO) -v- Addis Ltd, [1988] RA 25; [1988] 1 WLR 301) which had allowed not just tangible but also intangible factors to be taken into account when considering a rating assessment.

The new definition was intended to restrict the factors that could be taken into account essentially to the former. This is clear from the Secretary of State for the Environment’s statement in the House of Commons on 10 March 1988 that:

… changes will be taken into account only in so far as they relate to the physical state of the hereditament and its locality. Changes in economic factors will be taken into account in the 1990 and subsequent revaluations.

7.2 However what is or is not physical – or physically manifest – has been subject to much argument in cases where proposals have variously been made on the basis of an MCC consequent on the effects of the destruction of the World Trade Center in New York, the London terrorist bomb attacks or the London Congestion Charge.

7.3 The VOA has taken legal advice on the meaning of aspects of the definition of MCCs on several occasions since 1990. Current advice, particularly on the question of what is physically manifest, is that it is necessary to adopt a purposive approach to the construction of Schedule 6 para 2(7) i.e. to look at its purpose and the context in which it was enacted.

8. Background

8.1 It is first helpful to summarise the background. Whilst having an antecedent valuation date (AVD) for rating lists offers a number of advantages, it results in the complication that the legislation needs to set down what matters are taken at the antecedent date and what matters are taken at the date the list is compiled or later for changes to properties. The approach adopted is that everything is taken as it actually was at the AVD except those matters listed in Schedule 6 para 2(7). The latter are taken as they are at the date the list is compiled or at the material day, as is appropriate. The valuer then has to judge what the rent would have been for the property at the AVD had the Schedule 6 para 2(7) matters been substituted for the actual circumstances at the AVD. So in the simplest example of a new property built on a vacant plot the question is had the new property existed at the AVD, instead of the plot being vacant, what rent would it have achieved?

8.2 Matters to be taken as they were at the AVD will include:

  • the purchasing power of money and inflationary trends
  • the money supply in the economy as a whole. Changes in distribution of money between different regions and social classes will not be relevant
  • propensity to spend within the economy as a whole. No account should be taken of changes in the propensity of individuals or organisations to spend, or in their spending preferences between different products, services, raw materials, land and buildings
  • interest rates
  • people’s attitudes and preferences
  • the state of the market in which the hereditament is to be judged

8.3 The Schedule 6 para 2(7) matters can broadly be described as falling within the 2 established limbs of the Rebus principle: “physical” matters and matters concerning mode or category of use . The intention was that economic matters such as level of interest rates, state of the economy, propensity to spend, together with attitude matters such as fashion, are taken as they were in the AVD setting. But a Schedule 6 para 2(7) matter is not to be disregarded on account of the fact that its cause is economic.

8.4 The Schedule 6 para 2(7) matters are:

a. matters affecting the physical state or physical enjoyment of the hereditament

b. the mode or category of occupation of the hereditament

c. the quantity of minerals or other substances in or extracted from the hereditament

the quantity of refuse or waste material which is brought onto and permanently deposited on the hereditament,

a. 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 nonetheless physically manifest there, and

b. the use or occupation of other premises situated in the locality of the hereditament

8.5 In looking at each of the Schedule 6 para 2(7) sub-paragraphs the purposive approach has to be borne in mind.

9. The mentioned matters

Examining each of the sub-paragraphs in turn:

9.1 (a) matters affecting the physical state or physical enjoyment of the hereditament,

9.1.1 This relates to the first limb of the rebus sic stantibus principle. It covers two aspects concerning the hereditament itself. The first, physical state, is straightforward. Changes to the physical nature of the hereditament at the material day should be assumed to have occurred by the AVD eg extensions and part demolitions.

9.1.2 The second aspect is physical enjoyment of the hereditament. Not just “enjoyment” but physical enjoyment. This includes the ability of the tenant to enjoy the premises by being physically present in them. It follows that a statutory order or a legal prohibition preventing use would be a change under this head. An example of this was the introduction of the Firearms Act which made unlawful the use of hand guns and therefore made gun club buildings, which are sui generis and only useable as gun clubs, incapable of being lawfully physically occupied for their proper use.

9.1.3 Other changes to legal matters that affect the physical enjoyment of the hereditament may also be taken into account. Changes to legal matters which do not affect the physical enjoyment cannot be taken into account and the legal position should be viewed as it was at the AVD. So the mere existence of an enterprise zone (as in Addis in the Court of Appeal: Addis Ltd and others -v-Clement (VO), [1987] RA 1) or a draft compulsory purchase order (as in Prodorite Ltd -v- Clark (VO), [1993] RA 197 (LT)) are to be ignored if they did not exist at the AVD. Legal changes which are likely to have affected physical enjoyment include where public houses in parts of Wales were allowed to open on Sunday when previously they were not.

9.2 (b) the mode or category of occupation of the hereditament,

9.2.1 The mode or category of occupation of the hereditament being valued should be taken as it is at the material day. “Mode or category of occupation” is the second limb of the rebus principle and should be taken to have the meaning confirmed in the Milton Keynes case

9.2.2 A change of occupier is not a change in the mode or category of occupation.

9.2.3 A change in the intensity of use is not a change in the mode or category of occupation. A shop is to be valued as a shop not any particular kind of shop: a change from successful to unsuccessful shop is not a change in the mode or category of occupation.

9.2.4 Changes in level of trade or business on non-mineral hereditaments are not MCCs as such. Where there are physical changes to hereditaments which result in changes to the level of trade or business then, to this extent only, changes in trade can be taken into account, e.g. it is likely an extension to a restaurant or the building of a competing shopping centre at the other end of the high street would have affected the level of trade had the physical changes occurred prior to the AVD.

9.3 c) the quantity of minerals or other substances in or extracted from the hereditament,

cc) the quantity of refuse or waste material which is brought onto and permanently deposited on the hereditament,

9.3.1 Mineral hereditaments are treated differently from other classes of hereditament. Changes to the quantity of minerals extracted from a mine or quarry or waste deposited in a waste tip are MCCs by virtue of the definition above. This allows the annual revision of mineral assessments depending on previous year’s extraction or deposit. Prior to 1990 a similar provision existed for public houses.

9.4 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 nonetheless physically manifest there, [and]

9.4.1 This sub-paragraph causes the most difficulties particularly in its use of the phrase “physically manifest”.

9.4.2 The paragraph has two limbs. The first “physical state”) is the sister of the first limb of (a). Changes to the physical nature of the locality at the material day, as with changes to the physical nature of the hereditament, should be assumed to have occurred by the AVD eg if a shopping centre has recently been built elsewhere in the town then it should be assumed to have been built at the AVD. If nearby road access has recently been improved this should be assumed to have already been undertaken by the AVD.

9.4.3 The second limb (“physically manifest”) is less straightforward. The exact wording is matters… , though not affecting the physical state of the locality, are nonetheless physically manifest there”. The first limb deals with matters which do affect the physical state of the locality but the second limb concerns matters which are only physically manifest in the locality.

9.4.4 It is not correct to treat the second limb as embracing any more than the matter, i.e. that which is itself physically manifest in the locality of the hereditament to be valued at the material day. Economic and other non-physical factors are not to be taken into account as existing at the material day, notwithstanding that such factors may have led to the matter or matters that are physically manifest. To take into account, to any extent, such economic and other non-physical changes would be contrary to the purpose of the legislation and would work against consistency and uniformity across the statutory scheme.

9.4.5 A useful working rule is for the valuer to envisage the hypothetical landlord and tenant inspecting the hereditament to be valued and consider what would impress them as physically observable or physically manifest features in the locality of the hereditament. These might include:

  • traffic flow

  • pedestrian flow or footfall

  • noise, fumes or vibration

  • aircraft movements

  • increased trading hours of licensed premises

9.4.6 If any of these change to a degree which would be perceptible as between the date of compilation of the list and the material day, then there is a MCC. Perceptible does not mean simply measurable. In the appeal of Kendrick (VO) 2009 the Lands Tribunal rejected a technical analysis of footfall or aeroplane movements to decide if there had been a physically manifest change.. It appeared to regard something as being ‘physically manifest’ if it could be identified by simple observation rather than being measurable in a scientific sense.

9.4.7 The valuer is not required to enquire into the reasons behind the change. If, however, the reasons are themselves capable of physical observation, or obvious from what is physical manifest, then the valuer can assume this cause existed at the AVD. For example the reason for new regular aircraft movement overhead and accompanying noise would be an obvious and direct result of the creation of a new air lane.

9.4.8 If the link between the cause and that which is physically manifest is not so direct then the cause should be disregarded. Moreover, the physical manifestation should be envisaged at the AVD but the valuer should also consider the degree to which it accords with what would be expected at the AVD. If it does not so accord, then it will not be expected to persist and will not affect rental values. For example it was alleged in proposals made for shops in New Bond Street that footfall had significantly reduced as a result of a change in the propensity of Americans to fly, travel to London and spend money following the terrorist attacks and destruction of the New York World Trade Center. To the extent that there was a change in footfall the link to the WTC would not be immediately observable to the hypothetical landlord and tenant standing in New Bond Street but would require further enquiry. Footfall is something that varies over time. Over an economic cycle there will be marked change in pedestrian flow in a retail centre. A drop in footfall could be the result of many different causes including economic changes and changes in people’s attitudes. It is in the nature of shopping streets that they are subject to fluctuations - daily, weekly, monthly - and any attempt to demonstrate a manifest change will have to show on the facts some demonstrable shift. Therefore, the link between the cause and that which is physically manifest is not direct and the cause should be disregarded. By contrast, a change in the alignment of a footpath resulting in a change in footfall will be demonstrable and physically observable, but this is quite different from remote changes which cause a change in footfall.

9.5e) the use or occupation of other premises situated in the locality of the hereditament.

9.5.1 The wording used is similar to (b) but rather than using the phrase “mode or category of occupation” it says “use or occupation”. This should be interpreted so as to have regard to all changes of use not just those within the same mode or category of use ie it would include where the use of a shop changes from butcher to grocer. Changes in personal occupation will also be relevant eg if a major supermarket chain moves out of a shop in the locality and another occupier begins to trade. Vacation of a property in the locality will also be a change in the use or occupation of other premises.

9.5.2 The wording does not include a change in the intensity of use eg a change in the level of trade at nearby premises is not a change in the use and occupation of those premises.

10. Locality

10.1 Both sub-paragraphs (d) and (e) require the change to be within the locality of the hereditament. Locality is not defined in the 1988 Act or in earlier legislation. It is therefore necessary to rely on case law.

10.2 In the leading case of K Shoe Shops Ltd -v- Hardy (VO) and Westminster CC, [1983] RA 245 (HL)] “ locality “ was taken to be an area within which there would be sufficient evidence to produce a reasonably expected rent and outside which that rent might be different, and the decision of the Lands Tribunal on this issue was not disturbed.

10.3 The issue in Morton (VO) -v- Synor Electronics Ltd, [1983] RA 204 (LT) was the value of industrial units and comparison with modern physically similar units in an adjoining valuation area or physically poorer units requiring adjustment but in closer proximity. In his decision the Member stated that:

The term locality is not defined. I take the view that the extent of a locality is a matter of fact in each case and the boundaries are more likely to be defined by physical conditions affecting aspects of value than by areas of administration.

10.4 The decision in K Shoes was followed in Shearson Lehman Brothers Ltd -v- Humphreys (VO), [1991] RA 125 (LT) which concerned the locality of office premises:

Locality is not defined in the 1967 Act and must be given its ordinary meaning. In the context of section 20 “locality” may well include an area where one can expect to find comparable premises, transport facilities and other matters affecting the amenities of the locality, but that does not define the limits of the locality. In our view the limits of locality must remain imprecise and vary as to the circumstances in each case. It would be unwise to attempt any general definition.

10.5 Finally, “locality” was considered in Jafton Properties Ltd -v- Prisk (VO), [1997]LT RA 137 (LT) which concerned over supply of office accommodation:

Mr Bell defined the locality in these appeals as the City and the fringe in the Richard Saunders and Partners Floor Space Surveys. This is the area where tenants taking accommodation in or close to the appeal hereditament would look for accommodation. The valuation officer says that “locality” is not bounded by a distinct line but is an area within which the physical factors may affect the value of a hereditament and where there are similar buildings to satisfy the demands of a potential occupier. The “locality” in these appeals includes the area around the fringe of the City core but within the City boundary or close to it. It does not include the area to the south of the Thames. I do not think I should attempt any general definition of the word locality which must remain imprecise and vary with the different circumstances of every case.

For these appeals I prefer the valuation officer’s definition and I accept his delineation of the “locality” for the purposes of para 2(7)(d) and (e) of schedule 6”.

10.6 Thus the Lands Tribunal noted in several of the cases that “locality” is an imprecise term and not something for which it would wish to provide a general definition. What is the locality for any case will depend on the facts of the case.

11. Summary - what is or is not a MCC?

11.1 It is important, when considering MCCs, to bear in mind the scheme of the legislation - what was Parliament seeking to achieve in enacting Schedule 6 para 2(7) and not take into account intangible factors contrary to the scheme.

11.2 Be aware of the concept of the legislation that all factors, except where those mentioned in Schedule 6 para 2(7) have changed, are taken at the AVD. The idea is that rating is a tax on property at a snapshot in time retaken every 5 years with only a limited intermediate correction to the extent that changes occur within the two established limbs of the rebus principle.

11.3 For a useful working rule, see paragraphs 8.2 and 9.4.5 above.

11.4 The Practice Note to this section provides guidance on whether particular events are likely to constitute MCCs having regard to the principles set out above. These will be added to from time to time as events occur.

12. Valuation issues arising from a material change of circumstances

12.1 Where an MCC only lasts for a limited period of time it is often not possible to obtain any rental evidence showing the impact on value. At best rent payments may be deferred. The only evidence likely to be available is loss of trading income over the period of the MCC such as roadworks. That trading information is often incomplete and must be compared to comparable periods for earlier years, ignoring any effects which are not due to the MCC in question.

12.2 It is then necessary to convert a reduction in receipts and profitability due to the MCC into an effect on rental value. In practical terms if “ fair maintainable trade” (FMT) for a hereditament valued by the rental method is significantly reduced after the MCC compared to trading at the AVD due to its effects, then there is a stronger case for a reduction in rental value than if the reduction is small. The size of the reduction in assessment will depend on the circumstances, but it may well not be proportionate to the fall in FMT. For classes valued by the receipts and expenditure method there is less valuation difficulty because changes in FMT can be directly reflected in a receipts based valuation scheme.

12.3 The rating hypothesis requires that hereditaments are valued vacant and to let on a year to year tenancy. The effect of a MCC may have different effects on the receipts of similar properties. During the 2001 FMD Outbreak it was found that receipts for B&B accommodation, in areas affected, fell by different amounts, often depending on the reaction of the individual operator to the crisis. For a number of such establishments all located within a small area of a tourist location it was practical and in accordance with the principle of ‘vacant and to let’ to take an ‘average’ effect and apply as a general ‘tone’ rather than rely on actual trade in each case, particularly when those hereditaments have been valued using a tone value per physical unit measure, such as a price per bed unit.

12.4 Within a particular class of property in a location some uses may be more affected by an MCC than others. It is the effect on the market generally for the mode and category of occupation that must be considered not the effect on a particular user within the mode and category.

12.5 Although it is natural to concentrate on the bid of the hypothetical tenant, it must not be forgotten that the interests of the hypothetical landlord must be taken into account. A material change in circumstances that is only expected to last for a few months is unlikely to induce the landlord to reduce the rent even if the short-term effect is severe. It is necessary to stand in the shoes of both hypothetical landlord and tenant at the material day and decide what is the likely expectation of the duration and severity of the MCC, possibly in the light of similar circumstances in the past elsewhere, and making allowance for a levelling off of the worst effects once the initial period of the impact of the MCC has passed.

12.6 Where at the material day the anticipated effect of continuance of the MCC is considered to be small, for example a proposal is made for roadworks when the scheme has almost been completed, the correct course of action is not to reduce the assessment even though assessments of other hereditaments have been reduced following proposals made at a much earlier date.