Section 730: offices
This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.
This is a Group Class. Co-ordination responsibilities are set out in Rating Manual Section 6 Part 1. GVOs should ensure that within the range of available rental evidence the approach to valuation provides a correct relationship between the values adopted for offices within their Group and that similar levels of rent result in similar levels of assessment.
Close liaison should be maintained with adjoining Groups via cluster meetings to ensure uniformity of interpretation and application of rental evidence.
This section deals with the broad principles to be followed in the valuation of hereditaments which wholly or mainly comprise offices. Different considerations may, however, apply to offices forming a part of a larger hereditament and computer centres. The valuation of purpose built computer centres is detailed in RM Section 6 Part 3: Section 281.
3. Survey Requirements
3.1 Basis of measurement
The method of measurement of offices will vary between different valuation areas for historical reasons. It may also vary between offices of different ages and types within the same area.
It is recommended that offices should be measured to Net Internal Area (NIA) having regard to the definition in the VO Code of Measuring Practice.
In addition hereditaments classed as B1under the Town and Country Planning (Use Classes) Order 1987 should also be measured to GIA as they are likely to be compared with Industrial/Warehouse hereditaments. Class B1 - Business encompasses a wide range of uses including offices, light industrial and assembly, research and development. DoE Circular 13/87 expressly states that this business class covers high-tech uses, making the point that, for example, micro-engineering and pharmaceutical research, development and manufacture may be either in offices or light-industrial premises, whichever is more suitable. (See also Rating manual - Section 6 Part 3 - Section 380: Part: 7: High Tech )
The following sets out some general guidelines to the application of the Code of Measuring Practice and illustrates some of the difficulties which may arise if surveys are not consistent.
- Have measurements been taken to walls or skirtings?
- The Code recommends that all measurements are taken to the internal wall finish, ignoring skirting boards, and this practice should be followed in all cases, unless continuous heating apparatus intervenes (see (e) below).
Are toilets, kitchens, PBX rooms, plant rooms, etc included in floor areas or “reflected” in the unit rate adopted?
The Code recommends exclusion from measurement of toilets, toilet lobbies, and plant rooms, other than those of a process nature. Kitchens and PBX rooms are not excluded under the Code.
- For this purpose it should be taken that it is normal plant rooms for heating and air conditioning plant and lift motor rooms, etc, which are to be excluded. Where there are plant areas which serve the particular needs of the occupier as opposed to the general provision of services to the building those areas will normally be included. This situation might arise, for example, in the case of plant areas serving computer suites.
- Have structural columns been deducted?
- Internal structural walls, columns, piers, chimney breasts and vertical ducts are excluded under the Code.
- How have corridors, entrance lobbies and reception areas been treated in single occupation/multiple let buildings?
- The Code recommends exclusion from measurement of corridors used in common with other occupiers or those of a permanent essential nature, like fire corridors. Parts of entrance halls used in common or for the purpose of essential access are also excluded. Special care will however be required in the case of fire corridors separated from the offices by non-structural partitions.
For the purpose of this exclusion it will normally be only fire corridors which are set aside exclusively for fire escape purposes that will be left out of account. Corridors within a suite of offices in single occupation will usually serve a dual purpose. Their main function will be that of providing access to the separate offices within the suite, the provision of a means of escape in the event of fire being subsidiary and not justifying their exclusion from the floor area, even though occupiers of other suites in the block may have rights to use them as a means of escape.
- Is floor space occupied by heating or air conditioning ducts included in the floor area?
- The Code recommends exclusion from measurement of any areas rendered substantially unusable by the presence of continuous ducting (various examples are given with diagrams).
- Where lifts open directly into the office area is it practice to assume a notional lift lobby?
- The Code specifies those areas which are to be excluded from the NIA. As notional lift lobbies are not mentioned such areas are properly to be included in NIA. It is emphasised that the Code of Measuring Practice refers only to the inclusion or exclusion of areas for survey purposes. It may be considered necessary to divide areas up into smaller parts for valuation (e.g. adopting different values for offices, stores, kitchens etc).
Provided that a common approach is adopted in the analysis of rental evidence, and in the valuation, of all offices in the same category no difficulties should be experienced. If it is necessary to compare offices within one category with those in another careful attention should be paid to any differences between the categories in the calculation of floor areas.
3.2 Survey details to be recorded
Whilst carrying out the survey special attention should be given to the following features: -
External General description, construction, age, type (e.g. purpose built, hi-tech, converted) location, access, transport facilities etc.
Car Parking, allocated/communal, open/covered, number of spaces
|4.||Ceilings||finish, suspended, floor to ceiling height|
|5.||Windows||construction (eg steel, pvc etc) glazing (eg single, double, tinted etc)|
|6.||Heating||type of fuel, type of system (eg radiators, ducts, underfloor), extent|
|7.||Air||type (eg VAV, fan coil etc) provides (eg Conditioning cleaning, cooling, humidification etc) extent|
|8||Fire||sprinklers, smoke detectors Precautions|
|11||Lifts||type (eg manual/automatic), goods/passenger, capacity, floors served.|
|12||Security||type (eg closed circuit TV, entry phone)|
3.3 Plant and Machinery
Common items of rateable plant and machinery such as heating and ventilating equipment, sprinkler systems, passenger lifts, etc should be regarded as enhancing the value of the hereditament which they serve and should not be separately valued. Because the quality of these items of P&M vary considerably it is nevertheless important to ensure that full details of such plant are recorded in order that they may be properly reflected in the valuation of the hereditament.
3.4 Heating and Air Conditioning
The extent and effectiveness of heating and air-conditioning systems will vary significantly according to the type of system installed. This is particularly true of air-conditioning systems which vary in terms of the range of facilities offered, their performance, and the degree of environmental control offered. Consideration should therefore be given to the extent to which demand, and hence rental values, would be influenced by variations in heating and air-conditioning systems.
A basic air conditioning system will usually incorporate facilities for heating, cooling and ventilating. More complex systems will also control humidity, monitor the through-flow of air, filter, purify and deodorise the re-circulated air, and offer localised control in different parts of the premises and even in different parts of an open plan floor.
The use of microcomputers, word processors and other information technology in offices can create considerable problems for traditional systems because of localised heat generation and this has created a demand for more sophisticated systems.
Some computer suites have especially complex systems to control the environment to very fine tolerances of temperature, humidity and cleanliness. The cost of such systems will be many times that of standard heating and ventilating plant and this is a factor which may influence negotiations between the hypothetical landlord and tenant.
3.5 Computer Suites
Reference has been made above to the increased sophistication of air conditioning systems in computer suites.
Other special features often found in computer suites will include raised access floors and flexible trunking systems carrying essential services. These features may also be found in modern office accommodation where there is a need for special flexibility. The installation of such systems together with suspended ceilings, with ducting installed above, creates a need for greater inter-floor heights. These are factors which will influence relative demand for and hence rents of older office buildings when compared with modern ones.
4. Basis of Valuation
4.1 Rental Evidence
- Sufficient rental evidence will usually be available for the valuation of offices on the rental basis (see RM Section 4: Part 1). Rental evidence from a different mode or category of use in office accommodation may be considered if there is a reason to suppose that the occupier would pay a rent of a similar level. The best indication of that, failing the existence of a rent paid for the subject premises, is a rent paid for another hereditament in the same mode or category of occupation which happens to be at office levels. (See John Eric Reeves (VO) LT 2005 RA 74 – Truro College occupation of a centrally located purpose built office building for educational purposes, case detailed at 4.3 below).
Offices may be broadly divided into the following categories: - 1. Purpose built blocks, either singly occupied, or let out in suites.
- This category should be valued by reference to the actual rent, other rents within the same block, rents from comparable blocks and settlements determining the tone of the Rating List agreed with professional representatives.
- Banks, Insurance Offices and other offices situated in shopping streets.
- These offices will usually fall within Class A2 of the Town and Country Planning (Use Classes) Order 1987 and may be comparable with shops. (See also RM Section 6 Part 3: Section 920).
- Offices over shops
- In valuing separately assessed offices above shops evidence should be drawn from rents of separately let upper parts. The evidence derived from devaluation of rents for shops and upper parts let together as a single unit should only be considered in the absence of any direct evidence.
- Miscellaneous (e.g. converted houses)
It will usually be possible to derive a basis for hereditaments of this type directly from the available rental evidence.
If, however, evidence is scarce it may need to be supplemented by consideration of rents of similar premises occupied for commercial or quasi-commercial purposes.
- Offices outside traditional locations
Developments in computers and high technology industries have resulted in the creation of Business and Science “Parks” where offices, research facilities, and production areas may exist side by side, possibly with little or no differentiation in style, quality or rental value.
This class of premises will fall within class B1 of the Town and Country Planning (Use Classes) Order 1987, the “Business” class. They will generally form a separate category for valuation purposes and their congregation into “Parks” or estates should ensure that sufficient rental evidence is available to assist in their valuation.
The need to provide for flexibility between office, research and production uses may mean that traditional relativities between the values of those various parts are considerably modified. (See also RM Section 5: Section 380 Parts 6 & 7)
Where hereditaments in this category are purpose built or specially adapted to suit the needs of the particular occupiers care should be taken that any special features are properly reflected in their assessments.
4.2 Rental Adjustment and Analysis
Advice in respect of the adjustment and analysis of rental evidence is given in (RM Section 4: Part 1).
4.3 Evidence of Value
The value of evidence in any particular case will depend on the similarity between the subject hereditament and the comparisons used. For example, headquarter office buildings, or other substantial buildings in single occupation, will be in a different market from small suites in multi-let buildings and may have different levels of value. See: -
Caltex Trading and Transport Co Ltd v Cane (VO) LT (1962) 2 RVR 175
B L Cars v Andrews (VO) LT (1980) 254 EG 1103
Where offices over bank premises are let out special factors may influence the rents paid. In Afford, Earnshaw & Co v Harrison (VO) and Lyon, Griffiths & Co v Harrison (VO) LT (1958) 5 1RIT 542 it was held that the depression of rental values, because of the bank’s policy of only letting to professional firms, should be disregarded. If the evidence indicates that the rents of such offices are below those which might reasonably be expected between the hypothetical landlord and tenant, under the rating hypothesis, the actual rents may be adjusted to eliminate the effect of the depression.
In some circumstances the value of a hereditament as offices may be influenced by rents paid for premises in other uses. For example an occupier who has a particular need to be located in a central location with access from the High Street (eg Insurance Companies, Local Government Departments, and others requiring convenient locations for the collection of money) may be influenced by rents paid for other High Street premises.
In Commercial Union v Burne (VO), LT 1978 RA 173, the Tribunal, whilst finding that the appeal premises were offices and would let in an office market, upheld the VO’s approach of valuing them by comparison with banks, making allowance for poorer access, quality and layout. The appeal premises were the only offices in the locality with direct access from the High Street and were situated on basement to third floors with access via a 4 metre wide entrance between shops. The Tribunal found, as a fact, that there would be competition from other occupiers requiring a High Street location and that prospective tenants would look to High Street values as a guide in making their rental bids.
The use of established office tones for users in a different mode or category of occupation eg: educational can be justified if there is rental evidence from other educational users. Before office tone can be used, there has to be some evidence that the actual use is as valuable, to the user, as would be office use to other potential office bidders. In John Eric Reeves (VO) LT 2005 RA 74, the Tribunal found that the appeal premises, an office block in Truro town centre occupied by Truro College, should be valued with reference to the rent paid for the appeal property and evidence of rental value for other educational users in the locality.
If in another case such evidence was lacking then, however central or office-like the building, to adopt office tone would transgress the “mode or category of use” limb of rebus unless there is a reason to suppose that the occupier would pay a rent at a similar level. The best indication of this, failing the existence of a rent paid for the subject premises, is a rent paid for another hereditament in the same mode or category of occupation which happens to be at office levels. Failing that, office rental levels may be supported, provided that the users likely alternative would be to take an office building and adapt it, rather than construct a substitute from scratch. The latter approach suggests that rather than taking the subject hereditament, the occupier would be equally content to rent the other hereditament and pay the rent passing on that other hereditament, and that this therefore fixes the occupiers rental bid for the subject hereditament. This would not contravene the second limb of rebus.
5. Valuation Considerations
5.1 Unit of Assessment
The general principles concerning what constitutes a single rateable hereditament are set out in RM Section 3: Part 1. It is not uncommon for a single tenant to occupy different suites of offices in the same building which are not contiguous. The general rule for dealing with cases of this type is set out in the judgement of Denning LJ in Gilbert (VO) v S Hickinbottom & Sons Ltd, CA (1956) 49 RIT 231 where he said, “where the two properties are in the same occupation but are not within the same curtilage nor contiguous to one another, each of the properties must as a general rule be treated as a separate hereditament for rating purposes: and this is the case even though they are used by the occupier for the purposes of his one whole business”.
Rights of way over common parts are incorporeal rights which are not rateable per se and therefore in themselves are not capable of linking two or more separately rateable parts such as to make them a single hereditament. Therefore suites that are not contiguous either vertically or horizontally will usually comprise separate hereditaments.
What comprises a hereditament in any particular case is largely a matter of fact and degree. Giving judgement in the Hickinbottom case Morris LJ said “In the borderline cases, where difficulty arises, it is better to employ a commonsense assessment of the features of the case than to seek to have recourse to some standard formula”.
In such borderline cases it is suggested that VOs should have regard to the extent of the separate parts and the degree of separation between them in reaching their conclusions. Clearly it would offend commonsense to place a separate assessment on a small part of a much larger occupation merely because it is divided from the remainder by common parts.
Identification of the unit of assessment is always a question of fact. If the property is vacant the pattern of assessment when occupied should only be disturbed if there is a positive act to justify the change. If there is no change in the occupational pattern, there needs to be some physical change to the property, an overt act, that suggests when next occupied the pattern of occupation would differ from that implicit in the current pattern of assessment in order to justify it being revised. See RM: Section 3 Part 1 and RM: Section 3 Part 4: Valuing vacant property
5.2 Mode and category of occupation – vacant offices
When considering the ‘mode or category of occupation’ of a hereditament the first question for the valuer is ‘what is it used for?’ The answer to this question, for an unoccupied property, would be that it is not used for anything; it is unoccupied. Therefore, by definition, it does not have an actual ‘mode or category of occupation’ against which other alternative uses can be judged and consideration should be given to either the previous use, or the most likely future use.
Support for this position was given by the Lands Tribunal in LTE v Croydon LBC and Phillips (VO)  RA 225; after considering the explanation of the law as set out in Fir Mill, the Member said ‘in our view the only exception to the rule that one does not take into account another mode of use is where no beneficial use is being made of the property.’
5.3 Demountable Partitioning
Offices constructed with “open plan” floors will usually be divided up by the use of partitions, some of which can readily be dismantled and moved to other situations as the requirements of the occupier dictate.
Partitions are not a named item in The Valuation for Rating (Plant and Machinery) Regulations and, if they constitute plant, they will not be rateable. It is therefore necessary to consider whether the partitions, in any particular case are plant, or whether they are part of the rateable hereditament.
The question of whether demountable partitions were plant was considered in the income tax case of Jarrold (Inspector of Taxes) v John Good & Sons Ltd, CA (1962) 3 RVR 25. The question for consideration was whether the partitions were part of the premises in which the business was carried on, or part of the plant with which the business was carried on.
In that case a large open floor space had been divided by movable partitions consisting of metal ribs, with hardboard and door and window insets, which were screwed to floor and ceiling to form rooms of any desired size.
On the facts of the case it was held, and confirmed by the Court of Appeal, that the partitions were plant, being used by the occupier to cope with the vicissitudes of a fluctuating business by the provision of flexible accommodation as a commercial necessity.
The “Jarrold” case was later considered in the rating case of British Bakeries v Gudgion (VO) and Croydon LBC LT 1969 RA 465 and was distinguished on the facts. The full height partitions in “British Bakeries” were constructed of aluminium sections with PVC faced panels, partially glazed, which were assembled on site and firmly screwed to walls, floor and ceiling. Removal was effected merely by undoing a number of screws. On the facts it was held that the function of the partitioning was to make offices for staff, to provide places in which the business was carried on, movability being a matter of commercial convenience and not a commercial necessity. The partitions were held rateable as constituting the internal walls of the building and therefore part of the hereditament.
Half height and three-quarter height partitioning was held not to be rateable in “British Bakeries” “because its function was that of a low screen, breaking up open space without affording privacy and being easily moved, and as it was furniture and part of the plant with which the business was carried on, like desks, filing cabinets etc”.
The full height partitions in the “Jarrold” and “British Bakeries” cases were physically similar, it being their function which led to the distinction between them. It is considered that the facts will generally lead to the conclusion that full height partitions are part of the rateable hereditament, as in the “British Bakeries” case.
The treatment of partitions in rental analysis and valuation may vary between valuation areas. Insofar as they affect rental value they may be either stripped out in the rental analysis and valued as a separate item or their value may be reflected in the unit rate for the offices. VOs should ensure that a common approach is adopted within their districts and that analysis and valuation is carried out on a consistent basis.
It might be argued that, because the partitions are part of the rateable hereditament, any disability resulting from their layout ought to be reflected in the assessment of the hereditament rebus sic stantibus. The possibility of making variations in the layout without offending the doctrine of rebus sic stantibus should not, however, be overlooked. In the case of Fir Mill v Royton UDC and Jones (VO) LT (1960) 53 RIT 389 the Lands Tribunal found that it was correct to have regard to the possibility of making minor, non structural, alterations which might be expected to be in the mind of an incoming tenant who will occupy in the same general mode and category. R F Williams (VO) v Scottish & Newcastle Retail Ltd and Allied Domecq Retailing Ltd 2000 LT RA 119, 2001 CA RA 41 decision held the Lands Tribunal’s formulation of ‘mode or category of occupation’ in Fir Mill Ltd v Royton UDC and Jones (VO)  7 RRC 171 (the ‘Fir Mill’ case) (i.e. “a shop as a shop but not as any particular kind of shop; a factory as a factory, but not as any particular kind of factory”) should be regarded as recognised by Parliament (in the Local Government Act 1966, General Rate Act 1967 and Local Government Finance Act 1988) as “on the right lines, even if its precise scope has to be worked out on a case by case basis”.
5.4 Car Parking Spaces
It will be necessary to consider whether the car parking spaces, in any particular case, should be included with the offices or be the subject of a separate assessment. Where the entire block is in single occupation there will usually be no problem. However, difficulties may arise where office blocks are occupied in suites and the following guidelines are given to assist in these cases: -
- If the landlord has paramount control of the car park and he charges, or could charge, a fee for parking, a separate assessment should be raised, in the occupation of the landlord.
- See: City of London Real Property Co Ltd v Stewart (VO) LT (1960) 53 RIT 329.
- Where the landlord exercises no control and spaces are available for use by the tenants as a right on a “first come first served” basis and the use by the tenants exhausts the value of the car parking, a separate assessment should not be raised. In these circumstances the benefit of the car parking should be brought into account when determining the assessment of each suite of offices.
- See: Re the Appeals of Scott (VO) LT (1982) 22 RVR 34.
- If defined spaces are allocated to individual tenants for their exclusive use they will be in the rateable occupation of the respective tenants and occasional unauthorised use by other parties would not justify departure from this general rule. Unless the parking areas are contiguous with offices occupied by the same tenant the offices and parking areas will form separate hereditaments. General guidance concerning the unit of assessment is given in (rating manual Section 4: Section2).
See: Coxhead (VO) v Brentwood UDC LT 1972 RA 12.
Emery v Cooke (VO) LT 1971 RA 141.
In congested areas the availability of adequate, on-site, parking may be an important factor in rental negotiations. Where it is necessary to make use of rental evidence from offices which have adequate parking space to assist in the valuation of those which do not care should be taken to ensure that adequate adjustments are made.
5.5 Common Parts
The value of common parts, such as toilets, corridors, lift shafts etc should be regarded as reflected in the rental value of the various offices in the block.
6. Serviced Offices
This advice applies to Serviced Offices and Small Offices. Any difficulty in terms of interpretation should be addressed to the local Technical Adviser. Although the principles are likely to be similar, this guidance should not be applied to other classes of property, such as self-storage or workshop units, without bringing it to the attention of NSU via the TA.
The unit of assessment approach for serviced offices / small offices is of course, no different from any other class of hereditament. This section mainly deals with the particular issues that relate to serviced offices, however the principles should equally apply to small office takes, which are occupied independently from any service provider.
Serviced offices typically are purpose built or converted buildings where the landlord makes individual rooms or suites of rooms available for use as offices. A high degree of service is provided and this may extend beyond heating, lighting to secretarial services and access to photocopiers. An office may be taken for use for as little as a day or a person or company may stay for a number of years.
In the past landlords have not always wanted separate assessment of the individual office because:
of complications of rate collection and numerous rate bills, and
the aggregate RV for the small takes usually significantly exceeded the RV of the single assessment due to quantum
This view was not universally held because separate assessment did make it easier for landlords to secure void rating on unoccupied units.
However since serviced offices have gained in popularity landlords, in many cases, seem to prefer separate assessment. The introduction of the small business rate relief means the individual occupiers are often entitled to this in some form. This currently applies up to £6,000 RV and thereafter on a decreasing scale up to £12,000 RV. Whilst in theory this makes the units cheaper to the individual office users it is likely the reduction in rates actually increases the landlords’ income as he or she is able to charge a higher rent.
VOs need to be impartial in their decisions and ensure correct assessments relating to the legally correct number of hereditaments are inserted in rating lists. Decisions on whether or not a serviced office should be separately assessed should be taken on the basis of rating law and practice and not what may, or may not, suit a particular landlord.
6.2 Rateable Occupation
Usually the individual units will be capable of being hereditaments, providing the facts of occupation show that the individual units are in the rateable occupation of the office users. A useful case on a similar situation, though it actually concerned workshop starter units is Re the Appeal of Heilbuth (VO) 1999 RA 109. This was an appeal by the VO against a VT decision that 55 starter workshop units in Enfield, converted from a 1930s factory, should be assessed as a single hereditament.
The Lands Tribunal had to decide, whether the individual licensees were in rateable occupation or whether the whole centre was in the landlord’s occupation. There was no dispute that the licensees were in actual occupation and it was of benefit to them. The question was over the other two ingredients of rateable occupation, i.e. whether the occupation was exclusive and not too transient. The Tribunal reviewed the previous precedents and set out what it considered to be the main tests in these situations. In terms of transience, the Tribunal found that the length of occupation was not a conclusive test and each situation had to be viewed against its own facts and circumstances.
Essentially the need is to distinguish between the “transient” or “wayfarer” and the settler, and this judgement should be made in terms of the intention or expectation at the time occupation is first taken.
The Tribunal decided on the question of transience in the case, by having regard to the standard licence terms governing occupation and the evidence of the actual periods of occupation over the previous years at the business centre. The terms of the licence suggested an expectation of continuing occupation on a monthly basis and set out 6 monthly pattern of review. In conjunction with this, the actual pattern of occupation showed that over half the units were occupied for periods of between 1 and 5 years. Having regard to this evidence the Tribunal member was satisfied that the requirement of sufficient permanence was in place.
The other issue of exclusive occupation needed to be resolved in terms of who was in paramount control; the landlord or the licensee. On exclusive occupation the Tribunal considered the licensees, from their agreements, could reasonably expect to be able to carry out their business during normal business hours without interference or interruption by the landlords. It did not find the exclusivity affected by the landlords retaining control over the main gate or having a duplicate set of keys to the units in order to enter for a variety of purposes. This did not give the landlord’s a right to occupy or conduct business in the units or give them paramount control.
VOs will need to judge in each case whether the landlord retains such control over the units that it is not possible to regard the office users as being in control of their own units. In the Westminster case (Westminster CC v. Southern Railway 1936) the critical question was whose purpose was most being achieved, the owner or licensee? Perhaps the best way of considering this is to ask whether the office user is availing him or herself of a service or is actually occupying the individual unit. A man who stays in a hotel room is availing himself of a service: a person who rents a furnished flat is taking occupation. The degree to which the landlord can interfere with the office user’s use of the room or rooms is relevant. If the landlord is only providing a desk or room but not a designated room this will indicate the landlord is in control. If the landlord retains the right to move the office user to a different office unit at will but in practice rarely or never does so this will not defeat the facts showing the office user has de facto occupation.
In Heilbuth, the landlord retained keys and control to the main gate. This was held not to show control. A landlord of a shopping mall will retain such control as a matter of good management. Again, in Heilbuth the landlord had keys to the individual units so he could easily check on matters such as electrical safety etc. The Lands Tribunal held this did not affect the paramount control resting with the licensees, because this did not give the right to the landlord to conduct business in the units. It was the licensees who had the real use and control of the units.
The greater the service offered the less likely the individual units are separate hereditaments.
Length of occupation also goes to indicating paramount control as well as showing the occupation is not too transient. The test of transience applied to existing hereditaments looks at likely occupation as well as what actually occurs.
In both the Heilbuth case and Brook v Greggs Plc (1991) RA 61, concerning a market in Manchester, the Tribunal took an overall view of the property and appeared not to distinguish between individual units in terms of the pattern of previous occupation. In order to properly consider this aspect regard should be had to both the previous patterns of occupation and also the standard form of agreement.
Each unit should be considered individually though the occasional short period of occupation would probably not upset separate rateability. If a unit has let for say 18 months, then 9 months, then a year, the fact that the last let only lasted 1 month would not mean it should lose separate assessment if the expectation was that the office user would normally have been expected to stay for at least 6 months. Before a view can be taken on transience information on the occupancy of each unit over a period of at least 3 years or from the date the centre first opened will probably be needed. In the event that a new enterprise is being considered, without a previous record of occupancy, then greater emphasis should be placed on the licence arrangements, and whether a continued occupation is anticipated, and possibly to the pattern of occupation and unit of assessment at the operator’s other centres.
6.4 Residual hereditament
Within some business centres, there may be accommodation that is used on a more informal flexible and possibly daily basis, this should be excluded from the consideration outlined above and dealt with as part of the landlord’s residual hereditament.
The residual hereditament will consist of all the property that is retained under the control of the landlord. It will normally include space which will have value; such as separately charged meeting rooms or offices retained by the landlord’s business, space used for break out areas, kitchens, photo copying etc. There may be one or more residual hereditament; the usual unit of assessment tests will apply. Areas of no specific value in themselves, will still contribute in terms of providing contiguity.
Space used as reception areas will require separate consideration. They will need to be viewed in the context of the local market / valuation scheme. Circumstances relating to each property will vary according to lay out and configuration etc. Most large multi-let buildings will have a reception area on the ground floor, which is provided by the landlord and funded from the service charge. From a valuation perspective these areas (within reason) are normally not separately assessed and their value is presumed to be reflected in the main space price. Occupiers of multi-let buildings will often provide their own reception at the entrance to their own individual occupation. These reception areas should be valued at full main space rate. It is important that reception areas for serviced offices are considered and valued in the same way as the other offices in the same location.
Where frequent revisions need to be made, because office users take more or less rooms and they are judged to be in occupation, VOs should consider setting up informal but close arrangements with the landlord for notification of changes and for the VO to swiftly act on the notification.
6.5 Inspection of Serviced Offices
The main difference between conventional offices and serviced offices will be the size range of the serviced suites and the residual parts i.e. reception, meeting rooms, breakout areas, communication rooms etc. In practice these remain in the paramount control of the “landlord” (serviced office provider) and should be measured and recorded to enable valuation as individual hereditaments or as part of the serviced office provider’s residual hereditament.
Upon inspection the facts of occupation need to be determined. Usually the individual serviced suites or offices will be capable of being a separate rateable hereditament, providing that the individual units are in the rateable occupation of the office usersThe facts can be established by either internet enquiry, speaking directly with the receptionist or serviced office manager on site. Questions to be asked as follows:-
Establish that the hereditaments are serviced offices
Level of services provided
Rents charged are normally quoted in terms of price per workstation per month
Periods of stay within the serviced offices
Range of accommodation offered i.e. workstations or multiples of workstations, meeting rooms, “rent-a-desk” etc.
Can a copy of a typical licence be provided
Any residual hereditament will include all property which is retained by the service office provider including rooms let on a more informal flexible and possibly daily basis - this could include meeting rooms, breakout areas, receptions, rent-a-desk, stationery stores, communications rooms, photocopying rooms etc. Dependent on layout and configuration this can result in a single or multiple residual hereditaments.
Serviced offices should be measured to Net Internal Area having regard to the definition in the VO Code of Measuring Practice.
Survey Details to be recorded in addition to detail pertinent to the serviced offices above include general description, construction, age, type (e.g. purpose built, hi-tech, converted) location, access, transport facilities etc.
6.6 Valuation Approach
6.6.1 Serviced Office Market
In order to decide on the most effective valuation approach to employ for this class of property, consideration is required on the typical business model of how the serviced office market operates. The majority of serviced offices will have been acquired by the serviced office operator through conventional leases, where an open market rent is payable although some may be held freehold. The serviced office operators business will involve converting the existing office space into a suitable serviced office layout, which will suit the needs of potential serviced office tenants. The aim of the business will be to let the resultant space out, to ensure that the total fees collected exceed the fixed costs by enough, to realise a profit for the operator. Where held on a head lease, the largest fixed cost incurred is likely to be the head rent paid by the operator. This implies that in order for these businesses to continue operating at a profit the fees collected will have to exceed the head rent and other fixed costs.
The rent that is charged to serviced office occupiers is often a fully inclusive charge that will normally include rent, property taxes, furnishings, maintenance, heating, air conditioning, lighting, cleaning, security etc. In addition there are often two very significant extras provided free of charge – full time receptionist and telephone answering services. In most cases the only additional costs are for telephone and internet charges, meeting room charges and secretarial services. Rent may be charged per person or per work station, per month.
For rating purposes the task is to value the OMRV of each individual occupation, vacant and to let. There are often little or no comparable market rents for this size of property. The rate per workstation charge is of little use, because it is inclusive of all of the costs associated with the occupation and is far removed from the definition of Rateable Value. Further difficulties arise because the ‘model’ for operating serviced offices can vary significantly from provider to provider and as a consequence, levels of service can also vary significantly.
An important factor to be considered is the ‘serviced environment’ these units are located in. The potential rent paid by the serviced office occupiers will reflect the fact that there are a range of services available such as meeting rooms, photo copying, secretarial, kitchens and t-points etc, located close by. When comparing with conventional unserviced offices it must be considered whether the fact that the serviced office assessments have access to a range of ‘services’ nearby, is a factor that needs reflecting.
6.6.2 Review of any rental evidence
As stated the majority of serviced offices are held leasehold by the operators. In order for the serviced office business to survive it will need to make a profit. Therefore the amount the operator charges the serviced occupiers will have to be an amount, which will cover the existing head rent, plus all other associated costs and the operator’s profit.
Given the many factors that can be reflected in a serviced office licence fee which do not accord with the statutory definition of Rateable Value, it is recommended any traditional adjustment and analysis of such rents should be avoided. There are obvious pitfalls with this approach as often it is unclear what the rent may or may not include. Comparison of individual serviced office buildings with one another can also be difficult given the variety of services provided can vary greatly from building to building.
There may be occasions when an operator can provide an apportionment of passing rents quoting a breakdown of ‘services’ and ‘rent’. There may also be offices where the level of servicing is minimal and the rent may more easily be adjusted into the definition of Rateable Value. However these scenarios should also be treated with caution and any such evidence not considered in isolation.
An analysis of any gross all inclusive rents may give at least an indication of any quantum offered by the landlord. It is also essential that rental evidence and tone levels of value of comparable similar sized offices and comparable serviced office assessments in the locality are considere.
6.6.3 Valuation factors to consider
Consistency: Particular care needs to be taken where serviced office operators take up space on a phased basis in the same building, or where serviced offices exist in a multi-let building also housing conventional office hereditaments. If this is the case then the resultant £/m2 applied must be consistent across all floors, not withstanding any quantum (see below). A situation where property of a similar location, quality, size and specification is valued at different rates must be avoided.
Size / Quantum: Typically operators will offer a quantum discount for larger takes or conversely charge / demand more for smaller takes. This needs to be considered and built into the valuation matrix. A good source of evidence as to where these break points fall can come from the prices charged by the landlord. A typical example is that taken from the VT Decision in the Wellingborough case (281523004215/541N10).
0 – 50m2 £80 pm2
50 – 100m2 £70 pm2
100 – 300m2 £60 pm2
300 m² -500m2 £50 pm2
However it should be borne in mind that the above is only an example and quantum/size bands can often start at levels approx 25 m2 or lower i.e. if only single rooms are let.
It is recommended and considered good practice to apply small size bands to all standard office size based valuation schemes, even if at the point of creation no assessments exist in these size bands. This should ensure that if new assessments are created in these lower size bands, that they are all treated consistently.
The Head Lease: Another important factor to be considered is the operator’s head lease. The rent paid is evidence of what the market is willing to pay for a larger floor space within the same building. From a valuation perspective it must be considered that the RV £/m2 applied for much smaller office assessments, fairly reflects the difference in size. Generally speaking in the office rental market it is usual to see an increase in the rent per m2 paid for smaller sized occupations. One reason smaller occupations command higher rents in part relates to the landlord needing to be able to recoup its increased costs from managing such areas. These costs may relate to any increase in voids, loss of office space caused by an increase in circulation space, an increase in administration costs and professional fees, associated with multiple lettings etc. This in part will relate to what is stated above in 6.6.1 in that it is difficult to see these type of operations surviving, unless the operator / landlord is able to recoup more than their fixed costs, in order to make a profit. This infers that it is unlikely that the combined rents of the smaller offices would ever be below that of the head lease.
The VO will need to take a stand back and look at the market as a whole. The valuer will be required to ensure the resultant £/m2, is consistent with other similar assessments across a wider area. This will include other serviced offices and standard offices of a comparable size.