Rating Manual section 3: valuation principles

Part 4: valuing vacant property

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

1. General

1.1 Since 1601 Rating has been a tax on the occupation of land including buildings. In 1966 an additional rate was created providing for rates to be payable by owners on some vacant properties. This has been extended and modified, with the Rating (Empty Properties) Act 2007 being the latest change to empty rate legislation. This Act came into effect on 1 April 2008 and made changes to the empty rate provisions including increasing the unoccupied rate liability for many classes of property.

1.2 The legislative basis for the Empty Property Rate is dealt with in detail in RM Section 3 - Part 3 - Unoccupied hereditaments and Completion Notices.

This Section deals with the valuation implications when assessing empty property. The main changes made by the Rating (Empty Properties) Act 2007 were:

  • empty property rate increased to 100% - An option is included in the Act permitting the government in the future to reduce the rate from 100% by any amount down to 50% of the occupied liability

  • industrial/ warehousing property brought back into the empty property rate

  • initial void period for Industrial/ warehousing property is six months. The usual period of vacancy before the rate applies is 3 months and this period will continue to apply to other properties

  • empty property belonging to charities and Community Amateur Sports Clubs (CASCs) are not normally be liable to empty rates - A new section; S45A is inserted into the 1988 Act setting out two classes of properties which will be ‘zero rated’ if unoccupied. Previously these two classes had a maximum liability of 20% of the occupied charge when vacant but now they will have no liability when empty. New section S45A(2) and (3) specifies that the classes of property which will be zero rated if unoccupied are:

  1. Property owned by charities or trustees for charities that appear likely next to be used wholly or mainly for charitable purposes and
  2. Property owned by registered CASCs that appear likely next to be used wholly or mainly for the purposes of such a club.

Empty property belonging to a company in administration are not liable to empty rates.

1.3 Existing exemptions from the empty property rate remained including listed buildings and hereditaments with an RV below set limits. These are not liable to the empty property rate.

1.4 Rate liability and collection are matters for billing authorities and not valuation officers. Enquires regarding liability should therefore be referred to the billing authority.

1.5 Anti-avoidance powers - A new section, S66A was inserted by the 2007 Act into the LGFA 1988 empowering the Secretary of State and the Welsh Minister to make regulations to deal with steps that owners might take (or omit to take) in an attempt to avoid unoccupied rates through causing or allowing the state of their property to change. Such regulations would allow this to be done by making an assumption that the state of any property forming part of an unoccupied hereditament has not changed either:

  • since before a prescribed event or

  • as the result of an act or omission by or on behalf of a prescribed person.

1.6 The Government and Welsh Assembly have not implemented any of the powers to make anti-avoidance regulations. However, the Act enables retrospective anti-avoidance legislation to be introduced if it is proven, for example, constructive vandalism (soft stripping) by owners to avoid rates liability is undertaken to a significant extent.

2. The potential effect of the 2008 changes

2.1 Without any special anti-avoidance regulations, contentions that assessments should be reduced or deleted fall to be considered under existing rating law and practice. It is important that all properties, new and existing, IPP or VON, are inspected internally as soon as possible. This is to ensure the VO has a detailed and accurate record of the property as it was at the Material Day. An aide memoir to assist inspection is provided at Appendix 1. Following inspection careful consideration of the factors covered in the Rating Manual Section 3: Part 6 practice note on disrepair and in this section need to be undertaken before reaching a decision.

2.2 It is important when considering a case to know at what date the physical state of the property has to be considered. Rating manual - Section 2: Part 4: Material Day, provides examples to illustrate the application of the regulations relevant to the 2005 and 2010 rating lists. The main situations in dealing with empty property will be:

  • compiled list challenge – e.g. a statement that the property has been in disrepair since the date of compilation of the rating list. The material day is the date of compilation
  • deletion – where the entry is to be deleted then the material day is the date of the event justifying the deletion
  • material change of circumstances IPP– the material day is the date the IPP is received by the VO
  • Valuation Officer Notice – for a VO initiated alteration the material day is always the date of the happening e.g. demolition or MCC, unless the date is unknown in which case it will be the date of the rating list alteration

3. Valuation considerations for empty property

3.1 Particular matters that need to be considered in the valuation of empty properties and, indeed, contentions that the value should be reduced or hereditament deleted are likely to fall into the following categories:

  • disrepair

  • no demand - obsolescence

  • when next in use

  • private storage premises

  • works of alteration

  • vacant former agricultural buildings

  • vacant new buildings

These likely contentions are covered in turn in the sections that follow. An aide memoir to assist caseworkers is attached at Appendix 2.

4. Disrepair

4.1 Rating Manual Section 3: Part 6 provides extensive guidance in the form of a practice note. This has been extensively rewritten following the case of Monk v Newbigin 2015 though it was originally prepared at the time of the passing of the Rating (Valuation) Act 1999. This practice note should be referred to when considering unoccupied premises in disrepair.

4.2 Rating Manual: Section 3: Part 1: A - The Hereditament, provides detailed guidance about when a hereditament comes into existence and when it may cease to exist.

5. No demand – obsolescence

5.1 Existing buildings and hereditaments can become obsolete: technology moves on, demand changes, replacement buildings are constructed. Rating is a tax on rental value. Just because a hereditament exists does not mean it has a rental value - demand may have gone.

5.2 In considering questions of obsolescence and demand, it is important to remember to consider this as at the AVD. The rating system works by taking values at a common valuation date, the AVD. All things about the property and its locality are taken then subject to the exception of those things listed in para 2 (7) to Schedule 6 of the 1988 Act which are taken at the Material Day. These are:

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

  2. b) the mode or category of occupation of the hereditament

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

  4. d) the quantity of refuse or waste material which is brought onto and permanently deposited on the hereditament

  5. e) 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

  6. f) the use or occupation of other premises situated in the locality of the hereditament

The valuer is therefore asked to consider what would have been paid by way of rent at the AVD in the AVD world, subject to making the assumption that certain broadly physical matters were then how they actually were at the material day. So demand levels (subject to any variations in demand that would flow from the physical changes assumed), the state of technology, what would then be regarded as obsolete and people’s attitudes generally need to be viewed as they were at the AVD.

5.3 An existing RM Practice Note, Rating Manual - Section 4 - Part 1 - Rentals Method - Practice Note 2 : 1995 : 1995 Revaluation - Valuation of Space where a Supply/Demand Imbalance exists at AVD, gives advice on the approach to dealing with oversupply at the time of the 1995 rating lists and these principles apply equally to later lists.

5.4 A difficulty for VOs is in judging whether a property is actually obsolete or simply has not (yet) let. Consideration should be given to the following:

  • was the property occupied at AVD? This is primary evidence of demand

  • are there other similar properties in the locality that are occupied? Does this mean that the subject property has simply been ‘unlucky’, rather than there being no demand for the type and locality of the accommodation? A terrace of five shops or offices can be envisaged with four occupied. It may be there is only demand for four. This does not mean that the demand for the fifth, vacant one should be regarded as nil. It is the general demand for the mode and category of occupation in the locality that needs to be considered - not the specific.

  • what rent is being asked?

  • accepting that at the material day the subject property is vacant and to let the vacancy of other hereditaments in the locality may be value significant. It must be determined if the ‘emptiness’ is due to a physical cause in the locality e.g. oversupply or whether it is the actions of the actual landlord which has created an artificial environment within blocks of property e.g. to preserve the property for redevelopment. Where units of assessment are within blocks of property in one ownership the actions of the owner should not be allowed to affect the hypothetical landlord situation- see Coppin VO v East Midlands Airport Joint Committee (1970) 16 RRC 386 and on appeal (1971) RA 449

  • what other terms are being offered?

  • is it outside the Landlord &Tenant Act 1954?

  • has a proper marketing campaign been undertaken? Failure to let will suggest a lack of demand but is by no means conclusive (was the rent asked too high for example) Is the demand now different from that at the AVD?

5.5 Where a hereditament was, or similar hereditaments in the locality were occupied at the AVD this is likely to indicate there was demand at that time. If the hereditament becomes vacant during the five years of a rating list then, having regard to demand levels at the AVD, it is reasonable to regard it as not being obsolete. However if it is vacant at one AVD and is still vacant at the AVD for the subsequent rating list, then this does suggest demand no longer exists and the valuation should probably be reduced to nil. Obviously this is subject to the particular circumstances of the case and the answers to the questions about marketing, the actual owner’s intentions and level of rent outlined above.

5.6 Any contention that the property is incapable of being let must be considered in relation to the relevance of the rental evidence. Comparable occupied properties of similar size, age and character will evidence demand.

5.7 At page 43 of the decision in Sheil (Valuation Officer) v Borg-Warner Limited [1985] RA36 (LVC/260/1982) Mr C R Mallett FRICS, member of the Lands Tribunal said:

As a valuation for rating purposes is based upon the concept of the value of the occupation it is not surprising that the solution is not always easy to find when the premises are empty. If I may paraphrase what the Member (Mr J H Emlyn Jones FRICS) said in the Lands Tribunal decision of Lambeth London Borough v English Property Corporation Limited and Shepherd (VO), the mere fact that premises are unoccupied does not of itself justify a lesser value, than that applicable to similar premises which are occupied—- I would add that other considerations arise where empty premises are materially different from those which are occupied and where it can be shown that the premises remain empty because of lack of demand.

In Sheil (VO) v. Borg Warner the VO’s appeal was dismissed as the appeal property was considered materially different from those occupied and active marketing had failed to find a new occupier, evidencing that there was no demand for the property in its current state.

5.8 In any individual case the appellant needs to demonstrate that there would be no demand for the appeal property at AVD in its physical state having regard to any physical changes to the locality at the material day. Whilst not conclusive the absence of any marketing or restrictive marketing e.g. outside the Landlord and Tenant acts, short-term lets with no prospect of continuance, separately letting the car park etc, are all indicators that the intention of the owner/landlord is not that of the reasonable landlord.

5.9dence of superior properties, which have not let is not evidence for the appeal property. For example, the office property sector comprises a wide range of properties of varying ages, design, specifications and locations. Different markets exist for the different types of property available. The market for modern and refurbished buildings with high specifications in office locations is quite distinct to that for older properties with lower specifications in secondary or periphery mixed use locations.

5.10 In Tulang Properties Limited v Noble (V O) (1985 RA 47) the Lands Tribunal held that even where a property is considered unlettable there remains a value.

The property was held to be unlettable. Evidence was given of comprehensive marketing of the property over a prolonged period including offering incentives of rent-free periods of up to 5 years with no obligation to continue. It was held that the subsequent selling price of the property was firm evidence of value and that the VO comparables suggesting £8psm were not comparable to the appeal property. The assessment was reduced from £16,500 gross value, £13,722 rateable value to £13,500 gross value, £11,222 rateable value.

The figure of £13,500 gross value could be obtained by starting with the sale price of £244,000 and applying 14%( to give annual value) and 40% (for the tone of the list), or by applying £6.50psm (the comparables were in excess of £8psm.

Care should be taken when relying on sale price evidence that the price does not represent the value for redevelopment that would change the character of the hereditament, such as conversion to residential use.

5.11 The Pattern of Hereditaments in vacant properties RM Section 3: Part 1: A paragraph 7 et seq deals comprehensively with correct identification of the hereditament in vacant property.

5.12 Demand has to be considered in the context of the hereditament. It is considered that the pattern of hereditaments existing at the time of vacation is effectively frozen unless there is some overt act showing that this pattern has changed. This is well illustrated by the 2008 valuation tribunal case on Dudley House in Leeds where both ratepayers and VO were represented by counsel. This concerned a vacant 1960s office building that had always been let in parts. The ratepayers sought a single assessment on the basis of contiguity and because the owner as ratepayer was ‘in effect’ in ‘occupation’. The decision in Dudley clearly turned on the facts of that case, and the crucial fact was that it was a 15 storey tower that had been in multi-occupation since it was built in 1972 and it had never been occupied as a whole. To assess it as such would create a highly improbable hereditament. The VO argued that without some ‘overt act’ the existing pattern of assessments should not be disturbed seeking support from Osborne v Williamson [1980] RVR 122 where the ratepayer argued that two hereditaments (a flat and a maisonette in the same building) had become one, after both had fallen empty. The valuation tribunal confirmed that the Dudley assessments should not be merged. This decision endorsed the approach taken by the VO to determine the hereditaments within the property. An appeal to the Lands Tribunal, RA/15/2008, was subsequently withdrawn and so the VT decision stands.

5.13 In Osborne v Williamson the Valuation Officer (the Respondent) argued that:

There were two separate rateable hereditaments with two separate occupiers on 1st April 1973 when the valuation list came into force. These two hereditaments had not in any way changed since that time but remained structurally in the same condition, each being capable of separate letting at the date of the proposal.”

The Lands Tribunal accepted that argument:

In my judgement the submissions put forward by the respondents are to be upheld and I consider that the local valuation court came to a correct decision. Before the ground floor flat became vacant in February 1976 there were clearly two hereditaments in existence and this position was in no way altered when the flat became vacant. —– If the flat when empty constituted a separate hereditament, I cannot see how it ceased to be a hereditament when another hereditament, that is to say the maisonette, subsequently became empty. It would in my judgement require some overt act on the behalf of the owner indicating a merger of the two parts with a clear intention of effecting a single occupation of the whole before it could be properly said that the two parts ceased to exist as separate hereditaments.

5.14 A recent case, Hewitt (VO) v Telereal Trillium 2016 examined what should happen to the rateable value of an office block where the occupiers were in the process of moving out at the AVD and no particular, potential new tenant could be identified in the market who would have been interested at the AVD. It was clear the private sector would not have been interested in an office block of this size in its location (near Blackpool) and all possible public sector occupiers were already accommodated in other office buildings at the AVD.

The Tribunal accepted it was sound law that a tenancy had to be assumed under the terms of the rating hypothesis in the LGFA 1988 and that the hypothetical landlord and tenant would agree terms. It was content that if there was something about the property that made it intrinsically valueless then a nil value would be agreed between the parties and be the appropriate RV in line with Lambeth LBC v. English Property Corporation and Shepherd (VO). It, however, accepted there were other comparable properties in the locality which were occupied at the AVD indicating it was not intrinsically valueless and it considered the hypothetical landlord and tenant would negotiate a rent by reference to the ‘general demand’ or tone for those other office properties with similar characteristics. It said:

There is no reason to conclude that the public sector occupants of those comparable premises, if not already accommodated in those premises, would have been unable to enjoy beneficial occupation of Mexford House and find such occupation of substantial value.

This is a useful case giving guidance on the situation where a hereditament simply happens to be empty when other similar properties in the locality are occupied and where it could as easily have been that it was one of the other properties that had become empty instead. It is a different situation where there are unique characteristics about a property and it is clear there is no demand for those unique characteristics at the AVD and it has become, in the words of the Tribunal, ‘intrinsically valueless.’ Good examples might be the Victorian village school which, whilst perfectly occupiable has ceased to have value as a school because of the construction of a new school nearby or, indeed, a ‘white elephant’ large office block built in an unusual location for a specific occupier who no longer needs it and it is clear that no one at the AVD would have wanted to occupy the hereditament at any rent.

6. When next in use

6.1 S66(5) of the 1988 Act says, “Property not in use is domestic if it appears that when next in use it will be domestic.”

6.2 It has been argued that this means if an office block or other property is currently empty and it appears that it will be converted to flats then its next use will be domestic as flats. This is not now regarded as correct.

  • firstly it is considered the next use will actually be use by the owner as a building site for the conversion. It should be noted the word used is ‘use’ rather than ‘occupation’. Clearly a property being constructed or converted is not in rateable occupation but it can be regarded as in use

  • secondly it is unlikely that the same property will be in use when it becomes residential. If the existing building is to be demolished or part demolished it is most unlikely the same air space can be regarded as the same property. It is also unlikely that an office floor cleared of partitioning, lavatories and services (perhaps even with the external cladding removed) and then reconstructed as flats can be regarded as the same property as the pre-existing office accommodation

  • thirdly, and in any case, the expectation of conversion would have to be definite; it needs to appear the next use will be domestic. Appear will take in all factors, particularly physical appearance. The mere possibility of conversion would be insufficient. This is in accordance with the approach taken to determine when a non domestic hereditament has ceased to exist, as detailed in Rating Manual: Section 3: Part 1: A - The Hereditament

7. Private storage premises - some domestic storage use

7.1 The definition of domestic property includes the term “private storage premises”. Particularly with warehousing, ratepayers may make some use of otherwise vacant premises for domestic storage and contend they are such “private storage premises”.

7.2 However the definition applies to ‘property’, not just ‘hereditament’. ‘Property’ in the Act does not equate to hereditament but can mean part, as well as the whole, of a hereditament such as a building, room or even part of a room. The use of part of premises for private storage certainly means that part is used for private storage but as the rest of the premises are not used for private storage, it is not possible to describe the premises as ‘private storage premises’ unless when next in use the rest of the premises, or at least the major part, is likely to be used for private storage. (Property not in use is treated as domestic or non-domestic if its next likely use is domestic or non-domestic. As indicated this test applies room-by-room or even to part of a room).

8. Works of alteration

8.1 Rating Manual Section 3: Part 6 provides extensive guidance in the form of a practice note. This has been extensively rewritten following the case of Monk v Newbigin 2015 though it was originally prepared at the time of the passing of the Rating (Valuation) Act 1999. This practice note should be referred to when considering unoccupied premises in disrepair.

9. Vacant former agricultural buildings

9.1 Schedule 5 para 21(3) provides for the purposes of exemption from rating that “any land, building or property not in use shall be treated as used in a particular way if it appears that when next in use it will be used in that way.” Former agricultural buildings should normally continue to be regarded as agriculturally exempt despite being vacant if their last use was agricultural and exempt. If however a barn has been used for non-exempt storage and it appears likely the next use will again be non-exempt storage exemption will not apply. If a farm building has been converted to offices to let (rather than being the farm office) then it is no longer an agricultural building and will be not be exempt.

10. Vacant new buildings

10.1 Completion notices

Where a building is not regarded as complete and capable of assessment, the billing authority may serve a completion notice (s46A of the 1988 Act). The effect of a completion notice is that the building is deemed complete, which allows the VO to assess it as if it were actually complete from the date stipulated in the completion notice. Although the VO must assess following service of a completion notice, it should be remembered that a right of appeal to the billing authority against the completion day stated on a completion notice does exist. If successful, the outcome of such an appeal will have an impact on the effective date of the assessment. See Rating Manual: Section 3: Part 3 for more details regarding completion notices and unoccupied hereditaments. NB Completion notices are only applicable to buildings.

10.2 New buildings without completion notices

Where the billing authority has not served a completion notice, it will be necessary to consider whether the building is practically complete and ready for occupation for the purpose for which it was intended. If this is not the case then the building cannot be properly described as a hereditament and cannot be entered into the rating list. If rateable items are absent but will not prevent beneficial occupation for the intended purpose then the hereditament should be entered in the rating list.

The main test is can the hereditament be beneficially occupied for its intended purpose in its current physical state? If the answer is yes then the hereditament will be considered ready for occupation and will be entered into the rating list. If the lack of certain facilities is considered de minimus, then the hereditament should be entered into the rating list. See Rating Manual Section 3: Part 1: A The Hereditament Part 4 for more detail.

11. Keeping a record of empty property cases

11.1 It is important there is a consistency in approach to these cases. As each case will be determined on its own particular facts the resulting decisions, could easily be misinterpreted by others who do not have those facts. Therefore it is important to keep a clear record of the facts and thought processes, which have resulted in the action taken. Wherever possible the facts should be agreed with the ratepayer or ratepayer’s agent and where agreement cannot be reached the issues in dispute agreed to assist with any potential litigation.

11.2 There is merit in VOs considering identifying a Valuer as the Unit specialist on repair/refurbishment/redevelopment cases to take a lead, co-ordinate, monitor and make decisions in such cases.