Rating Manual section 3: valuation principles

Part 4: appendix 3 - works within hereditaments

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

Practical guidance to determine whether works are repair or alteration.

1. The principle of rebus determines that as at the material date the existing physical state of the hereditament is a factor, which may affect the valuation.

2. The intentions of the actual landlord should be disregarded A proposed scheme of works to alter a hereditament is not evidence that it will take place; it is accidental to the hereditament. Equally vacation by an occupier is not evidence that the hereditament has no value in the open market, particularly if the reason for vacation is due to the landlord’s intentions. Valuation of vacant properties where no works are evidenced is considered in detail in Rating Manual Section 3 Part 1The hereditament

3. However, once works are evident on site, supported by the programme of works detailed in the scheme, a judgement can be made as to whether the hereditament is being changed by improvement (redeveloped) and therefore the part or whole undergoing alteration has become different to the original hereditament and should be considered as such or whether the works are simply repair of the existing hereditament.

4. Where a scheme exists, the effect on the hereditament will depend on the facts of the individual case. The following guidance will assist in determination of how the evidenced works should be treated.

a) Works of decommissioning and exploratory surveys, e.g. asbestos surveys, are considered commensurate with maintaining the existing hereditament and therefore not part of works to alter the hereditament. Decommissioning works are normally good housekeeping to prevent damage whilst the property is vacant and the surveys exploratory to enable a decision to be made on how a scheme of alteration will progress and do not change the hereditament from its original occupation. The effect of such works should be considered under the repairing hypothesis.

b) Works to alter the hereditament from that demised, e.g. where the whole or part of the building has been handed over to contractors, who are in the process of carrying out improvement works, which will result in a different hereditament to that originally demised. In these circumstances, whilst undergoing works, the hereditament, or part, has a different use and should be valued and where the whole is involved, described as such. This may result in a description of ‘Building undergoing reconstruction’ with £nil rateable value if it is evidenced at the material date that conversion works are in progress.

5. A combination of (a) & (b) may be presented as a reason for deletion or reduction to £nil rateable value. Each case must be judged on its own facts. Where deletion of the hereditament is sought the guidance in Rating Manual Section 3 Part 1 The hereditament paragraph 8 should be followed.

Where a reduction in value is sought, the following tests may be applied; whilst individually they may not be determinant, taken together they will assist in making a judgement.

a) Is the property entirely vacant or part vacant?

Yes: consider valuation in accordance with the empty property section of the Rating Manual Section 3 Part 1 The hereditament

b) What works are evident? Categorise the works in accordance with 4(a) & (b) above. Consider:

i) At the material day what works are necessary to restore the hereditament to the state expected to command the rateable value shown in the rating list?

ii) Where scheme costs are provided, analyse only those required to repair the hereditament to the state identified at i) above to determine if at the material day the hereditament is capable of economic repair and the works are therefore to be disregarded.

iii) On analysis of the works costs do they show if there is a better specification of finish compared to the original? Will there be an improvement of the hereditament, comparing the before and after?

c) Are the works, which are not economic repair, an intrinsic part of the hereditament? Decoration would not be, but other works, including structural work, would be. Between these two there is a grey area where the work does not necessarily have to be structural in the sense of affecting the structural integrity, but could be work to the fabric or surface fabric which will alter the identity of the hereditament, on completion returning a different hereditament to the occupier. Full details of the works will need to be recorded in order to make a judgement. If the works of conversion are determined to be an intrinsic part of the hereditament at the material day then, during their course, the hereditament will have a different use and fall to be assessed as such. Dependant on the severity and duration of the works, this may even result in £nil value for the whole, or part subject to the works.

d) What is the duration and severity of the works? Where part only is subject to the works of alteration this will enable any physically manifest affect on the remaining hereditament to be quantified.

6. Set out below are a number of case study examples that help to illustrate the facts, which need to be established, and the thought processes to be followed. These are by no means certainly exhaustive as any variation in location; age and general level of values may result in a different answer. The importance of establishing all the relevant facts cannot be over-emphasised.

Offices being refurbished or repaired

Example 1. - Office Building built in 1992.

Total area 12000 m2 on GF 01 and 02 Floors. Heated and Air conditioning

RV £1,500,000

Work is being undertaken to modernise the accommodation which involved the stripping out the lighting , suspended ceiling, internal office partitioning back to the shell finish . The original windows remain.

There will be improvements to the air conditioning system. New suspended ceilings with category two lighting. Toilet and kitchen facilities enlarged and made DDA compliant. The air conditioning system is also being improved to make it more efficient involving the creation of new openings in walls and ceilings..

Total cost to be in the region £12m. Work will take place over 12 months

IPP received to TOR the whole building from the date when the work commenced

Factors to consider:

Physically at the material day are the works damage causing disrepair, works of alteration or a combination of both? Determination is essential to decide how the assessment should be considered, in accord with the repair assumptions or rebus. It is important full details of the costs are obtained to establish what is repair and what is new work. On the face of it the cost of the works indicated here are very substantial and would appear to be very much more than a simple upgrading. In particular the air conditioning works show that the scheme is creating something different from the existing hereditament.

Conclusion:

In accordance with the guidance given in Rating Manual Section 3 Part 1The hereditament paragraph 8, the hereditament has not ceased to exist and deletion is not appropriate. Once it is physically evidenced the works which cause damage, such as strip out which would be considered in accordance with the repair assumptions also include works of alteration and improvement then it is clear a seamless scheme has commenced and the value of the hereditament should be reviewed to reflect the altered hereditament, probably as, ‘Building undergoing works’, £0 rateable value with an effective date of the start of the works of alteration.

Example 2 - Offices being up dated

A 1960s office building is still occupied but is vacated in parts to allow a rolling programme of modernisation to the accommodation. This includes removing old suspended ceiling and replacing with new suspended ceiling to incorporate category 2 lighting. 40% of existing floor space had been cellular offices and meeting rooms created by partitioning. This is being removed to provide open plan accommodation with new partitioned meeting rooms to15% to 20 % of floor space. The existing heating system remains

Factors to consider:

The works are simply upgrading, the sort of work a tenant will undertake from time to time.

Conclusion:

The entry should not be altered because of the ongoing works, they are considered economic repairs and therefore to be disregarded.

Example 3 – Offices undergoing comprehensive refurbishment

1970’s building in the hands of contractors. Undergoing a comprehensive programme of refurbishment including: 35 year old air conditioning system being replaced by a new system, suspended ceilings installed where they did not previously exist, old raised floor replaced by a new one, improved heating system installed and new partitions

Factors to consider:

It is important to determine whether the ongoing works will return a materially different hereditament. Full details of the works will enable determination of what is repair and what is improvement. Consideration of whether the character and use of the property will materially change on completion should be judged by comparison with properties in the locality of the same age, character and use to that of the subject property on completion. Costs of the works will also indicate whether the works are more than a simple upgrading. It will usually be the case that if the works will result in an increase in the £/M2 used for the RV on their completion then the works probably go beyond mere refurbishment and are creating something materially different. Whilst the works are underway the hereditament is likely to have no value

Conclusion:

In accordance with the guidance given in Rating Manual Section 3 Part 1The hereditament paragraph 8, the hereditament has not ceased to exist and deletion is not appropriate. Once the works of alteration and improvement commence the description and value of the hereditament may be reviewed to reflect the altered use of the hereditament, ‘Building undergoing works’, £0 rateable value.

Example 4 - 12-14 Princes Street Ipswich

Office building built in 1958 with metal window frames and flat roof. Building considered to be out dated and would require updating. Soft stripping carried out removing the heating system socket covers and light switch covers backing boxes remained and wiring was visible. The sanitary ware and kitchen units had been removed. Some areas of wall finishes had been removed.

RV £40,250 Ground and First Floor £14,750 (inc VAT) for 2nd floor.

IPP received to TOR the whole building from the date when soft stripping took place.

Estimated cost to put back into repair toned back to AVD £148,700

Total Floor space on all floors 500m2

Factors to consider:

The case is referred to in the IA. There is no scheme in existence: the building has merely been damaged. The VT decided works to make good the damage were repairs the hypothetical landlord would regard as economically reasonable and undertake.

Conclusion:

The assessment should not be deleted or reduced as the works are considered economic repair.

Example 5 - The same building as referred to in example 3

A programme of works is underway which included structural alterations and modernisation including the installation of a new lift shaft.

Factors to consider:

There is a scheme in existence which will result in a building materially different from what existed before.

Conclusion:

There is a scheme of works in operation and the lift shaft works show that the scheme is creating something different from the existing hereditament. In accordance with the guidance given in Rating Manual Section 3 Part 1 The hereditament paragraph 8, the hereditament has not ceased to exist and deletion is not appropriate. Once the works of alteration and improvement commence, the description and value of the hereditament may be reviewed to reflect the altered use of the hereditament, ‘Building undergoing works’, £nil rateable value.

Example 6 - Empty Office Building

1970’s Office building. 5 Floors total area 2500m2. RV £200,000

This building has been empty for over 5 years. The building has been stripped back to the basic floor shell with all lighting fittings and power points taken out. The owner is trying to let floors or parts of the floor and on securing a letting intends then fitting out to a modern office spec. Half of one floor has been fitted as a self contained suite for marketing purposes showing the suites which will be created. There is little to no demand for the proposed new suites and the building apart from the marketing suite remains in the stripped out state.

Factors to consider:

The case has on first glance strong similarities to the Princes Street Example 3 above. However the creation of a show suite shows there is a real scheme in existence not simply to refurbish, which on its own would seem to be insufficient to justify deletion, but to create new hereditaments by dividing the existing into separate units. The scheme is to create something different from before and the creation of one suite shows the works underway.

Conclusion:

The hereditament falls to be valued in accordance with Schedule 6 of the 1988 Act. The works which created the show suite are works of conversion and, as such, if evidenced ongoing at the material date, the value should be reassessed to reflect their effect. When complete, a judgement must be made as to whether reconstitution is appropriate.

Example 7 - Empty Office Building 2

1960’s Office building on 3 floors total area 900m2 RV £45,000 in secondary location.

There is a lease for the whole building but the tenant had reduced its occupation to the Ground and First Floors and attempted to sub let the 2nd floor to which there was no interest and it remained vacant.

Cracks were discovered in the walls and resulting investigations found there were serious foundation problems which would require underpinning remedial work. Costs were estimated at between £250,000 and £300,000.

The building was quickly vacated but some abandoned office furniture remains.

Factors to consider:

The cost of the works is substantial. The remedial works may not be repair but instead the rectification of an inherent defect which is not automatically the hypothetical landlord’s responsibility under the RV definition. This would need to be established as a first question.

Assuming the works are repair they might (just) be economically reasonable if the unit was modern and well located. However it is likely, and the facts would need to be established, that the future rental flow (as in the Princes Street case) is not secure into the foreseeable future which would indicate the repair work would not be economically reasonable.

Conclusion:

Even though the hypothetical landlord would not consider the works economically reasonable and therefore they are not deemed to be done, this does not necessarily mean the RV is nil. Cracking and foundation problems may very much concern the landlord but assuming the building is not unsafe or unsightly the hypothetical tenant from year to year may not be particularly concerned at the cracking and there may be little if any impact on rent. That said the speedy vacation suggests the problem was serious enough to concern the tenant and this needs to be investigated.

Example 8 - Same Building as Example 7

The same circumstances but the building remains occupied.

Conclusion:

As suggested under Example 7 cracking and foundation problems may very much concern the landlord but assuming the building is not unsafe or unsightly the hypothetical tenant from year to year may not be particularly concerned at the cracking which is not his responsibility to remedy and there may be little if any impact on rent. Etheridge(VO) v Knight[1973] LT RA 219 highlighted the point that the fact that repair may be uneconomic does not necessarily lead to a reduction in rental value, nor that the reduction in rental value necessarily follows the quantum of the cost of remedying the disrepair.

Empty Shop Units

Example 9 - Former Bank in Parade of Shops

Zone A 60m2, Zone B 60m2, Remainder 25m2. Strong Room. RV £19,000

Landlord strips out all fittings back to the shell unit. Bank Front removed. Landlord offers the retail unit to let. IPP Proposal to take out of rating

Factors to consider:

Normally the stripping out of a shop would not affect the RV as it is the sort of work tenants do from time to time. In this case the works not only stripped out the premises but had the additional intention of changing or converting the unit from a bank to a shop.

Conclusion:

The hereditament falls to be valued in accordance with Schedule 6 of the 1988 Act and economic repairs disregarded. A change of use may affect the description and value of the hereditament but it is not fatal to its existence. See Rating Manual Section 3 Part 1The hereditament paragraph 8. The hereditament’s assessment should be reduced to nil.

Example 10 - Shop Unit in parade of Shops

A similar unit as in example 9 but had been used as an A1 Retail Unit. This has also been stripped out to the shell unit and is being offered to let for retail use.

Conclusion:

The stripping out of a shop will not affect the RV as it is the sort of work tenants do from time to time. It is no different from the Princes Street case.

Industrial Units

Example 11 - Workshop empty for 10 years in dilapidated State

1950’s building of brick walls steel truss roof corrugated asbestos clad roof. All windows and doors boarded up. Roof leaks. 250 m2 RV £6,000

Factors to consider:

It seems likely there is no demand for the unit but this will need to be checked. If there are other 1950’s units that are occupied in the locality at AVD then that is evidence of demand. Has the owner simply left it vacant with no intention to occupy or let or sell it? If so then it is in disrepair, which will need to be considered against the usual repairing criteria.

Conclusion:

In the absence of a material change, demand is an economic factor affecting valuation, not the existence of the hereditament. If no demand is evidenced at AVD, then the value may need to be reviewed, even to £nil if appropriate.

Composites

Example 12 - Composite Hereditament Vacant workshop next door to living accommodation.

House and garden where owner had a workshop built on adjoining land and operated a machinery repair business.

House - 3 bedroom detached with garage

Workshop 100m2 RV £2500

Owner retires and empties building of business chattels.

Conclusion:

If the owner uses the majority of the workshop as private storage it will be domestic. Otherwise the whole hereditament remains composite and the empty rate will apply to the workshop.