Rating Manual section 4: valuation methods

Part 3: appendix 2 - the contractor's basis - the effect of grant

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

1. The General Principle

The Lands Tribunal’s decision in Allen (VO) v English Sports Council/Sports Council Trust Company (involving 93.88% grant aided improvements to the National Sports Centre at Bisham Abbey) has established that in a Contractor’s Basis valuation no allowance should be made for grant funding, save in the exceptional circumstances that the presence of grant has created an additional supply of hereditaments which has depressed the original value. In the majority of cases, however, grant funding aids the provision of special facilities which are unlikely to be in competition with other existing hereditaments, so the decision in Allen effectively overturns the treatment of grant in Willacre v Bond (VO) and severely limits the scope for grant which was envisaged obiter in Monsanto v Farris (VO).

The reasoning behind the Lands Tribunal’s decision is:

  1. “..as pointed out by the Member in the Leicester case (Leicester City Council v Nuffield Nursing Homes Trust [1979]RA 299)…it is implicit in the concept of the rating hypothesis of an annual tenancy of the hereditament that funds available to a ratepayer for the construction of the hereditament should be assumed to be available to it on an annual basis. Viewed in this light, grant funding will assist the payment of rent, and cannot be used as a pretext for reducing the valuation.

  2. Although the availability of grant funding might be seen as effectively a costless form of finance, this provides no justification for allowance for grant aid within the valuation. “Since the decapitalisation rate is now prescribed, the question arises whether, in such circumstances, prescription has excluded grant as relevant to a contractor’s basis valuation at any stage. In our view it has done so.” It follows that ”…. the ability of the ratepayer to urge his lack of resources on the landlord in the hypothetical negotiations is removed from him by prescription of the decapitalisation rate.”

Accordingly, no allowance should be made within a Contractor’s Basis valuation either specifically for grant funding, or for limited affordability on the part of the hypothetical tenant, even in instances where the means of the only identifiable likely tenant are slender.

The stop which Allen effectively puts on “ability to pay” adjustment in the Contractor’s Basis, does not apply to other methods of valuation, and therefore Section 11 of Volume 4 of the Rating Manual “Ability to pay” continues to provide appropriate advice for circumstances where the Contractor’s Basis may fail to indicate the rental bid from a tenant of slender means.

Nor does the Tribunal’s decision fetter the valuer in considering the nature of the hereditament to be costed at Stage 1. Indeed the subject hereditament in Allen involved some unremunerative expenditure forced on the occupier as a result of planning policy and the flood-prone nature of the site, and both parties agreed that elements of the actual cost ought to be stripped out at Stage 1 of the Contractor’s Basis. In some instances it may be appropriate to consider whether the availability of grant has resulted in a hereditament which is more costly, either because of size or level of specification, than would be actually required by the likely hypothetical tenant at the AVD. If this is so then a simpler and/or smaller substitute should be costed at Stage 1. On the other hand if it is judged that the actual hereditament is exactly the design which the hypothetical tenant would have wanted at the AVD, then no such adjustment should be made.

In exceptional circumstances, where it is suggested that a reduction is warranted because the availability of grant has led to increased supply of a certain class of hereditament in a locality, full details should be sent to CEO (NSU) for approval before a reduction is finalised or agreed.