Large shops
This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.
1.1 This instruction applies to department stores and large shops. The point at which a shop becomes a large shop to be valued on the overall basis, as opposed to a zoned shop, depends upon the marketplace and it is the point at which valuation on the zoning basis loses its integrity. This can be by requiring very small fractions of zone A rates on the least valuable areas or the excessive use of quantum in order to achieve devaluation to its rent. There is no fixed starting point in terms of size when the standard shop becomes a large shop. Size is relative to the nature of the town in which the property occurs.
1.2 The generic term ‘large shops’ includes:
-
larger department stores – typically multi-level stores that have distinct ‘departments’ and may also have franchised retailers trading within the store. Often stand-alone but may anchor the larger shopping developments, both in and out of town.
-
other department stores – although smaller, such stores still offer a wide assortment of product lines in distinct ‘departments’, capable of standing alone and also anchoring medium sized shopping centres.
-
large town stores – typically a large prominent store, often providing a focus for the particular locality, and
-
large specialty stores – offering a wide variety of goods within a defined market (for example news, books and stationery).
1.3 In general (and outside of central London) all town centre shops with a total gross internal area (GIA) of over 1,850m² are classed as Large Shops and dealt with by National Valuation Unit (NVU).
1.4 This instruction does not apply to shops SCat coded 154 with a GIA between 750m² and 1,850m². Advice in respect of shops under 1,850m² GIA is found in Rating Manual: section 6 part 3 - shops and shopping centres. In general such shops are dealt with by Rating Valuation Unit (RVU) valuers.
1.5 This instruction excludes the large multi-floor purpose built retail properties occupied by the likes of flat pack furniture retailers.
2.1 List description: shop and premises
Primary description code: CS
SCAT code: 155
Suffix: S
Bulk class: S
3.1 The Retail Commercial Class Co-ordination Team (CCT) has overall responsibility for the co-ordination of this class. The team is responsible for the approach to and the accuracy and consistency of large shops valuations.
3.2 Large shops are a specialist class of property to value and valuers are dealing exclusively with property over 1,850m² GIA.
4.1 This is a specialist class. The NVU specialist referencers are responsible for referencing and gathering facts and the NVU commercial team is responsible for valuation and for the maintenance of the large shop database.
4.2 The retail Class Co-ordination team will deliver Practice Notes describing the valuation basis for revaluation and provide advice as necessary during the life of the rating lists. Valuers have a responsibility to:
- Follow the advice given at all times – Practice Notes are mandatory
- not depart from the guidance given on appeals or maintenance work, without approval from the co-ordination team
- seek advice from the co-ordination team before starting on any new work
- maintain the large shop database
5.1 There is no specific legal framework in relation to this class of property.
6.1 Inspections should be carried out in accordance with the Valuation Office Agency Code of Practice. Arrangements for inspecting properties (Non-Domestic Rating) should comply with the Valuation Office policy on inspections.
6.2 Large shops and department stores should be measured to Gross Internal Area (GIA) for rating purposes in accordance with the RICS Code of Measuring Practice 6th edition or its replacement. This is how units are let in the open market and therefore the only method to be adopted. Both GIA and Net Internal Area (NIA) should be recorded as the proportion of one to the other is a factor to be reflected at the valuation stage.
6.3 GIA is defined as the area of the building measured to the internal face of the perimeter walls at each floor level. It includes columns, stair wells, lift wells and escalator wells, internal projections, ducts and the like, and corridors of a permanent essential nature (for example fire corridors), but may not include atrium above the lowest floor. Note that escalator cores do not constitute an atrium.
6.4 An inspection checklist is included at Appendix 1.
Unit of assessment
6.5 Let outs to third parties may meet the criteria for a separate assessment, provided they meet the four tenets of ratable occupation. Such let outs need to be considered on a case-by-case basis. On inspection, gather sufficient details of third party occupations to enable a separate assessment to be made including the extent and location of the occupation within the host store and the terms on which it is held. See also paragraphs 7.2 and 8.4.
7.1 Rating surveys should be captured on the Rating Support Application (RSA). Plans and Surveys should be stored in the Property Folder of Electronic Document and Records Management (EDRM)
7.2 Separately assessed third party occupations should be SCat coded using the 500 series codes as shown in Survaid and suffixed G. For example a separately assessed coffee shop within a large shop should be SCat coded 500 G, separately assessed gymnasia, 503 G or separately assessed offices 506 G.
RSA Data Entries
7.3 Large shop valuations are usually shown on Rating Support Application (RSA) as simple one line entries for the main space. Floor levels will be recorded as Range of Floor (RF) and ‘Use’ as Total Floor Area (TFA). However, floor areas should be recorded on a floor-by-floor basis on the survey noting any substantial redundant areas and whether these have been stripped back to shell.
7.4 Any area changes made in RSA should also be made to the large shop database.
8.1 Historically large shops were zoned with large end allowances for size and layout. By common consent the correct method to value a large shop is on an overall approach using the same rate per m² on each floor. The area of the property is multiplied by this overall rate per m² which reflects all its advantages and disadvantages. This is the polar opposite of zoning which relates ancillary space in terms of the most valuable part of the shop.
8.2 The adoption of the single overall rate per square metre being applied to the Gross Internal floor area for a rating valuation was confirmed in Harrods Ltd v Baker VO [2007] RA 247 which was the first Lands Tribunal decision to adopt the new methodology. This method may however lead to comparability issues as all valuation factors (see below) are, in effect, rolled up into base price per m².
8.3 The valuation approach for this class of property is founded on actual rents, which after adjustment will normally be the starting point. Lotus & Delta Ltd v Culverwell (VO) & Leicester City Council [1976] RA 141. The overall rate per m² adopted will vary according to the size, location and physical characteristics of the store.
8.4 Unit of Assessment. See Rating Manual: section 3 part 1 - Occupation and the Hereditament. Consideration must be given to Unit of Assessment on a continuing basis for all maintenance and appeal work related to Large Shops. The general assumption would be that, after consideration of the tenets of rateable occupation, most ‘concession type’ occupiers in Large Shops would not satisfy the tests of separate occupation and therefore the host hereditament will remain unaltered. However each case must be considered on its merits and merely because an operator has a concession does not automatically mean separate assessment is not appropriate. For example, where a discrete cafe operator has a licence for a fixed term, this would indicate that a separate assessment might be appropriate.
8.5 The advice provided in Rating Manual: section 4 part 1 - practice note 1 rental adjustment (for the appropriate list year) should be followed.
Valuation Considerations
8.6 Large shops vary considerably and value significant factors include location, age, size, the number of floors and intercommunication between floors. The single overall rate per m² applied to each large shop has to reflect every factor, which may affect rental value. The overall value therefore, takes account of a large number of influences deriving from the individual characteristics of each particular property. The valuer’s task in undertaking a valuation of a large shop for rating purposes is to appraise the rental evidence in the light of the characteristics of the rented comparables and apply the results to the specific characteristics of the subject hereditament being valued.
8.7 Most open market valuations are based on comparable rental evidence often obtained from wide geographical areas with much debate about the relative value of the evidence. Adjustments of rents to accord with the statutory basis of rating are required to reflect both lease terms and physical attributes. Rental adjustment and analysis is critical for this class of property. The physical factors that influence a large shop valuation are not always the same as those that have a bearing on a standard zoned shop. As large shops are valued on a different basis to standard shops there is no direct relationship between patterns of Zone A levels nor valuation trends between the revaluation dates. It may be interesting to analyse trends in changes of zone A rates against each other but this is of little assistance in arriving at a valuation of a large shop on an overall GIA basis. Standard shops compare to standard shops and large shops measured on an overall basis compare to similarly valued large shops which exist in a different market to zoned shops with a different supply and demand dynamic.
Location of the Retail centre and ranking
8.8 Location is the most important factor affecting value. To this end the Zone A level within a town can be taken as an indicative measure of the relative strength between towns where detailed population, expenditure and catchment information is not available. However, treat Zone A’s with caution – they provide a hierarchy of value between similar locations but do not give an indication of positioning within that hierarchy. For example, if town A had a Zone A value 20% higher than comparable town B it would be demonstrated that town A is higher ranked than town B. It would not however give an indication of the value differential between the locations to be reflected in the overall rate per m² of similarly sized large shops in the two locations, which would be unlikely to be as high as 20%.
8.9 The strength of a particular retail centre to support a large shop will primarily depend on the extent and quality of the catchment area and the competition within it. It is important to compare like with like and a system has developed of ranking towns. Outside of London, comparison should be considered between units in the largest traditional centres such as Birmingham, Manchester, Leeds and Liverpool (the premier league). Likewise the modern Regional Shopping Centres should be considered together. Equally it is possible to compare towns further down the retail ranking. Smaller towns are generally compared with towns of a similar ranking/ hierarchy from the same economic region. It is recognised however, that this will not always be the case. For example, when the unit is close to the boundary of an economic region or there is a specific reason to consider evidence further afield. The very largest hereditaments, or those in specific individual locations (such as Bath, York, Cambridge and Oxford) may still require to be considered across the national groupings.
Size
8.10 A quantity adjustment is a result of the interaction of supply and demand of properties at larger sizes resulting in a lower rental value rate (in terms of rate per m²) than that of smaller properties. Within the Large Shop class this is expressed as a reduction of the basic rate. However there must be evidence to support such a variation. The simplest way to reflect size is to reach the valuation by comparing properties of the same or similar size. Generally, the closer the size of the comparable to the subject property, the more weight it can be afforded. When lack of evidence requires comparison of dissimilar sized shops in geographically spread locations careful consideration and interpretation of all available evidence is needed.
Surplus accommodation
8.11 Surplus accommodation needs to be considered with the property ‘vacant and to let at the antecedent valuation date (AVD)’ and not solely related to the demands of any one single occupier.
Other Valuation Factors: Location and prominence within the retail centre
8.12 Within any town, large shop values do not vary in direct proportion with Zone A rates. Considerable changes in Zone A pitches can result in much smaller changes to the overall rate applied. Therefore, the important factor to note is that the value applied to a large shop bears little relationship to the much more location specific standard shop valuation. However, both location within the retail centre and the prominence of the large shop can be value significant. Prominence is provided by a combination of factors including the relative size of the shop, the scarcity of other large shops and physical factors such as architectural features.
8.13 It must also be acknowledged that the larger the shop the more it becomes a destination store and less reliant on its trading pitch and pedestrian footfall.
8.14 Quality generally: Fitting Out
8.14.1 Large shops and department stores are valued for rating as fitted units. Rents for this class of property are frequently on a shell basis. Before any analysis occurs it is essential to discover the terms of the letting in relation to fit. It must also be borne in mind that a fitted rent on a particular property might not actually reflect the current physical state of that property. It could relate to the historical situation that existed when the original lease was entered into therefore ignoring considerable tenant’s improvements which, if rateable, must be reflected in the rating assessment.
8.14.2 Lease terms can also include provisions stating that at review the property is assumed to be fit for immediate occupation. Landlord and Tenant case law has considered this point and it need not be interpreted that the property is to be valued in a fitted condition for rent review purposes.
8.14.3 At rent review, as opposed to a new letting, it has been accepted practice to add a percentage to the shell rent to reflect the fitted condition of the large shop unit. A percentage addition to the reviewed rent for fitting out in line with the table below has also been accepted in the rating context. The percentages adopted have not been specifically agreed and are the result of historical rent review evidence on the rare occasions when practitioners, third parties or courts are required to determine a rent on a fitted basis.
Fittings up to 10 years old on review (Second review) +10.00%
Fittings greater than 10 years old on review +5.00% to +7.50%
Older fittings which are close to physical obsolescence +2.50% to +5.00%
8.14.4 It must not be assumed that a building that is say 20 years old has fittings of the same age. Retailers continue to invest in their stores updating the fabric of the building and its services to ensure a safe and pleasant environment for its staff and customers.
8.14.5 For new lettings, offset any capital contribution against the rateable fitting out costs. For practical advice consult internal instructions.
Air Conditioning
8.14.5 Every large shop assessment intrinsically reflects its fitted condition and it should be noted that this fitting addition incorporates the air conditioning at the store. However, there is no specific amount attributable to the air conditioning aspect.
Vertical circulation
8.16 Modern requirements are met by escalators with extra wide almost atria like openings affording the shopper an uninterrupted view of the retail offer whilst making speedy upward progress through the floors. The rate of such ‘upwardness’ (measured by the reduced number of people reaching the higher floors) is referred to as ‘decay’. Enclosed escalators which force the shopper to walk round the escalator banks to see the retail offer (as opposed to the modern open feel) are inferior. The provision of lifts and stairs alone (ie without the benefit of escalators) will further reduce the vertical circulation and thus increase decay. Careful consideration of relevant rents of large shops demonstrating varying vertical circulation characteristics can help in identifying the valuation effect of this feature.
8.17 A further consideration in valuation can be the number of floors, although this is also a factor that is heavily size influenced. This again underlines best practice that, as far as possible, comparisons should be made between large shops of a similar size, a similar number of floors and similar physical characteristics.
Compartmentalisation and Horizontal circulation
8.18 The general ideal demand within the current large shop market is for clear open space with uninterrupted sight lines. When the space is interrupted with structural walls, the sales area becomes compartmentalised and clear sight lines disappear. This is an aspect that has to be taken into account in the valuation. This feature generally occurs in older properties although it can be turned to an advantage by being made to provide an alternative ambient atmosphere for the sale of luxury or specialised goods. Usually however it can be regarded as a disadvantage to the shop.
8.19 If the floor plates are significantly large, the store operator may seek to sub divide that space for his convenience – for example to segregate different types of franchise by non-structural partitions. The shop will be valued rebus. On the other hand compartmentalisation by structural walls will have a negative effect on the valuation as it decreases the flexibility to alter the size of those sub divisions.
8.20 Circulation issues (vertical and horizontal) should always be considered together as there is clear interaction overlap. However, it is important to avoid double counting when considering the valuation effect of other physical features.
Car parking
8.21 Any incremental value arising from car parking being within the same occupation may need to be considered when comparison is being made with other large shops without such facilities.
The Ratio of Gross Internal Area to Net Internal Area
8.22 This ratio indicates the relative efficiency of the building. Most large shop and department stores have a ratio of between 75% and 85% NIA to GIA. This ratio is another factor to be considered when comparing properties. The ratio will vary according to the age and character of the property
Varying floor levels – Ceiling heights
8.23 These can only really be regarded as value significant if they are pronounced and obviously apparent. The market is sufficiently robust to simply ignore these factors unless providing a severe disability.
Second Entrances
8.24 Adjustment for the presence or absence of such a feature will be largely dependent on the size of the property and the location and quality of the additional access. However a prime second access can add a significant amount to the overall rate of a store.
Return Frontages, Age and Shape of Property
8.25 These are aspects which can influence value but normally are only contributory to features such as circulation; sight lines, prominence and position.
Loading and sorting facilities
8.26 Loading and sorting facilities are generally not value significant unless they are of such a nature that they incur significant additional operational costs to the occupier.
Comparison between properties
8.27 Broadly speaking, there are two alternative approaches to the rental analysis and valuation of large shops. These approaches are:-
(i) Mathematical factorisation: This requires the application of percentage adjustments for the relevant valuation factors for each hereditament. For example, x% may be added for a rear customer entrance, in all properties which have this characteristic. In practice the adjustments are rather fluid and an overall percentage adjustments emerges from comparison, reflecting an aggregate variation for all factors of difference.
(ii) Overall factorisation: This is the market approach. The comparables are ranked in ascending order of value. A holistic view is made by the valuer of the relative merits of the subject property, in relation to the comparables and the property is placed accordingly in the hierarchy. Adjustments for all the physical factors are considered together to arrive at an overall rate.
8.28 The methods have advantages and disadvantages:
(i) Mathematical factorisation: This method appears in theory to achieve uniformity but the percentage adjustments are difficult to validate by reference to evidence as often there is only a single overall figure. In the Lands Tribunal decision of Harrods Ltd v Baker (VO) [2007] RA 247 at paragraph 85, the Tribunal rejected the ratepayer’s valuation approach which was on this basis for two reasons:
- many of the individual factors interact.
- it was not possible to attribute any particular adjustments for individual factors from the agreed comparable properties
(ii) Overall factorisation: This is the market approach which adopts an overall figure to take account of the features of the property. It is difficult to demonstrate uniformity.
8.29 It is difficult to use rents from large shops to demonstrate the value effect of a particular characteristic. Each rent reflects a multiplicity of factors and it is hard to isolate a particular factor by rental comparison. Comparison is always made on the basis of multiple factors being balanced against each other to derive a general measure of rental value. However, with experience it is possible to make some broad adjustments. Valuations can only be undertaken on the basis of detailed personal knowledge of each store. From this knowledge, valuers rank the comparables in value order based on their overall perception of the interaction of the factors in each case. The valuer’s task is then to determine where the subject property fits in to this hierarchy, based on a range of the advantages and disadvantages of each store. This provides upper and lower values within which a judgement can be made.
8.30 In practice both the mathematical and overall factorisation methods will need to be used together as there is little to distinguish them. The reasoning behind an overall large shop valuation for rating must always be recorded on the Large Shop Database (see below).
Key rents
8.31 All properties on which a key rent has been identified must be inspected.
- Rating Support Application
- Survaid
- Retail 2 Class Co-ordination Team
- The Large Shop database
- National Valuation Unit (NVU)
The Large Shop Database
9.1 Please see internal instructions for directions to, and maintenance of the Large Shop Database.
1. Market Appraisal
1.1 Since April 2017 the stock of department stores and large shops has diminished with some of the surplus space being repurposed. The number of these stores becoming vacant has increased, but with a flood of shops coming on to the market through administrations and retrenchment, it has provided opportunity for retailers actively looking to increase their portfolio to secure favourable deals. Administrations have also enabled large shop users and department store operators to buy up companies enabling them to increase their market share.
1.2 As online sales as a proportion of total retail sales continues to increase, the size of the physical store required by operators is reducing, with surplus space being converted to office space or residential or a combination of both. Some large shop occupiers announced a slump in sales in the lead up to April 2021, while others enjoyed an increase in profits during the same period, but this was attributed (at least in part) to strong post lockdown in-store demand. Lockdowns nevertheless cost large shop and department store operators tens of millions of pounds, reducing profits or increasing losses.
1.3 Operators of large shops and department stores have needed to modernise to survive, investing millions of pounds updating their stores, changing their business models and improving their online platforms.
1.4 In the lead up to the AVD, Real Estate Investment Trusts (REITs) were experiencing difficulty in collecting rents from retail tenants. Large stores operators were actively trying to re-negotiate lease terms and rents with their landlords. It was widely reported that Investment Trusts and other landlords were offloading their underperforming retail portfolio.
2. Differences between the 2017 and 2023 PNs
2.1 The market knowledge section has been updated to reflect the state of the market as at AVD. Whilst base rates are expected to change, there are no substantive differences to the valuation scheme. Sections on mode or category of occupation, rental evidence and tenant’s works of fitting out, have been added.
3. Ratepayer Discussions
3.1 Discussions with industry representatives commenced in April 2021 and are ongoing.
4. Valuation Scheme
4.1 Department stores and large shops are measured to gross internal area and valued overall, with a check to a zoned approach at the margins, in accordance with market practice. There is one scale, which applies nationally, with all relativities set to 1.000.
4.2 Roof top plant is excluded from GIA where access is by way of an open roofed area.
4.3 Atrium
An atrium is an open area from ground floor upwards. It should be distinguished from an escalator core. A true atrium will only have the GIA of the ground floor included.
4.4 Atrium with escalators
An escalator core is included in GIA at every floor. However, if the escalator core is excessive in size (as a feature in some stores for example), the excessive area may be removed from the GIA, thus treating it as a type of atrium like feature, the value of which is reflected in an enhanced rate per m².
4.5 Mode or category of occupation
Department stores and large shops are in the same mode or category of occupation and one can be compared with another. In the case of Marks and Spencer Ltd v Collier (VO) [1966] 12 RRC 61 the Peterborough store was defined by the Lands Tribunal as a ‘departmental walk-round store’. There is no assumption of ‘development’ to offend rebus. The stores are very much in one another’s markets, especially now that large shops are seeking larger stores and ‘middle of the road’ department stores are seeking less space.
4.6 The Valuation Officer maintains that a shop must be valued as a shop and not any particular kind of shop. This follows the Lands Tribunal ruling in the case of Fir Mill Ltd v Royton UDC and Jones (VO) [1960] 7 RRC 171, where it was held that the mode or category of occupation by the hypothetical tenant, must be conceived as the same mode or category as that of the actual occupier.
4.7 Rental Evidence
All relevant rental evidence is admissible and that includes new open market lettings, rent reviews and lease renewals. However, the weight that is attached to rental evidence will depend on the circumstances and some well-established principles.
4.8 Rental evidence which requires a lot of adjustment to bring it in line with the statutory hypothesis is given less weight. For example, new lettings of anchor stores in shopping centres require subjective adjustment, for factors ‘not relevant to the hereditament’, that is to say, the rent will reflect the value of the anchor tenant to the landlord’s scheme. This will differ between potential occupiers and depend upon the footfall the anchor store is likely to generate, the positive influence its presence will have on Zone A values of the smaller shops in the shopping centre and consequently, the equity in the centre. This adjustment being subjective at best and not quantifiable at worst, does call into question the reliability of the rent. The funding of the centre may even be conditional on a particular anchor tenant signing an Agreement to Lease. Such tenants are aware of the value they bring to the centre and demand a concessionary initial rent and / or incentives which cover (or more than cover) fitting out costs.
4.9 If a rent on a new letting of an anchor store in a shopping centre is to be analysed, any capital contribution should be offset with the cost of rateable fitting out. Surplus capital contribution maybe amortised as an incentive and deducted from the headline rent, but any rateable fitting out cost which exceeds the capital contribution, should be amortised and added to the headline rent.
4.10 In most cases, a reviewed rent needs no adjustment other than for tenant-installed rateable fitting out. It can therefore be taken as reliable evidence unless it is stepped or indexed. At review, the bargaining position between landlord and tenant is far more balanced. It is not until the first rent review that the playing field is levelled and the anchor tenant has to pay open market rental value under the terms of the rent review clause. Where rents have increased at rent review, it is important to confirm this is not the result of fixed increases (stepped or indexed), which are unrelated to open market value.
4.11 Evidence from lease renewals and lease re-gears, should be treated with caution. Lease re-gears will reflect a tenant’s covenant strength, proximity to lease expiry, and many other factors.
4.12 Rents renegotiated as a result of a Company Voluntary Arrangements, should also be treated with caution. They result from an imbalance in negotiating positions and are often initially agreed on a short-term basis, allowing both parties to decide on the longer-term potential of a property.
4.13 Where an open market letting is the primary evidence, it will be necessary to obtain full details of the agreement for lease and the lease itself. Particular attention should be given to the date of the agreement, any inducement received by the tenant and how much of this is to be apportioned to fitting out the premises. In order for this to be accurately reflected, shop fitting out costs should be obtained.
4.14 The Valuation Officer prepares a List close to the Valuation Date. The 2023 Rating List was being prepared in 2021/ 2022. Paragraph 3.3.2 of the** RICS Professional standards and guidance** says,
‘Viewed with the benefit of hindsight, comparable evidence can be much clearer than it would have appeared to a valuer at the date of valuation. The valuer valuing retrospectively needs to place themselves in the position of someone reviewing the available evidence on the valuation date, and then make a judgement on the extent and nature on the evidence that could reasonably be expected to have been available at the time.’
Tenant’s works of fitting out
4.15 New large shops and department stores are generally (if not exclusively) let on a shell basis. This means that the landlord is letting the walls, floor and ceiling and the land on which the building stands. That is all. In this state, unless there is a valid Completion Notice, it is not a hereditament according to rating law** [Porter (VO) v Gladman Sipps [2011]** RA 337], and the tenant will not be able to trade from it. The tenant must therefore carry out first and second fix and add items such as escalators and lifts, boilers, generators etc. The amortised cost of tenant’s works may amount to more than the rent.
4.16 The Valuation Officer will request fitting out costs and a breakdown of those costs, in order to separate the rateable improvements, from those which are not rateable, such as tills and shelving.
4.17 In the adjustment and analysis of a rent and fitting out costs, the market rate (as opposed to the decapitalisation rate) should be used. The decapitalisation rate can only be used when three criteria are satisfied (Miscellaneous Provisions 1989). The three criteria are:
(a) There must be a hereditament.
(b) There must be a valuation (to which the decapitalisation rate is being applied).
(c) The Contractor’s Basis of Valuation is used for all or part of the valuation.
4.18 At the adjustment and analysis stage a valuation is not being performed and the Miscellaneous Provisions do not apply. The result of analysis is an equivalent or virtual rent on a fitted basis, which is added to the basket of evidence.
4.19 The equivalent or virtual rent carries greater weight if it is supported by settled comparable evidence or rents agreed or determined on a fitted basis.
4.20 Keep in mind that the valuer is trying to determine whether the rent includes the improvements or not. If not, then if they are rateable and if they add value, we have to add something to the rent for them.
4.21 In Dorothy Perkins Retail Ltd v Casey (VO) [1994] RA 391, the ratepayer argued that the air conditioning was de minimis because it was bespoke to the tenant and in almost every case a new tenant would rip out the old system and replace it with one to their own specification. In addressing that point, Judge Marder said,
‘I am unable to grasp the concept of a benefit which is not of value. It is difficult to conceive of a hypothetical tenant, faced with a choice of two shop units vacant and to let, one with an effective air conditioning system and the other without, who would not pay more for the acknowledged benefit of the air conditioning system, and he would do so because he regarded an air conditioned shop as more valuable than one which lacked air conditioning…It cannot be right to assume as a matter of principle that the value of air conditioning is de minimis or that it would be lost in the higgling of the market’
4.22 For new properties, tenant’s fitting out works transform the building from a shell-like state into one which is a hereditament and can be entered into the Rating List.** Porter v Gladman Sipps [2011]** RA 337. Without these works, the property is not a hereditament of itself.
4.23 If the works constitute a requirement, either because they are a requirement of the lease or because they are the sort of works that the majority of tenants would expect to have in place as part of any fit out, (taking account of the size and location of it), then the works will increase the rateable value.
4.24 In Edma Jewellers v Moore (VO) [1974] LT RA 343 JH EMLYN JONES said,
‘It is perhaps helpful to consider what the valuer is trying to do in carrying out this exercise. The objective is the determination of the rent which a tenant might reasonably be expected to pay under the rating hypothesis in those cases where the tenant under an actual lease carries out certain capital expenditure on the landlord’s hereditament.’
4.25 It has long been accepted practice that an addition for rateable fitting out is appropriate. The 2023 Rating List posed a unique problem in that at the time of List preparation there were few rents that could be reliably adjusted and analysed to indicate the amount to be added for tenant’s works of fitting out. While the market indicated that rents of large shops were falling, costs of fitting out were rising.
4.26 The Valuation Office Agency sought cooperation with the retail industry to agree a cost-based scale that could be applied at the valuation stage. Unless relevant market rents of fitted shop units clearly indicate otherwise, the following scale should be applied at the valuation stage to represent the annual value of rateable fitting out of large shops in England and Wales. (The scale excludes high-end retailers):
ENGLAND
Category 1 Rateable fit up to 5 years old £23.75/m²
Category 2 Rateable fit from 6 to 20 years old £15.00/m²
Category 3 Rateable fit from 21 to 35 years old £11.75/m²
Category 4 Rateable fit from 36 years old plus £5.00/m²
WALES
Category 1 Rateable fit up to 5 years old £18.25/m²
Category 2 Rateable fit from 6 to 20 years old £12.00/m²
Category 3 Rateable fit from 21 to 35 years old £9.00/m²
Category 4 Rateable fit from 36 years old plus £5.00/m²
4.27 This approach for England and Wales has been discussed with a number of representatives acting on behalf of the retail industry and broad agreement reached.
1. Market Appraisal
1.1 The 2010 Revaluation had an AVD at the market peak just prior to the biggest recession of recent times. Retail was one of the worst affected of the property sectors with several retailers having gone into liquidation and several towns’ high streets being left with high vacancy rates. Large shops in many of these towns may have had subsequent rent reviews resulting in nil increases. This effectively means that for the purposes of the 2017 revaluation with an AVD of 1 April 2015 there may be rental evidence of limited value, affected by upwards only review provisions.
1.2 There will however be some new evidence available as the country has polarised in that certain areas have continued to prosper whereas others have dropped into decline. The ‘premier league’ of main cities and centres (see paragraph 8.9 of Rating Manual section 550a) will still have new letting and rent review evidence as they have not been so badly affected by the recession and the revaluation in these centres is more likely to be based upon more reliable evidence.
1.3 The remainder of the country may be more difficult. Towns will have to be ranked on a consistent basis so that comparability can be made. What evidence of new lettings and rent reviews there is must be adjusted and analysed on RSA in order to ensure a consistent approach.
2. Differences Between the 2010 and 2017 PNs
2.1 There was no Practice Note for the 2010 Revaluation.
3. Ratepayer Discussions
A meeting has been arranged with the Rating Surveyor’s Association for 06-Oct-15.
4. Valuation Scheme
4.1 Large shops are measured to gross internal area and valued overall with a check to a zoned approach at the margins in accordance with market practice. There is one scale which applies nationally with all relativities set to 1.000.
Large Shops Inspection Checklist. The checklist below identifies the information that will need to be gathered in order to properly complete the survey.