Rating Manual section 3: valuation principles

Part 2: practice note 1 - guidance on particular events and whether they constitute a material change of circumstances

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

1.1 London Congestion Charge

The creation of the Congestion Charge Zone has resulted in the physical presence of signs, cameras etc and may also be physically manifest by an observable reduction in traffic. There is a clear link from these to the cause - they tell you there has been a legislative change. The situation is analogous to an order preventing traffic going down a road. The valuer therefore needs to envisage the existence of the Congestion Charge Zone at the AVD and consider what the consequences, if any, the imposition of an access charge would have on values. A subsequent increase in charge would not be physically manifest and thus not an MCC - but a physical extension to the zone would be.

2.1 London terrorist bombings 7 July 2005

The effect of the London terrorist bombings on the propensity of people to travel within, come to London and to shop may be physically manifest by a reduction of footfall in shopping streets or noticeably less crowded tube trains. However there are no observable physical changes to the locality or setting of the hereditaments to be valued. The physically manifest changes in activity do not have a direct and immediately obvious to the eye cause and can only be associated with what are really attitude factors. Therefore the physical manifestations of reduced footfall etc should be envisaged as existing at the AVD but, divorced from the underlying economic and public perception causes, will not persist in the AVD’s economic climate.

3.1 World Trade Center

See the approach set out in paragraph 5.2 to RM2:5.

3.2 The New York World Trade Center was very clearly not within the locality of, for example, New Bond Street shops or hotels in London. Its destruction is, therefore, not a physical change to the locality. It is difficult to conceive that there were any physical changes in the locality of these properties as a result of the destruction of the WTC but if there were then these physical changes should be taken to have already occurred by the AVD.

3.3 The consequence of the destruction of the WTC was actually a public attitude shift both in the USA and in the UK (a non-physical cause). Any consequent footfall reduction taken back to the AVD should be viewed as unlikely to persist in the AVD world and therefore be disregarded.

3.4 For these reasons, the settled assessments for certain London hotels based upon observable reductions in taxis and people arriving at other hotels in the locality made prior to the clarification in this section of the Rating Manual should not be followed. Whilst the physical manifestation should be taken back to the AVD, there is no assumption of a frozen state and the prospective landlord and tenant standing outside one of the hotels to be valued at the 2000 AVD (1 April 1998) would expect, given AVD demand, attitude and the economic setting that guest numbers would quickly return to expected AVD levels and would make no allowance in their rental agreement. Whilst there will inevitably be some unfairness, because of the date restrictions on 2000 list alterations it is now not possible to correct the reductions. VOs should not regard themselves bound by the earlier agreements nor is it a matter of VOs impugning their lists. Agreements made on an incorrect legal basis do not create a tone.

3.5 In Re The appeal of Kendrick (VO) 2009 the Lands Tribunal said the VT appeared to have treated the events of 11 September as a matter that was physically manifest. It said this was not possible because it was a past happening, not a matter existing on the material day. While past events could not constitute matters for this purpose, it could see that the consequences of such events, if they endured at the material day, could be said to do so. Thus the attitude of air passengers to air travel as the result of the events of 11 September could, it was prepared to accept, qualify as a sub-paragraph (7)(d) matter, provided, of course, that it was physically manifest in the locality of the hereditament. It found, however, that this attitude was not physically manifest because it was masked by a number of other factors all affecting the footfall and numbers of aeroplane movements.

**3.6 ** Speed restriction on Lake Windermere - The local authority has imposed a 10mph restriction on boats on Lake Windermere in Cumbria. Whilst the consequence might have been thought desirable to the majority - a reduction in noise and an increase in tranquillity - local businesspeople have noticed a reduction in trade as a wealthy and prone to spend segment of visitors, the power boat fraternity, have departed. The change is physically manifest - greater tranquillity and no fast moving boats on the water - and its cause is direct ie the speed restriction. Any rating proposals should be considered on the basis that the speed restriction was in force at the AVD and the lake was more tranquil.

3.7 Foot and Mouth Disease Outbreak 2001 - Valuation officers accepted that the outbreak of FMD in 2001 was a MCC. The disease as such was physically present in many localities, physical signs were present on footpaths etc and in some areas carcass pyres and graves were physically observable and manifest. The cause would have been clear to the hypothetical landlord and prospective tenant standing outside a hereditament. A and D notices to stop businesses trading together with the orders closing footpaths etc were legal matters affecting the physical enjoyment of properties.

3.8 Olympic Bid - On 6 July 2006 the International Olympic Committee announced that London would again host the Games: this time in 2012. The announcement itself is not a MCC being similar to the draft compulsory order announcement in Prodorite or the creation of the enterprise zone in Addis. As with other MCCs it is necessary to show there has been a value significant MCC within the paragraphs of Schedule 6 para 2 (7).

3.9 The announcement itself did not affect the physical state of the locality or the use and occupation of premises in the locality. It is not in itself something covered by Schedule 6 para 2(7). It is difficult to see any banners advertising the “bid” as manifesting the outcome or indeed having a valuation significant effect given, at the AVD, the Games would be nine years away.

3.10 As re-development, vacation of premises, redevelopment etc occurs there will be physical changes to the locality which will constitute MCCs. These should be considered in the normal way as with any other redevelopment scheme. So if dwellings previously served by a corner shop are demolished then it may well be that the rental value of the shop would have been less at the AVD had the dwellings been demolished by the AVD.

4.1 Smoking Ban - From 2 April 2007 in Wales and 1 July 2007 in England a complete ban on smoking in public places came into force. The regulations under the Health Act 2006 make it against the law to smoke in virtually all enclosed and substantially enclosed (as defined) public places, workplaces and work vehicles. This includes permanent and temporary structures such as tents and marquees. The law applies to anything that can be smoked including water pipes (such as hookah pipes) and herbal cigarettes. Managers of smoke free premises have legal responsibilities to prevent smoking and ensure no-smoking signs are displayed. These signs must be a minimum of A5 size and must be displayed in a prominent position at every entrance to the smoke free premises. The sign must contain the international “no-smoking” symbol at least 70mm in diameter and carry the following words “No Smoking. It is against the law to smoke in these premises”. It is the local councils who are responsible for enforcing this new law.

4.2 Anticipating the ban a number of publicans erected, and have continued to erect, external shelters to allow drinkers to smoke legally whilst enjoying their drink but protected from the weather. Various designs are available on the market to order ranging from basic bus shelter like metal structures to quite elaborate timber designs. Heaters and flat screen TVs can be features.

4.3 Whilst the erection of a shelter was always considered by CEO (Rating) as likely to constitute a MCC as it represents a change in the matters affecting the physical state of the property, it was not considered that this change in the law could constitute a MCC and earlier versions of this advice reflected this. Advice from counsel now shows this view to be wrong and that the ban on smoking can be a matter affecting the physical enjoyment of a hereditament. In other words, how it can physically be used beneficially.

4.4 A change in the law which prevents the use of premises in a particular way, e.g. because it prevents people from firing handguns (in a gun club) or serving alcohol, or extends the use that can be made of premises, e.g permitting the serving of alcohol on Sundays or for extended hours, is something that affects the physical enjoyment of those premises. Smoking is an activity undertaken by customers at Bingo Clubs, Public Houses, Members Clubs and many other hereditaments including offices.

4.5 The previous CEO advice was that the ban does not represent a matter affecting the physical enjoyment of the public house because it can still be physically enjoyed as a public house. Smoking being merely an incidental activity by customers and not something which went to the heart of the beneficial use of a public house which would be the sale of alcohol for consumption on the premises. However counsel advises that this is not the test.

4.6 The test is whether there has been a change to matters affecting the physical activities that can be carried out rather than by any reference to the frequency with which an activity is carried out or whether it constitutes the main or a subsidiary activity in the hereditament.

4.7 It was accepted by CEO that the ban would have been a MCC for a club whose purpose was primarily smoking, e.g. of fine cigars or water pipes, and counsel could see no difference between the situation where smoking was the primary purpose of the use of the premises and where it was an incidental, albeit a major incidental activity in the premises.

4.8 Given the ban affects the physical enjoyment of premises it would seem to follow that whilst it does not affect the physical state of other properties, i.e. those in the locality, it must, as it affects the physical enjoyment of premises, also be physically manifest there.

4.9 In considering smoking ban proposals VOs need to envisage what rent would have been paid for the hereditament at the AVD assuming the ban was then in place affecting both the subject premises and other premises.

4.10 Proposals citing the ban on smoking should be re-examined to see if they satisfy the general requirements for validity (including sufficient wording to identify the nature and date of the change) and, if so, it is recommended invalidity notices should now be withdrawn allowing discussions to proceed with a view to resolving the proposals. Proposals made on the basis of the smoking ban must be allocated a Special Purpose Indicator of SMK.

5.1 Impact of flooding on rating assessments - Flooding has to be considered in the same way as any other matter. Firstly it has to be established that the flooding comes within the ambit of Schedule 6 para 2(7).

5.2 If flood waters damage the hereditament this will be a change to the physical state of the building (para 2(7)(a)). As set out in the Practice Note to the 1999 Act where flood damage sufficiently damages a building so that it is incapable of beneficial occupation VOs have always, as with fire damage, regarded it as having no rateable value. This may mean, where the building is the entirety of the hereditament, that the entry should be deleted.

5.3 If the building remains capable of beneficial occupation then the repairing assumptions of the hypothetical tenancy envisage the hypothetical landlord putting the premises into repair before the letting commences providing it is economically reasonable. If this is the case no reduction should be conceded

5.4 Where flooding is a periodical occurrence the AVD rental evidence will already reflect the flooding risk. Where flooding has not previously occurred, or has not happened for many years, the attitude of prospective tenants in the real world may be altered by the now perceived higher risk of flooding. Providing the flooding occurs before the AVD, this attitude should be reflected in valuations for the next revaluation. It should only be reflected in the present assessments if it can be seen as coming within the para 2(7) matters.

5.5 Flooding, as such, is not considered to be a change in the physical state of the locality. “Physical state” connotes some degree of permanent change as opposed to transient phenomena. Flooding may be present for a few days only and is no more a change to the physical state of the locality than are wet pavements after rain, a heavy snowfall or a sunny day, even if the phenomenon can be very much more noticeable. Changes resulting from flooding such as swept away bridges or banks, whilst un-remedied, are a change to the physical state of the locality.

5.6 On the other hand floodwaters can be seen as the physical manifestation of a marginal risk. Whilst present they manifest the risk of flooding in a locality and clearly indicate, whilst present, there is a modern day risk of flooding. Proposals made during the time of flooding, providing the normal requirements of a valid proposal are met, can therefore be valid MCC proposals. In valuing for the proposal any change in attitude on behalf of prospective tenants that would have occurred at the AVD due to any heightened expectation of flooding can be taken into account. However, when the flood has ended any subsequent proposal made in respect of the flood or any other purported MCC matter cannot take the heightened risk of flooding into account as it is not then physically manifest on the material day. The Material Day in respect of a VO alteration is the day the relevant circumstances first arose and consequently, where the VO accepts that during a period of flooding the rateable value of a hereditament was affected, it is possible for the VO to make a retrospective alteration reflecting those matters outlined above. Such an allowance would be removed with effect from the day the flooding had receded and in most cases will therefore only apply for a short period of time.

6.1 Proposal citing the “credit crunch” - a proposal asking for a reduction on the grounds solely of the Autumn 2008 banking crisis will not be valid as it will fail to mention any of the matters in Schedule 6 para. 2(7) of the LGFA 1988. These are covered in section 3 above.

The “credit crunch” is an economic, not physical matter and, as such, is not a MCC. Proposals actually citing a physical change or where something is ‘physically manifest’ such as a noticeable change in footfall may be valid. Care will need to be exercised in dealing with such proposals to ensure only the physical matters are taken back to AVD and not any economic or other non-physical factors.

7. Proposals citing an increase in the number of vacant shop units in a street or offices in a locality

7.1 Proposals citing an increase in the number of vacant shop units in a street or offices in a locality - The downturn in the economy in 2008 has resulted in a number of prominent retailers ceasing to trade and vacating units in the High Street. According to Experian, there were, at the start of 2009, nationally 90,000 retail units vacant : but this figure was predicted to rise to 135,000 during the year.

7.2 An increase in the number of vacant units in a shopping street is likely to constitute a MCC on the grounds of it being a change in the ‘use and occupation of other premises situated in the locality of the hereditament’ see para. 3.5.1. Proposals can therefore validly be made on this ground though they will need to specify an actual change and the date it occurred rather than a vague mention of an unspecified increase in vacancy.

7.3 In considering the effect of the material change, the physical circumstances at the material day (day the proposal is served on the VO in the case of a MCC proposal) have to be carried back and imagined to exist at the AVD (1 April 2003 for 2005 rating lists). The question the valuer has to ask is had these shop(s) been vacant at the AVD would this have affected rental values. It is likely that transposing back a few extra vacant shops would not normally affect the AVD market as it would merely have supplied a few extra units available to rent where there was already demand for them. Take the recent closures of a number of shops belonging to shop chains that have failed. Had these been vacant as at 1 April 2003, the AVD for the 2005 lists, it is likely in most cases the company that did occupy it would have bid for it. The existence of these companies is part of the AVD world and looking at the particular high street in question it is likely they would have wished to secure representation and bid for a suitable unit. The units are likely to have been very well suited to their particular requirements. Of course, looking at a particular shop and considering AVD demand is no different from the normal valuation process. In valuing a particular shop it has always, like any other hereditament, been viewed as vacant and to let at the AVD.

7.4 Where a shopping street experiences a particularly high level of vacancy compared to the AVD position this may justify the conclusion that the AVD value would be affected. Whilst a few extra vacant units might readily have let at the AVD the existence of a large number of vacant units might surprise and cause a prospective tenant to pause in making a bid. Strong AVD demand might well overcome this but if one conceives of a small parade of 10 shops all occupied at the AVD but, at the material day, 5 are vacant it is easy to see how such a situation is likely to result in lower rental bids being made. Not only is supply on the market and competition to achieve lettings high but there is also a visual appearance of low demand and failure

7.5 Similarly the downturn in the economy may result in office space being vacated or new space not being let There are two factors here:

  • vacation of existing space

  • new space being constructed which may or may not become occupied

7.6 The construction of new office buildings is likely to constitute a change in the physical state of the locality and be a MCC. Proposals can validly be made on this ground. Similarly the vacation of existing space can be a MCC by virtue of it being a change in the ‘use and occupation of other premises situated in the locality of the hereditament.’

7.7 The valuation effect of a change in the level of general office occupancy is unlikely to be significant because, taking the physical circumstances of occupancy back to the AVD, the actual AVD demand would have resulted in the space being occupied had it actually been vacant at the AVD.

7.8 In considering RVs, new offices buildings constructed post AVD have to be viewed as already constructed at the AVD because they are MCCs. The construction of new offices may result in increased supply, though this needs to be offset against any demolitions of offices that have taken place. It may be that had there been an increased supply at the AVD, assuming the new office buildings had existed then, this could have affected rental levels at the AVD and therefore justify reduced RVs. In considering AVD demand account also has to be taken of any increased demand resulting from other physical changes.

7.9 This is a complex matter which also needs to take into account changes in ratios of office quality e.g. a change in the proportion of modern high quality space compared to older e.g. 1970’s space and the differing demand for different types of office space e.g. the markets for high quality large modern office space and for small office suites over shops are completely different.