Rating Manual section 6 part 3: valuation of all property classes

Section 920: shops and shopping centres

This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.

1. Introduction

1.1 Certain types of shop have particular characteristics needing special mention; they have their own section in this Rating Manual and those sections take precedence.

Retail premises Section
Banks 90
Betting shops 110
Building society offices 90
Cafes 875
Department stores 550
Hypermarkets & superstores 520
Insurance offices 90
Kiosks This section
Large shops 550
Markets (other than livestock) 630
Off-licences This section
Post offices This section
Pfs forecourt shops 770:11.1
Restaurants 875
Retail parks 920
Retail warehouses 920
Shops - large 550
Sub post offices This section
Superstores 520

1.2 This section deals with the valuation of standard retail units, ie the majority of shops found in traditional retail positions or in Shopping Centres.

2. Co-ordination

2.1 The co-ordination aspects of the shops dealt with in this section are provided in the relevant Practice Note.

3. Survey Requirements

3.1 Basis of Measurement

Standard shops should be measured to Net Internal Area (NIA) , having regard to the definitions contained in the VOA Code of Measuring Practice for Rating Purposes.

Consistency of approach is essential, particularly with regard to the following:-

  1. Internal widths should be taken from the block/brickwork or from the plaster coat applied directly onto the block/brick. Internal linings such as stud frames should be ignored. Irregularities in perimeter and party walls should be particularly noted.
  2. Where a shop has a non structural front, depth should be measured from the back of the pavement or forecourt (normally the building line). Bay windows in the frontage should be measured separately.
  3. Permanent features such as staircases, columns, piers, structural walls, escalators, lifts etc should be accurately plotted on plans.
  4. The precise position, construction, length and thickness of all non structural walls in front of the first structural wall should be recorded and shown on plan.
  5. All toilets should be measured and shown accurately on plan where the provision is in excess of normal staff requirements (having regard to the type and size of hereditament).
  6. Ancillary items such as
  • forecourts
  • rear yards
  • outbuildings

should be measured and noted on plans.

  1. Where the existence of a mezzanine floor reduces headroom the area affected below should be measured, with the height being noted.
  2. Canopies, although strictly excluded from NIA, should be measured and recorded separately.
  3. The site area of outdoor retail areas should be measured and stated separately; as should the site area of car parks and the number of spaces within the hereditament.

3.2 Zoning Method

It is widely accepted that the Zoning Method is the most suitable approach for the analysis and valuation of the standard shop units covered by this Section of the Manual. Depending upon the characteristics found in a particular sales locality, patterns will vary; this will apply both to the depth of each zone and to the number of such zones. In all cases it is vital that measurements are suitably recorded. Survey records should be such as to avoid the necessity for re-inspection in the event of alternative zoning patterns being adopted in the near future.

Valuation aspects arising from use of the Zoning Method are dealt with at para 4.2 below.

3.3 Value Significant Features

Any features likely to have a bearing on a shop’s value should be satisfactorily recorded. Of these, the precise location of the unit is likely to have the greatest impact with even small changes in position having a significant effect on value. Also of significance will be size, shape and quality of sales space; number of sales floors: number and position of entrances; size and nature of display windows; return frontages; convenience of storage facilities, access/loading for goods; accommodation surplus to requirements. Those individual characteristics which affect a unit’s suitability for retail use should be noted too - eg layout; position of pillars, stairs, customer and goods lifts, and escalators; varying floor levels; low storage heights; whether the frontage is set back or set forward, obstructed or prominent.

3.4 Surveys

Whilst carrying out the survey special attention should be given to the following features:-

Internal 1. Entrance sole/shared, standard/prestige   front/back/side
  2. Walls   structural/non-structural, finish
  3. Floors   solid/timber, raised/channelled
  4. Ceilings   finish, suspended, floor to ceiling height
  5. Frontages/ construction (eg steel, pvc etc) glazing   Displays(eg single, double, tinted etc)
  6. Heating   type of fuel, type of system (eg radiators, ducts, underfloor), extent
  7. Air Conditioning eg (cleaning, cooling, humidification etc) extent of area affected,   type (eg cassette, ducted, etc) purpose and number of vents and grilles.
  8. Fire Precautions   sprinklers, smoke detectors
  9. Lighting   natural/artificial, quality
  10. Toilets   extent, quality
  11. Lifts   type (eg manual/automatic), goods, passenger, staff/customers, capacity, floors served
  12. Escalators   number, up/down, between which floors,where sited
  13. Security ) type (eg closed circuit TV, entry phone External
    1. . General description, construction age, type (eg purpose built, , converted), location
  2. Car Parking, allocated/communal, open/covered, number of spaces, staff/customers, free/charge made/refund given.    

3.5 Plant & Machinery

Adequate information regarding all items of Plant & Machinery should be carefully recorded, including those frequently found - such as heating, air conditioning, lifts etc. Details will be required not only to assess their affect on value, but also in the event of particulars being sought by the ratepayers or their agents under the relevant statutory provisions.

Reference should also be made to RM4:3 and the VOA Rating Cost Guide.

3.6 Cold Stores

Information on cold stores appears in RM4:3 and VOA Rating Cost Guide (5:070).

3.7 Heating & Air Conditioning

The extent and effectiveness of heating and air-conditioning systems will vary significantly according to the type of system installed, the range of facilities offered, their performance, and the degrees of environmental control.

A basic air conditioning system usually incorporates facilities for heating, cooling and ventilating. More complex systems 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 or parts of a floor.

4. Valuation

4.1 Method

There will normally be sufficient rental evidence to enable all shops to be valued by this method. (See also RM4:5 on the RENTAL BASIS).

4.2 Shop Zoning

4.2.1 Large Shops

Regarding large shops and departmental stores reference should be made to RM 5:550 as special considerations apply.

4.2.2 General

To cater for the very different distinguishing features of shops, the zoning method was introduced. After some initial resistance, this approach has over the years become widely accepted by the courts and tribunals concerned in the valuation of shops for rating purposes. It is also frequently employed by landlords & tenants in the determination of rental values at rent review and lease renewal stages.

4.2.3 The Zoning Method

The zoning method is:

  1. useful in making a comparison of the value of different trading positions;
  2. used and understood by landlords and tenants and/or their advisors, and accepted by arbitrators, the Lands Tribunal and the courts;
  3. not perfect, but is nonetheless a valuable tool in the interpretation of values, to be used skillfully and not slavishly, and not to be regarded as providing the perfect, correct or unique answer;
  4. not usually used by the market in the letting, or in the analysis of rents of large retail outlets - the rents of those supermarkets, superstores, hypermarkets, departmental stores, variety stores, etc, which are let, are usually based on overall area considerations.

4.2.4 Application of Zoning Method

Basically the zoning method relies on the assertion that the most valuable part of a shop per square metre is found in the sales area at the front of the shop, nearest the principal customer entrance, and including any display. In applying the method, unit values therefore diminish as depth increases, until eventually a point is reached at which any further reduction in value would offend common sense. Although halving back from one zone to the next is a widespread practice, this is not essential to the method’s application.

4.2.5 Depth and Number of Zones

The method involves a sales floor being divided into a number of zones. The depth of the respective zones and their number will vary depending upon the characteristics of shops in the particular locality under consideration.

4.2.6 Choice of Zoning Method

Applying the zoning method as outlined above does go a long way towards remedying the difficulties which arise from the comparison of units of varying depth/frontage, but it should be noted that absolute consistency is not always achieved. A problem can arise where, in seeking a Zone A unit price, the rental analysis employs a zoning pattern different to that adopted when the rents were agreed. Should a Zone A unit price, so found, be applied in the valuation of shops having dissimilar depths, distortions in the relative rental values could arise. In any such analysis the depth of the unit is an essential factor in determining the Zone A unit price. Accordingly the choice of a zoning pattern must be exercised with great care, to find one of best fit with the rental evidence being considered.

4.2.7 Most Frequently used Zoning Method

The most frequently used pattern is one or two zones plus a remainder, but sometimes one of three zones plus a remainder is found to be more sensitive to the problems of 4.4.5. In any event a VO should consult Region in cases where it is proposed to adopt a zoning pattern which differs from that currently being applied. Depending upon such evidence, RDs should consider at Revaluation the extent to which it is proper and practical to harmonise zoning patterns throughout their Region. It is appreciated that a common approach may not be correct for every centre, and that consequently a degree of flexibility must prevail. However, with the extensive occupation of shopping centres and High Street by national and regional multiple retailers a more uniform approach could well be evolving.

4.2.8 Illustrations of Zoning Methods

Appendix 3 provides a graphic comparison of the effect as depth increases on the analysed Zone A price of uniform shops of adopting either of the most commonly used patterns or that now proposed. The analysis of any rent on a shop between 5 and 50 metres deep will be between 4 and 12½% higher on 4.57/7.63m zones than it would on 2 x 6.1m zones. Similarly the adoption of 3 x 6.1m zones will produce higher ZA analysis on any shop in excess of 18.3 deep (21.3% higher at 50m, Remainder at A/8) again compared with 2 x 6.1m zones. Departure from the zoning pattern on which the rental evidence is derived can therefore introduce distortions of the relativities of rental values based principally on the depth of the unit. An illustration is included at Appendix 4. In most cases however these distortions are obscured by the imperfect market in shops and limited comparable evidence.

4.2.9 Reconciliation of Rental Evidence

Zoning is based on the supposition (supported by evidence) that marginal unit value will decrease with distance from the frontage. A very common difficulty facing a VO will be to reconcile the rental evidence of deep shops with those of shorter adjoining units.

4.2.10 Effect on Values of depth of shop

The effect on values of using 3 x 6.1m zones in comparison with using traditional zoning patterns will depend on the pattern adopted and the depth of shops from which the weight of evidence is drawn. The effects of two changes can be isolated.

  1. A change from 4.57/7.62m zones to 2 x 6.1m zones+ remainder will tend to increase the assessments of the shorter shops and reduce those of the deep shops. Which of these movements is the more pronounced depends upon the depth of shop from which the rental evidence is derived. If it comes from deep shops then the value of the shorter shop will increase; if it comes from the shorter then the deep shop values will reduce.
  2. The introduction of a third zone will produce similar changes which are dependent of the source of the evidence. Either the values on the shorter shops will increase or the values of the deep shops will reduce. If it comes the remainder A-Factor had been shaded and/or end allowance made the practical effects will be less noticeable.

Only a minority of shops exceed 18.3m depth. It is therefore reasonable to assume that most rental evidence will exist on shops with a lesser depth (ie shorter shops). The most likely effect therefore of a change from 4.57/7.62m zones to 2 x 6.1m zones and/or the adoption of a third zone will be to reduce values on the deeper shops, thus avoiding the need for special allowances.

There is almost no difference in effect between the adoption of 6.1m and 6.0m zones.

4.2.11 Consistency of Results

Practice has shown that in the majority of cases the method can produce reliable and consistent results if correctly applied. The method is a means to an end, to produce a correct valuation in accordance with the statutory definition and because of the great variation in shops the valuer must always be ready to exercise judgment in its use and application.

4.2.14 VSA - Reserved

4.3 Rental Adjustment and Analysis

4.3.1 General

When adjusting and analysing shop rental evidence the advice provided in RM4:5 should be adopted. An awareness should always be maintained of the possibility that different levels of value may prevail for each separate class A1, A2 and A3 of the Use Classes Order (England & Wales) 1987 - see Appendix 1.

On the basis that any necessary adjustment of rents to place them in terms of rateable value has already been made, the next few paragraphs cover specific factors affecting shops to which regard should be had at the analysis stage, in considering the rental evidence and in the formulation of the approach to valuation.

4.3.2 Overage and interim rents (See also RM 4:5 - Practice Note 1 paras 15 and 20)

The term “overage” means the possible enhancement of a rent because the period between reviews specified in the lease is greater than is normal for the class of property.

VOs are advised to establish a local “norm” for review patterns for each of the major classes of retail property.

Agents may use “interim rents” as evidence in support of a downward adjustment. (An “interim rent” is a rent fixed by the Courts under the provisions of section 24A of the Landlord & Tenant Act 1954 and is to be based on the rent under a new tenancy from year to year.)

No allowances should be made from the “normal” review patterns established for properties in a VO’s area without prior consultaton with the Technical Advisor.

4.3.3 User Clauses

It is not unusual for a retail lease to contain a clause restricting the use to which premises may be put. Although such a clause may have influenced the level of rent passing, it should not be assumed that this is invariably the case: a further examination of the facts relating to the particular shop should be undertaken.

4.3.4 Upward only Rent Reviews

Many rent reviews under existing leases are subject to upward only review provisions. VOs will need to exercise particular care in considering their usefulness.

4.3.5 Shell or Fitted Rents

The VO should identify the basis of the rents upon which the analysis is to rest.

4.3.6 Analysis in Terms of Zone A

Before detailed analysis begins it is necessary to establish the zoning pattern to be adopted.

Rents should be analysed in terms of Zone A by apportioning the adjusted rent on the basis of the relative values which the parts of the hereditament bear one to another.

Guidance on relative values should be obtained wherever possible from an examination of the rents of shops in the particular location.

It should be borne in mind that the values to be attributed to the individual parts should represent the values which those parts contribute to the rent of the whole hereditament if it were offered vacant and to let. The particular use to which the present occupier chooses to put any part is not necessarily conclusive evidence as to the most appropriate use.

Apportioned values for ancillary accommodation will depend on local demand for such accommodation as part of the single hereditament. In the case of upper floors and basements the presence of passenger lifts and escalators should be reflected, where appropriate.

Accommodation which is surplus to modern (AVD) requirements must be valued accordingly. With the advent of modern stocktaking techniques less space is generally needed for storage purposes.

The approach of relating values directly to rents obtainable if the ancillaries were separately let should not be followed, despite the Tribunal’s comments in F W Woolworth & Co Ltd v Peck (VO) LT 1967 RA 365. However, that does not necessarily mean that evidence of rents of separately assessed elements should altogether be ignored when making a judgement on value relativities within the hereditament. The extent of influence (if any) on value can depend on the relative size and character of the ancillary part and is essentially a matter of value judgement in the light of all relevant evidence.

Valuation Considerations are dealt with at para 5 below.

4.3.7 Use of “X Factors”

The “X factor” has usefully been defined in John Lewis & Co Ltd v Goodwin (VO) and Another LT 1980 RA 1 at page 23:-

“The X factor is the divisor in the fraction A/X, where A/X represents the proportion which the value psm attributed to any part of premises being valued (or whose value is being analysed) has to the zone A rate”.

The area derived using X factors is known as the area “in terms of Zone A” (ITZA) (but see also para 4.5 below).

The use of X factors is a means of analysis, to achieve a Zone A price. In deciding relevant X factors for any locations the guidance at para 4.2.5 above is relevant. VOs should ensure that X factors are decided on an appreciation of value relativities within a hereditament and that the X factors for each location are relevant to that location.

4.4 Evidence of Value

4.4.1 Field of Rental Evidence

The predominant factor determining the level of demand for a shop will be the quality of its trading position. Accordingly the field from which rental evidence can be drawn to support the value of a particular shop or group of shops tends to be limited to a narrowly defined area.

It is nevertheless important to have regard to all the rental evidence in a given street or centre and also to the extent to which that evidence fits into the rental picture of the locality generally in order to achieve a consistent overall pattern.

It should be borne in mind that the object is to assess each property in accordance with the statutory definition at its value as at the relevant valuation date. This may not necessarily be achieved by adopting a basis which is supported by the largest number of rents.

4.4.2 Full Facts Needed

VOs should remain aware that the information received may not provide the full picture. Where this is thought to be the case appropriate measures should be taken to obtain all relevant details.

4.4.3 Weighting of Evidence

The importance of location must be borne in mind. Even nearby shops rents may need adjustment. RM 4 : 5 should be followed.

4.5 Presentation of Evidence

Valuations produced in evidence before the VT or LT should show shop areas expressed in terms of actual zoned areas and not areas converted in terms of Zone A. Where areas converted in terms of Zone A are shown, for example, on schedules of comparables, in analysis, their derivation from actual zoned areas should be shown and clearly distinguished (Croydon LBC v Phillipps (VO) and George Lewis of London Ltd LT 1969 RA 723).

4.6 Recording of Rental Evidence and Information

4.6.1 Recording of Rental Evidence

Reference should be made to RM 4:5, the Rental Adjustment and Analysis System, for general instructions on the completion and recording of relevant data.

To assist in the interpretation of the rental evidence it is usually helpful for the adjusted rents to be plotted in graphic form. The precise format of this is a matter for the judgement of the VO in consultation as necessary with the Technical Advisor.

4.6.2 Recording of General Information

It is particularly important that VOs keep a detailed record of the circumstances surrounding their main shopping areas as at both the antecedent valuation date and the date the Rating List comes into force.

This should include:-

  • a record of the various occupiers; which can usefully be recorded on a recent Goad Plan (if available) suitably updated;
  • details as to the status of any developments in progress or in the pipeline relevant to the centre;
  • details as to road layout, traffic schemes, parking restrictions etc, and of car parking facilities and charges;
  • details of public transport facilities, services and charges;
  • a note of any relevant economic factors affecting the area;
  • a photographic record as appropriate.

Pedestrian counts undertaken and recorded could form a valuable additional record in respect of the main centres and specifically if developments are in progress or planned.

4.7 Unit of Assessment

4.7.1 Number of Traders

The general principles concerning what constitutes a single rateable hereditament are set out in RM4:2. Where a number of different traders are found under one roof, and consideration is being given to the question of whether there should be one or several hereditaments, reference also should be made to RM5:630.

4.7.2 Composite Hereditaments

Retail premises with living accommodation give rise to special considerations and reference should be made to the Council Tax Manual regarding the interaction with the Council Tax provisions relating to Composite Hereditaments. Regions should be informed should any difficulty arise in practice due to the interface between the two local taxes; Council Tax Manual Practice Note 6.

5. Valuation Considerations

5.1 General

In determining assessments from the available rental evidence the principle of “as you devalue - so you must value” should be followed (see Marks and Spencer Ltd v Collier (VO) LT 1966 RA 107).

5.2 Value Sensitive Aspects

5.2.1 Remainder Zone

In most locations there will be evidence to support the remainder price for at least the standard range of small shops but there are seldom sufficient rents to prove unit values to the full depth of larger stores.

The deeper remainders involve consideration of three interrelated aspects;

  1. depth itself.
  2. shape
  • the ratio of depth to the frontage of the shop
  • masked areas, and
  1. size

*(see Trevail (VO) v C & A Modes LT 1967 RA 124, Marks & Spencer Ltd and Cambridge City Council v Allsop (VO) LT 1969 RA 274, Thomas Scott & Sons (Bakers) Ltd v Davis (VO) LT 1969 RA 444 and F W Woolworth & Co Ltd v Christopher (VO) and Lincoln City Council LT 1972 RA 224)

Where circumstances are such that a reduced price on the remainder is considered appropriate care should be taken, particularly where the variation is made by way of X factor adopted, to ensure that there is a sensible value relativity for the remainder when compared with other generally similar shops. The adjustment of the X factor without appreciation of its real impact on value can produce either an unrealistically low increase in assessment or even, in an extreme case, a reduced assessment when compared with similar shops but with smaller remainders at a higher price.

5.2.2 Non Ground Floor Sales Areas

When valuing upper floors and basements due regard must be had, where appropriate, to the effect on value of the presence and location of stairs, passenger lifts and escalators.

5.2.3 Access to Basement and Upper Floor Sales Areas.

The value of non ground floor sales areas is affected by the type and prominence of access. In reviewing the rental evidence and formulating an approach to value, the value significance of different types of access, eg stairs, passenger escalators and lifts, and their different positions within the shop, should be considered in terms not only of the value of the floor served by the access but also having regard to the effect on the overall value of the shop.

In any area where there is demand for non ground floor sales the basis should in normal circumstances show an increase in the hereditament’s overall assessment ie. the benefit of the improvement should be greater than the loss in value of the floor space given up. This is most likely to occur:-

  1. where a shop is improved by conversion of non ground floor areas to sales together with the provision of customer access,

or

  1. where there has been an improvement in the type and/or position of customer access and specifically where the position of that access is improved by relocation towards the front of the shop.

5.2.4 Access to and from Stock Areas

The relative value of stock areas in different shops can be affected by the type and quality of access both for delivery to the stock areas and for subsequent movement of goods from stock to sales areas.

5.2.5 Return Display Frontages

Where there is a return display frontage the effect on the value of the hereditament must depend on local evidence. Where there is no access for shoppers and an enhanced rent appears to have been paid, analysis on the basis of a sum per linear metre of display is generally adopted.

If a percentage approach is adopted it should be borne in mind in valuation that for any given depth of return display frontage the benefit of that frontage in percentage terms will more normally decline as the width of the shop frontage increases (see John Lewis & Co Ltd v Goodwin (VO) and Another LT 1980 RA 1 at page 24.)

Where a rear display or return display frontage has pedestrian access the usual method of analysis is to zone from the rear or return frontage but to adopt a price no lower than that applicable when zoned from the principal frontage. If however the additional frontage is to a low value street or is a pedestrian access only without display frontage, a price per linear metre might be preferred in the former case and a spot value or percentage addition in the latter.

In some areas it may be found that the added security risks and difficulty in preventing goods from being stolen outweigh any benefits. In all cases local evidence should be scrutinised to assist in determining the method of treatment as well as the amount of variation in value.

Return frontages are often unique and care must be exercised when translating evidence of one return into the valuation of another.

Corner shops where the longest frontage is to the most valuable trading street can give rise to particular difficulty. The question of allowance for shape may additionally need to be considered (see W H Smith & Son v Clee (VO) LT 1978 RA 93).

5.2.6 Masked Areas

Care should be taken at both analysis and valuation stages to ascertain the extent to which any allowance for masked areas is justified. Factors to be borne in mind include the extent of the masking, the size of the sales area, the benefit of any return frontage to the masked area, the effect on layout and the extent of any crowding caused. Any allowance for masking is best confined to the area affected and not expressed as a percentage against the whole.

5.2.7 Split Levels

Where there is a difference in floor level between the front and rear of the shop any allowance should be related to the part not at the level of the main street frontage.

5.2.8 Tenant’s Improvements

Where a rent is likely to be of importance in establishing tone it is vital, before any analysis occurs, to ensure that full details of both the letting and the hereditament have been obtained. Particular care is needed as rents provided may be on either a shell or a fitted basis of letting.

Rent reviews on a fitted basis usually reflect the value of the landlord’s fittings included in the letting. Care needs to be taken to distinguish such fittings from later improvements and/or replacements by the tenant.

When a rent does not fully reflect tenant’s improvements reference should be made to RM4:5.

5.2.9 Partitions

Partitions will usually be part of the rateable hereditament (see British Bakeries Ltd v Gudgion (VO) and Croydon LBC LT 1969 RA 465; Lewis Vintners T/A Smokey Joe v Speight (VO) LT (1984). 272 EG 1177).

Not all partitions will, however, be structural such that their removal would offend rebus. In cases where partitions, although part of the rateable hereditament, are non-structural they should normally be ignored for zoning purposes. (Reference should be made to RM4:4 for guidance on rebus).

In the majority of cases, therefore, for both analysis and valuation it will be appropriate to zone through non-structural partitions.

Exceptionally there may be instances, for example within a suburban situation, where partitioned rear areas have no value as sales and where an analysis ignoring the partitions would not therefore correctly represent the rents.

5.2.10 Customer Toilets

Where customer toilets are provided as an additional facility over and above the usual staff toilets it would normally be expected that their provision would enhance the value of the shop and should therefore be included in both analysis and valuation.

5.2.11 Finish

In order to appreciate fully any rental evidence it will be necessary to make a judgement as to the assumed level of finish reflected in the standard prices being adopted and the value consequences (if any) of any departure from that level.

The value significance of different levels of finish will need to be considered at an early stage where shell rents are to be adjusted. For example consideration should be given to the extent to which demand, and hence rental values, would be influenced by variations in heating and air-conditioning systems.

5.2.12 Automatic Teller Machines

See RM 5:1120.

5.3 Particular Types of Hereditament

5.3.1 Kiosks

In valuing kiosks floor area comparisons with normal shop units are of little assistance and the zoning method is inappropriate.

Location rather than size is the major determinant of value and space along frontage more important than space in depth (see Suri v Masters (VO) LT 1982 RA 219). Many are rented and, as a class, kiosks will usually be spot valued.

In some instances there may be very small shallow shops which are little more than kiosks and where again the zoning method will be inappropriate.

5.3.2 Post Offices, Sub Post Offices and Off-Licences

The holding of these licences very seldom results in any significant additional value to the property. In any case where evidence suggests that such value may be present, full details should be submitted via Region to CEO (Rating).

For Post Office Property in general reference should be made to RM 5:800.

5.4 Allowances

5.4.1 General

At the time of a revaluation existing allowances should be reviewed in the light of the rental evidence and the market conditions and trading patterns at the date of valuation. The reasons both for any allowance included in a valuation and for the quantum of that allowance should be clearly noted on the Valuation Sheet.

5.4.2 Pioneering Allowances

Where a hereditament is in a development which is unfinished, some allowance may be justified until the physical environment improves.

Where a hereditament is in a shopping development which has been completed but where only a few shops have been let, the non occupation of the empty shops will be a factor to be borne in mind but the value consequence (if any) will depend primarily on a judgement of the perception of the hypothetical tenant as to future lettings, and in the context of a tenancy from year to year. Where in these circumstances a VO is dealing with an appeal but considers that the amount of the allowance would have been different at the antecedent valuation date from that at the date of the proposal because of a difference in expectation of letting of the empty units due to changes in the economic climate, the matter should be referred via Technical Advisor to CEO (Rating) for advice.

5.4.3 End Allowances for Quantity

In the majority of cases it is of course the very size of the hereditament that makes it attractive to a large space user. See also RM 5:550.

In every case the question of an end allowance for quantity calls for separate consideration and must be viewed in the context of the particular unit prices adopted for the remainder area of the ground floor and for any ancillary space.

These prices may already have taken into account factors which might otherwise justify a reduction for quantity and the utmost care is required to ensure that any allowances are not duplication.

At a revaluation the question of any allowance will need to be reconsidered in the light of the rental evidence, the value relativities adopted within the shop itself and the general market conditions at the relevant date (see also para 5.5 below)

5.4.4 End Allowances for Shape

In certain circumstances, the shape of the shop may be such that an allowance is warranted. In most cases this is better reflected in the area affected (see for example 5.2.6 - Masked Areas). Whereas the frontage to depth ratio is a factor to be considered in determining the value of the remainder (see above), the frontage to depth ratio can exceptionally also be a factor in a consideration of an end allowance (see W H Smith & Son v Clee (VO) LT 1978 RA 93).

5.5 Stand back

It is essential that the final assessment should be founded on a sensible and defendable relationship between the various parts of the shop.

Where the valuation has been derived from rental evidence of smaller shops on the zoning method it is a useful check to calculate the overall ground floor sales price, both for comparison with non ground floor sales areas within the store and to make cross comparison with other larger shops in the same centre.

Care must be taken to ensure that end allowances do not duplicate reductions in value which have been reflected in the adjustments made to the prices adopted for individual areas of floor space.

In applying percentage allowances the valuer must always be conscious of the effect in value terms of the allowance made, and ensure that it does not overcompensate for the impact on the part concerned.

5.6 Tone of the List

During the life of the Rating List redevelopment may result in changes to the shopping patterns and hence rental values.

The Technical Advisor should be consulted before action is taken in the following circumstances:-

  1. Where a VO considers that a change in the existing pattern of assessments is justified;
  2. Where a VO considers that a new development warrants higher levels of assessment than those currently prevailing, except where that uplift is to reflect the modernity of a development when contrasted with the age and character of adjacent shops. (See Thomas Scott & Sons (Bakers) Ltd v Davis (VO) LT 1969 RA 444).

6. Shopping Centres

6.1 Shopping Centre Malls

6.1.1 Definition

A Shopping Mall is any part of a shopping development, open or covered, for which the sole or main purpose is to provide customer access to two or more shops or other units in a Centre.

6.1.2 Background

There has been uncertainty regarding the rateability of Shopping Malls.

The position in Scotland has been clarified by Section 17 of the Rating & Valuation (Amendment) (Scotland) Act 1984. The effect of this Section is to exclude from valuation any Shopping Mall used solely for access.

No similar legislation exists for England and Wales. However, see 6.13 below which, affectively, treats shopping malls in England and Wales in the same way as those in Scotland.

6.1.3 Rateability

No Shopping Mall as defined above should be valued or appear in any Rating List. The main reason for this is the lack of an identifiable rateable occupation.

However, any occupation within a Mall that can be identified as a hereditament should be valued and entered in the Rating List. Typical examples will be public conveniences, concession areas and advertising rights. In addition the regular use of malls for other than purely access/egress purposes - eg vending stalls, carts, barrows, exhibitions of saleable items - could justify assessment. Levels of value will be a matter for local judgement.

Any areas which are purely decorative in nature such as ponds, fountains, gardens etc may be considered as part of the general setting of the Mall and therefore excluded from valuation.

6.2 Food Courts

6.2.1 Co-ordination

See the relevant Practice Note.

6.2.2 Unit of Assessment

A food court usually comprises from 4 to 12 kiosks selling a variety of food and drink for consumption in an adjoining communal seating area.

Although it is always essential to consider the actual facts of occupation in each case, the majority of food courts (ie kiosks and communal area together with ancillary accommodation) are likely to form a single hereditament. More careful consideration will be required in particular with the so called food streets or boulevards.

The idea of the concept is that a food courts should form an anchor and general attraction in a shopping centre so that shoppers will be tempted to stay at the centre for longer periods of time than might otherwise have been the case. The occupier of the food court is likely to be either the shopping centre developer (eg Capital and Counties plc) or a caterer (eg Grand Metropolitan Retailing). Individual kiosks may then be operated under management franchise or tenancy agreement.

In those cases where the tenancies have been granted in respect of individual kiosks it is commonly found that:

i) there is an absolute bar against sub-letting or sub-franchising and ii) the lease is written so as to exclude any security of tenure which would otherwise be available from the Landlord & Tenant Acts.

Features of agreements (usually set out in detail in a tenant’s manual) suggest that paramount control and thus rateable occupation remains with the overall food court operator. Such agreements often include the following features:- * Times for opening and closing are laid down * (Tills are linked to the landlord’s central computer * Menus are subject to landlords’ approval both as to content and price * Only plates, cups etc, as provided by the landlord (in house style), may be used. Kiosk operators pay for these on a cost basis. * Management and supervision of the food court is carried out by employees of the landlord. * The landlord provides and meets the costs of all cleaning and maintenance of the common areas. * The landlord installs all the catering equipment which remains his property * The kiosk staff are required to wear uniforms as provided by the landlord but paid for by the operators at cost.

In all cases it is important to identify the extent of the hereditament, distinguishing it particularly from adjoining Shopping Mall areas.

6.2.3 Rents

In most cases where the shopping developer remains in occupation of the food court individual kiosk operators pay turnover rents. The percentage of turnover rent, which will be fixed in advance, can vary according to season and type of trade but tends to fall within the range of 15%-30%.

Where the whole food court has been sub-let to a single caterer then the rent is likely to be based on an estimate of anticipated trade but may also be geared to the total number of lettings in the shopping centre. The caterer may of course sub-let on similar terms to those referred to in the paragraph above.

The terms of any letting agreement should be clearly established in every case, preferably by way of obtaining a copy of the relevant document.

6.2.4 Valuation

A rental valuation will be appropriate based on whatever evidence can be drawn from the actual food court and other lettings in the shopping centre.

Any trading information that is made available is likely to be somewhat limited and thus unreliable as a basis for valuation.

Valuation reviews of food courts may be required in developing shopping centres. Such reviews would be particularly appropriate in those cases where the food court rent was geared to new shop openings.

Where the whole food court has been sub-let to a single caterer then the rent is likely to be based on an estimate of anticipated trade but may also be geared to the total number of lettings in the shopping centre. The caterer may of course sub-let on similar terms to those referred to in the paragraph above.

The terms of any letting agreement should be clearly established in every case, preferably by way of obtaining a copy of the relevant document.

6.3 Car Parks/Parking

For the Unit of Assessment, and the Valuation approach, reference should be made to RM 5:200.

6.4 Public Toilets

These should be valued on the same basis as Public Conveniences provided by Local Authorities - see RM 5:600:4.2

6.5 Advertisements/Video Walls

These should be valued having regard to RM 5:20.

6.6 Petrol Filling Stations

Where a petrol filling station is separately assessed it should be valued in accordance with RM 5:770. In circumstances where a petrol filling station forms a single rateable hereditament along with a main store, reference should be made to RM 5:520.

7. Remarks

7.1 Publications

VOs have been supplied with the following publications where they relate to a centre in their area.

Goad Shopping Centre Report - Chas E Goad Ltd -

Shopping Flowcount - Property Market Research Services Ltd.

Whilst “Shopping Flowcount” may prove to be a useful reference aid there is a need to be aware of its limitations. Possible sources of bias and variability identified by the publishers are detailed in Appendix 2.

Where evidence of pedestrian flow is considered necessary in connection with an appeal before the VT or LT the “Shopping Flowcount” should not be used in substitution for counts carried out by VO staff.

Practice note: 2017 - Air conditioning in shops

1. Market Appraisal

1.1 Introduction

The term ‘air conditioning’ covers a variety of functions ranging from merely cooling and re-circulating air, to replacing, comfort heating and then fully conditioning it. This is achieved either by the use of cassettes or an air handling Unit (AHU) as part of a ducted air handling system (AHS).

Air conditioning in shops remains a common feature and designed properly will enhance the retail setting, providing a controlled environment. It will enhance and support the business of retailing, being conducive to staff and customer comfort.

1.2 The market for Air Conditioning Systems

In recent years, the costs and design of air conditioning cassettes has allowed air conditioned retail space to be within the grasp of many retailers. Having said that, it is not yet a universal feature in shops. Corporate high street chains often have a ‘policy’ that means all shops in the portfolio have air conditioning or handling systems installed irrespective of location and the prevailing outside weather conditions. This results in a tendency for bespoke AHS being prevalent in prime retail locations. Cassette based systems feature in all types of retail premises. However, these systems become more difficult to install where the shops are larger or where there is limited access to outside space to expel the waste heat. Ducted systems lend themselves to larger premises, but there is no ‘hard and fast’ rule; in practice, a variety of systems are installed in a variety of premises.

1.3 The Phasing Out of R22 Refrigerant

From 2015, it is illegal to put Hydrochlorofluorocarbons (HCFCs), including the ozone-depleting refrigerant gas R22, in refrigeration, heat pump and air conditioning (AC) systems. R22 is commonly used in AC systems pre-dating 2004 and so its ban is likely to have an effect on retailers with air-conditioning systems of that vintage.

Following EU Regulation 2037/2000 on ozone depleting substances (ODS), R22 has not been legal for use in new AC equipment since 2004.Since at least 2000, AC manufacturers and users have known about the impending bans of new (or ‘virgin’) R22 in 2000, and ‘recycled’ R22 in 2015.

In 2010, existing AC equipment became affected. The ODS Regulation imposed a ban in all EU Member States against the use of new R22 to maintain existing AC equipment. Since then only recycled R22 obtained from decommissioned AC equipment or reclaimed R22 can be used. Such recycled or reclaimed R22 is becoming increasingly scarce and expensive.

From 2015, AC systems will not be able to be topped up with any R22, whether virgin, recycled or reclaimed.

There will be three options for operators of such AC systems:

  • Option 1: Run the system with its existing R22 fluid until it fails. This is a ‘hope for the best’ solution, but might be a temptation for retailers with AC systems in secondary or tertiary retail locations
  • Option 2: Replace the existing system with completely new AC equipment
  • Option 3: Use an alternative modern refrigerant to top them up. This may involve replacing parts of the existing AC system.

The occupier will have to consider the following when choosing which option: * the age of the current AC system; * the efficiency of the system; * leakage problems; * whether alternative refrigerants are compatible; * cost; * efficiency and availability of modern refrigerants, and * equipment manufacturers’ advice about using modern refrigerants.

Arguably, having had a 15 year ‘lead-in’ to prepare for this change, the retail rental market should have anticipated this change and rents will reflect any uncertainties at the relevant dates for the 2017 Revaluation. There will always be some AC users who are ‘caught out’ when the R22 supplies are no longer available, but it is reasonable to suppose retailers will have anticipated the change over the last 15 years and taken action to prepare for it.

However, if at the material day the AC is not working because the R22 has run out and no modifications have been made to make the system work with another refrigerant, case workers may be faced with proposals to reduce the rateable value. Hypothetically speaking, the landlord is assumed to have provided the system and if it is a ‘repair’ issue, the AC is therefore deemed to be in good repair. If it is considered a renewal of the AC system is required, it is considered that the landlord would ordinarily consider it economic to make the expenditure based on the value of the hereditament.

In other words, a reduction in RV is not appropriate where an AC system is not operating due to the lack of availability of R22 refrigerant generally; neither is it appropriate if the system is not working due to refrigerant loss.

1.4 Value to Occupier

It is often difficult to discern the impact of AC on the rents passing in retail. It is a feature of the overall tenant’s fitting out and, whilst it can probably be incorporated in a new fit out and therefore used by a subsequent occupier, it might just as easily be removed as part of any new fitting out.

However, care should be taken not to be persuaded by such a dismissive approach to previous occupiers’ ‘fitting out’. The AC is of value to the actual tenant, and the hypothetical tenant fresh on the scene not only wants the shop as it is, but he or she includes the actual tenant who does very much value the fitting out. In other words, it is of value to the occupier. It follows that it is of value to the hypothetical landlord.

The decision in Berry (VO) v Iceland Foods Ltd [2015] UT(LC) RA 201 provides some guidance on this point; the UT considered the value of a bespoke AHS fitted by Iceland. The decision should be considered in full and in context; however, at paragraph 122:

“The issue is therefore whether the parties to the hypothetical letting of the appeal property would agree a higher figure to reflect the presence of Iceland’s bespoke air handling system. We are satisfied that they would so the remaining question is how much higher a figure would they agree? Both parties must be assumed to be willing to transact for the premises including the system, but neither party can be assumed to have a whip hand. The notional landlord must be taken to appreciate that the system is too powerful to meet the needs of most tenants in the market for a retail warehouse, and who would be unlikely to be willing to pay more than the £4 per sqm at which they would value the more modest system which would satisfy their requirements. The prospective tenant who wished to trade in Iceland’s style (and there was evidence that Iceland was not the only such trader, although its direct competitors are relatively few in number) would realise that if it did not take these premises with a suitable air handling system already installed, it would be necessary for it to install its own system at a cost to it of £4,384 a year. In addition to that cost the hypothetical tenant would incur the time and inconvenience of fitting out, for which no rent free allowance can be assumed, and the likelihood that the system would have to be removed at the end of the term. In our view the landlord would be in the stronger negotiating position, and would argue that £4,325 was too low a figure to reflect the value and convenience of the existing system.”

2. Changes From The Last Practice Note

There is no change in practical terms to the guidance provided in the previous (2010) practice note. This practice note provides valuation guidance on the treatment of air conditioning in shops for the 2017 Rating Lists. It outlines the steps to be taken when considering air conditioning systems and recommends using £7.00/m² over the area effectively air conditioned should no better evidence or indicators of value be available.

3. Ratepayer Discussions

There have been no ratepayer discussions.

4. Valuation Scheme

4.1 Outline of Valuation Approach

In making an appropriate addition for air conditioning the recommended approach is:

  • Firstly, to seek rents which already include the value of air conditioning, either the rent on the subject property or comparable rents elsewhere.
  • Such rents should be analysed to quantify the effect of air conditioning on the rental market being considered.
  • Comparable assessment evidence should be considered, and this includes additions previously accepted or agreed in respect of similarly specified air conditioning systems.
  • Where no comparable rental or assessment evidence can be found, an addition generally will be appropriate, ideally calculated using the cost of providing the actual system installed in the subject property.
  • Once the actual cost of provision is established, this will be converted to an annual equivalent.
  • In the absence of any more reliable evidence, a backstop of £7.00/m² is recommended.
  • The value of air conditioning is only one of several value significant factors affecting the hereditament, and as such, should not be treated as a separate issue.

For more information on the approach to rental adjustments and improvements, please refer to Section 4 - Part 1 Rental Adjustment Practice Note 1, 2017, Part 14 - Improvements.

4.2 Annual Value of Air Conditioning Systems

Wherever possible the Zone A adopted should be based on those rents which already include the value of air conditioning.

If reliable rental evidence is not available to show the value of air conditioning, and comparable assessment evidence is not available, the annual rental equivalent of these improvements will need to be found based on cost. For the 2017 Revaluation, an annual equivalent approach is considered to be the most appropriate.

The costs actually incurred by the retailer should be used wherever possible. However, it is acknowledged that the recommendation for VOs to amortise costs as part of a virtual rent approach to valuation in respect of air conditioning is not accepted by ratepayers and their advisors.

The Upper Tribunal in Berry (VO) v Iceland Foods Ltd [2015] UT(LC) RA 201 (at paragraphs 99 to 101) decided the statutory decapitalisation rate ought to be used and applied it to the costs to arrive at a decapitalised figure. The members went further and determined that the landlord would be in a stronger negotiating position and suggested the resultant figure would in all likelihood be higher. The Iceland decision places the use of the statutory decapitalisation rate in context, being one consideration in a series of steps to be taken to arrive at a reasonable uplift for the benefit of air conditioning systems in shops.

4.3 Approach in the Absence of Reliable Rental Evidence and Actual Costs

Where rental evidence or the costs actually incurred cannot be obtained, only a very general indication can be given as to the addition that should be made.

Bearing in mind that details of the actual system are not known, the type of system assumed for the purpose of ascertaining a price to be adopted comprises a cassette system providing heating/cooling of air with moisture removal and air circulation.

Generally, for a modern cassette system with the same specifications as detailed in paragraph 4.4 below, £7.00/m2 may be used as a ‘back-stop’. This figure is considered to produce a reasonable addition based on providing a system designed to effectively cover the retail space concerned; it does not necessarily take account of any overcapacity or over specification; nor does it necessarily reflect poor or under specified systems. It therefore produces an addition for a system that deals effectively with a particular retail space, expressed in £/m2 terms.

4.4 Making Adjustments to the backstop addition for AC in the Absence of Reliable Rental Evidence and Actual Costs

The majority of air conditioning installations, especially in prime and secondary locations, will be designed to a standard of specification to ensure the air volume in the target retail space is properly and adequately treated.

Whilst adjustments can be made to an addition for AC (based on the ‘back-stop’ figure), it is recognised that the more detail known about any particular system and its cost, the more likely an annual rental equivalent could be ascertained.

In practice, it may be known that specific systems on the ground are over specified for a given retail space, or alternatively may be under specified and only able to deal effectively with a proportion of the given retail space. In these cases, adjustments should be made depending on the details of the actual system concerned.

It is reasonable to assume that ducted systems will be bespoke and therefore properly specified to deal effectively with the given volume of air to be conditioned, especially considering that the figures in this section are used in the absence of anything better. Therefore, it is not envisaged that this type of system will be over specified or under specified and the whole area benefiting from the ducted system should be taken as air conditioned. However, it follows that the more the detail known about any particular system, the more likely an annual rental equivalent could be ascertained.

In addition, the way that some shops are used may have an effect, particularly where this involves heat-generating equipment. Each system is likely to have been designed to meet the individual property’s physical characteristics and the tenant’s occupational needs.

Therefore, in most cases it is anticipated the relevant amount of space benefitting from the system will be the area to which the ‘back-stop’ figure is applied.

However, it may be that the air conditioning system is either over or underspecified for certain installations and adjustment to the area covered by the ‘back-stop’ figure may be required.

4.4.1 Ducted Systems

It is a reasonable assumption that ducted systems are specifically designed to treat the air in all areas of the retail unit benefitting from the system; if the amount being added for the benefit of air conditioning is challenged, there is no practicable alternative other than to ascertain the likely costs of installation, seeking expert help from building surveyors with experience of dealing with such systems. It is difficult to envisage the ‘effective area’ being reduced where ducted systems are installed.

4.4.2 Cassette based Systems

Determining roughly whether a cassette based system is under or over specified presents certain challenges. The performance of cassette units vary depending upon the floor layout, ceiling height, obstruction to airflow caused by walls, shelving, curtains, etc. There may also be ductwork supplying fresh air as part of a cassette system.

It is reasonable to assume the system is adequate where it appears there is a good proliferation of ceiling cassettes. However, where the number of ceiling cassettes appears to be inadequate, or is stated to be so, it is possible to estimate a reduced ‘optimum area’ in terms of m² that would be expected to be conditioned. It is reasonable to adopt such an area when applying the figure provided in paragraph 4.3 above.

Where it is apparent or ascertained that the actual system is not capable of effectively conditioning all the relevant space, an appropriate ‘effective area’ can be adopted in the absence of a more reliable approach. For such a determination to be made, the output (in Kilowatt kW) of each cassette will need to be established. Once these are established, the table below provides a list of typical cassette outputs and their corresponding area they would be expected to condition.

Should there be any difficulty in determining the area in m² effectively conditioned, a full submission should be made to National Specialists Unit.

Where it is apparent the cassette system is under specified, and the number and output wattage of the cassettes is known, the following table can be used as a guide to seek to establish an area dealt with effectively by the system installed:

Cassette Type and Wattage Area Covered in m2 – up to Cassette Type and Wattage Area Covered in m2 – up to
2.8 kW* 20 8.8 kW 60
3.5 kW* 27 10 kW 65
5 kW 35 12 kW 75
5.25 kW 40 12.5 kW 80
6 kW 42 13 kW 85
7 kW 50 14 kW 100
  • Surface or wall mounted only.

Over specification of a system should not result in an ‘effective area’ being adopted that is greater than the actual area benefitting from the AC. Where the calculation shows the system to be adequate, but no more, then the back-stop figure should still be applied to the whole area. Where it is calculated that the ‘effective area’ is lower than the area supposedly benefitting from the air conditioning system, the ‘effective area’ can be substituted in the process of making an addition.

It is reiterated that once costs are ascertained in any particular case, adjustments should be made depending on the details of the actual systems concerned. However, it follows that the more the details known about any particular system, in particular the costs of installation, the more likely a specific virtual rent or annual equivalent could be ascertained as detailed above.

4.5 Large Shops, Departmental Stores, Hypermarkets and Superstores

Large shops, departments stores and hypermarkets are outside the scope of this practice note. However, the practice in the landlord and tenant market in determining the rent of large shops, department stores, hypermarkets or superstores is to make percentage adjustments for tenant’s improvements, when required. The value of air conditioning is included in these overall adjustments. When dealing with such hereditaments for rating purposes a similar approach should be adopted.

Large shops (and department stores) are covered in Rating Manual Section 6 - Part 3: Section 550. Hypermarkets and superstores are covered in Rating Manual Section 6 - Part 3 Section 520.

Practice note 1: 2010: Air conditioning in shops

Summary

This Practice Note provides valuation guidance on the treatment of air conditioning in shops for the 2010 Rating Lists. It outlines the steps to be taken when considering air conditioning systems and, following the resolution by consent of an appeal to the Lands Tribunal in respect of an entry in a 2005 Rating List, recommends using £7.00/m² over the area effectively air conditioned should no better evidence or indicators of value be available.

1. Introduction

This Practice Note provides valuation guidance on the treatment of air conditioning in shops for the 2010 Rating Lists. The approach taken in the 2000 lists is helpful; therefore, for more detailed guidance, reference should be made to:

Rating Manual Section 6 part 3: Section 920: Shops and Shopping Centres: Practice Note 1 : 2000 : Revaluation 2000 : Air Conditioning in Shops

The framework for co-ordination is shown in Rating Manual Section 6 Part 1.

2. Description and Functions of Air Conditioning Systems

The term “air conditioning” covers a variety of functions ranging from merely cooling and re-circulating air, to replacing, comfort heating and then fully conditioning it. This is achieved either by the use of cassettes or a ducted system.

3. Rateability

For the 2010 Rating Revaluation the rateability of air conditioning systems arise under the Plant and Machinery Regulations 2000.

Air conditioning systems are rateable. Should it be argued that an air conditioning system in a shop is not rateable on these grounds, a full submission should be provided to CEO (Rating).

4. Outline of Valuation Approach

In valuing air conditioning the recommended approach is:

  • Firstly, to seek rents which already include the value of air conditioning.
  • Such rents should be analysed to quantify the effect of air conditioning on the rental market being considered.
  • Where no comparable rental or assessment evidence can be found, an addition generally will be appropriate, ideally calculated using the cost of providing the actual system installed in the subject property.
  • Once the actual cost of provision is established, this will be converted to an annual equivalent.
  • A back-stop approach at £7.00/m² to the areas benefiting from AC is provided for use in the absence of any more reliable evidence.
  • The value of air conditioning is only one of several value significant factors affecting the hereditament, and as such, should not be treated as a separate issue.

For more information on the Valuation Approach, please refer to Section 4 Part 1: Rental Adjustment Practice Note 1, 2010, Part 14 - Improvements.

5. Annual Value of Air Conditioning Systems

Wherever possible the Zone A tone should be based on those rents which already include the value of air conditioning.

If reliable rental evidence is not available to show the value of air conditioning, the annual rental equivalent of these improvements will need to be found based on cost. For the 2010 Revaluation, the virtual rent approach is considered to be the most appropriate.

The costs actually incurred by the retailer should be used wherever possible. However, it is acknowledged that the recommendation for VOs to amortise costs as part of a virtual rent approach in respect of air conditioning is not accepted by ratepayers and their advisors.

6. Approach in the Absence of Reliable Rental Evidence and Actual Costs

Where rental evidence or the costs actually incurred cannot be obtained, only a very general indication can be given as to the addition that should be made.

Bearing in mind that details of the actual system are not known, the type of system assumed for the purpose of ascertaining a price to be adopted comprises a cassette system providing heating/cooling of air with moisture removal and air circulation.

Generally, for a modern cassette system with the same specifications as detailed in paragraph 7 below, £7.00/m2 may be used. This figure is based on providing a system designed to effectively cover the retail space concerned; it does not take account of any overcapacity or over specification; nor does it reflect poor or under specified systems. It therefore gives the price for dealing effectively with a particular retail space, expressed in £/m² terms.

In practice, it may be known that specific systems on the ground are over specified for a given retail space, or alternatively may be under specified and only able to deal effectively with a proportion of the given retail space. In these cases, adjustments should be made depending on the details of the actual system concerned. However, it follows that the more the detail known about any particular system, the more likely a specific virtual rent could be ascertained as detailed in paragraphs 4 and 5 above.

It is reasonable to assume that ducted systems will be bespoke and therefore properly specified to deal effectively with the given volume of air to be conditioned, especially considering that the figures in this section are used in the absence of anything better. Therefore, it is not envisaged that this type of system will be over specified or under specified and the whole area benefiting from the ducted system should be taken as air conditioned.

This figure is intended merely as an indication but, as it flows from recent discussions with agents acting on behalf of a significant number of retailers with outstanding appeals on the issue of air conditioning, it is expected to be adopted in the absence of any better indicators of value in the majority of circumstances.

7. Determining the specification of the system

Where better evidence is not available recourse should be had to the figures in paragraph 6 above. The majority of air conditioning installations, especially in prime and secondary locations, will be designed to a standard of specification to ensure the air volume in the target retail space is properly and adequately treated.

In addition, the way that some shops are used may have an effect, particularly where this involves heat-generating equipment. Each system is likely to have been designed to meet the individual property’s physical characteristics and the tenant’s occupational needs.

Therefore, in most cases it is anticipated the relevant amount of space benefitting from the system will be the area to which the “back-stop” figure is applied.

However, it may be that the air conditioning system is either over or underspecified for certain installations and adjustment to the area covered by the back-stop figure may be required.

Ducted Systems

It is a reasonable assumption that ducted systems are specifically designed to treat the air in all areas of the retail unit benefitting from the system; if the amount being added for the benefit of air conditioning is challenged, there is no practicable alternative other than to ascertain the likely costs of installation, seeking expert help from building surveyors with experience of dealing with such systems. It is difficult to envisage the “effective area” being reduced where ducted systems are installed.

Cassette based Systems

Determining roughly whether a cassette based system is under or over specified presents certain challenges. The performance of cassette units vary depending upon the floor layout, ceiling height, obstruction to airflow caused by walls, shelving, curtains, etc.

It is reasonable to assume the system is adequate where it appears there is a good proliferation of ceiling cassettes. However, where the number of ceiling cassettes appears to be inadequate, or is stated to be so, it is possible to estimate a reduced “optimum area” in terms of m² that would be expected to be conditioned. It is reasonable to adopt such an area when applying the figures provided in paragraph 6 above.

Where it is apparent or ascertained that the actual system is not capable of effectively conditioning all the relevant space, an appropriate “effective area” can be adopted in the absence of a more reliable approach. For such a determination to be made, the output (in Kw) of each cassette will need to be established. Once these are established, the table below provides a list of typical cassette outputs and their corresponding area they would be expected to condition.

Should there be any difficulty in determining the area in m² effectively conditioned, a full submission should be made to CEO (Rating) following the usual protocols.

Where it is apparent the cassette system is under specified, and the number and output wattage of the cassettes is known, the following table can be used as a guide to seek to establish an area dealt with effectively by the system installed:

Cassette Type and Wattage Area Covered in m² – up to Cassette Type and Wattage Area Covered in m² – up to
2.8Kw* 20 8.8Kw 60
3.5Kw* 27 10Kw 65
5Kw 35 12Kw 75
5.25Kw 40 12.5Kw 80
6Kw 42 13Kw 85
7Kw 50 14Kw 100

*Surface or wall mounted only

Over specification of a system should not result in an “effective area” being adopted that is greater than the actual area benefitting from the AC. Where the calculation shows the system to be adequate, but no more, then the back-stop figure should still be applied to the whole area. Where it is calculated that the “effective area” is lower than the area supposedly benefitting from the air conditioning system, the “effective area” can be substituted in the process of making an addition.

It is reiterated that once costs are ascertained in any particular case, adjustments should be made depending on the details of the actual systems concerned. However, it follows that the more the details known about any particular system, in particular the costs of installation, the more likely a specific virtual rent could be ascertained as detailed in paragraphs 5 and 6 above.

8. Large Shops, Departmental Stores, Hypermarkets and Superstores

The practice in the landlord and tenant market in determining the rent of Large Shops, Departmental Stores, Hypermarkets or Superstores is to make percentage adjustments for tenant’s improvements, when required. The value of air conditioning is included in these overall adjustments. When dealing with such hereditaments for rating purposes a similar approach should be adopted.

Practice note 1: 2005: Air conditioning in shops

Summary

This Practice Note provides valuation guidance on the treatment of air conditioning in shops for the 2005 Rating Lists. It outlines the steps to be taken when considering air conditioning systems and, following the resolution by consent of an appeal to the Lands Tribunal in respect of an entry in a 2005 Rating List, recommends using £7.00/m² over the area effectively air conditioned should no better evidence or indicators of value be available.

1. Introduction

This Practice Note provides valuation guidance on the treatment of air conditioning in shops for the 2005 Rating Lists. The approach taken in the 2000 lists is helpful; therefore, for more detailed guidance, reference should be made to:

Rating Manual Section 6 part 3: Section 920: Shops and Shopping Centres: Practice Note 1 : 2000 : Revaluation 2000 : Air Conditioning in Shops.

2. Description and Functions of Air Conditioning Systems

The term “air conditioning” covers a variety of functions ranging from merely cooling and re-circulating air, to replacing, comfort heating and then fully conditioning it. This is achieved either by the use of cassettes or a ducted system.

3. Rateability

For the 2005 Rating Revaluation the rateability of air conditioning systems arise under the Plant and Machinery Regulations 2000.

Air conditioning systems are rateable. Should it be argued that an air conditioning system in a shop is not rateable on these grounds, a full submission should be provided to CEO (Rating).

4. Outline of Valuation Approach

In valuing air conditioning the recommended approach is:

  • Firstly, to seek rents which already include the value of air conditioning.
  • Such rents should be analysed to quantify the effect of air conditioning on the rental market being considered.
  • Where no comparable rental or assessment evidence can be found, an addition generally will be appropriate, ideally calculated using the cost of providing the actual system installed in the subject property.
  • Once the actual cost of provision is established, this will be converted to an annual equivalent.
  • A back-stop approach at £7.00/m² to the areas benefiting from AC is provided for use in the absence of any more reliable evidence.
  • The value of air conditioning is only one of several value significant factors affecting the hereditament, and as such, should not be treated as a separate issue.

For more information on the Valuation Approach, please refer to Rating Manual Section 4: Pt 1 Practice Note 1 (Part 11 - Improvements).

5. Annual Value of Air Conditioning Systems

Wherever possible the Zone A tone should be based on those rents which already include the value of air conditioning.

If reliable rental evidence is not available to show the value of air conditioning, the annual rental equivalent of these improvements will need to be found based on cost. For the 2005 Revaluation, the virtual rent approach is considered to be the most appropriate.

The costs actually incurred by the retailer should be used wherever possible. However, it is acknowledged that the recommendation for VOs to amortise costs as part of a virtual rent approach in respect of air conditioning is not accepted by ratepayers and their advisors.

6. Approach in the Absence of Reliable Rental Evidence and Actual Costs

Where rental evidence or the costs actually incurred cannot be obtained, only a very general indication can be given as to the addition that should be made.

Bearing in mind that details of the actual system are not known, the type of system assumed for the purpose of ascertaining a price to be adopted comprises a cassette system providing heating/cooling of air with moisture removal and air circulation.

Generally, for a modern cassette system with the same specifications as detailed in paragraph 7 below, £7.00/m2 may be used. This figure is based on providing a system designed to effectively cover the retail space concerned; it does not take account of any overcapacity or over specification; nor does it reflect poor or under specified systems. It therefore gives the price for dealing effectively with a particular retail space, expressed in £/m² terms.

In practice, it may be known that specific systems on the ground are over specified for a given retail space, or alternatively may be under specified and only able to deal effectively with a proportion of the given retail space. In these cases, adjustments should be made depending on the details of the actual system concerned. However, it follows that the more the detail known about any particular system, the more likely a specific virtual rent could be ascertained as detailed in paragraphs 4 and 5 above.

It is reasonable to assume that ducted systems will be bespoke and therefore properly specified to deal effectively with the given volume of air to be conditioned, especially considering that the figures in this section are used in the absence of anything better. Therefore, it is not envisaged that this type of system will be over specified or under specified and the whole area benefiting from the ducted system should be taken as air conditioned.

This figure is intended merely as an indication but, as it flows from recent discussions with agents acting on behalf of a significant number of retailers with outstanding appeals on the issue of air conditioning, it is expected to be adopted in the absence of any better indicators of value in the majority of circumstances.

7. Determining the specification of the system

Where better evidence is not available recourse should be had to the figures in paragraph 6 above. The majority of air conditioning installations, especially in prime and secondary locations, will be designed to a standard of specification to ensure the air volume in the target retail space is properly and adequately treated.

In addition, the way that some shops are used may have an effect, particularly where this involves heat-generating equipment. Each system is likely to have been designed to meet the individual property’s physical characteristics and the tenant’s occupational needs.

Therefore, in most cases it is anticipated the relevant amount of space benefitting from the system will be the area to which the “back-stop” figure is applied.

However, it may be that the air conditioning system is either over or underspecified for certain installations and adjustment to the area covered by the back-stop figure may be required.

Ducted Systems

It is a reasonable assumption that ducted systems are specifically designed to treat the air in all areas of the retail unit benefitting from the system; if the amount being added for the benefit of air conditioning is challenged, there is no practicable alternative other than to ascertain the likely costs of installation, seeking expert help from building surveyors with experience of dealing with such systems. It is difficult to envisage the “effective area” being reduced where ducted systems are installed.

Cassette based Systems

Determining roughly whether a cassette based system is under or over specified presents certain challenges. The performance of cassette units vary depending upon the floor layout, ceiling height, obstruction to airflow caused by walls, shelving, curtains, etc.

It is reasonable to assume the system is adequate where it appears there is a good proliferation of ceiling cassettes. However, where the number of ceiling cassettes appears to be inadequate, or is stated to be so, it is possible to estimate a reduced “optimum area” in terms of m² that would be expected to be conditioned. It is reasonable to adopt such an area when applying the figures provided in paragraph 6 above.

Where it is apparent or ascertained that the actual system is not capable of effectively conditioning all the relevant space, an appropriate “effective area” can be adopted in the absence of a more reliable approach. For such a determination to be made, the output (in Kw) of each cassette will need to be established. Once these are established, the table below provides a list of typical cassette outputs and their corresponding area they would be expected to condition.

Should there be any difficulty in determining the area in m² effectively conditioned, a full submission should be made to CEO (Rating) following the usual protocols.

Where it is apparent the cassette system is under specified, and the number and output wattage of the cassettes is known, the following table can be used as a guide to seek to establish an area dealt with effectively by the system installed:

Cassette Type and Wattage Area Covered in m² – up to Cassette Type and Wattage Area Covered in m² – up to
2.8Kw* 20 8.8Kw 60
3.5Kw* 27 10Kw 65
5Kw 35 12Kw 75
5.25Kw 40 12.5Kw 80
6Kw 42 13Kw 85
7Kw 50 14Kw 100

*Surface or wall mounted only

Over specification of a system should not result in an “effective area” being adopted that is greater than the actual area benefitting from the AC. Where the calculation shows the system to be adequate, but no more, then the back-stop figure should still be applied to the whole area. Where it is calculated that the “effective area” is lower than the area supposedly benefitting from the air conditioning system, the “effective area” can be substituted in the process of making an addition.

It is reiterated that once costs are ascertained in any particular case, adjustments should be made depending on the details of the actual systems concerned. However, it follows that the more the details known about any particular system, in particular the costs of installation, the more likely a specific virtual rent could be ascertained as detailed in paragraphs 5 and 6 above.

8. Large Shops, Departmental Stores, Hypermarkets and Superstores

The practice in the landlord and tenant market in determining the rent of Large Shops, Departmental Stores, Hypermarkets or Superstores is to make percentage adjustments for tenant’s improvements, when required. The value of air conditioning is included in these overall adjustments. When dealing with such hereditaments for rating purposes a similar approach should be adopted.

Appendix 1: Town & country planning use classes order, 1987 (As amended)

A1 SHOPS (General Retail) including:-
Shops retailing goods, other than hot food;
Post Offices;
Travel and Ticket Agencies;
Sandwich Bars;
Hairdressers;
Undertakers;
Showrooms, excluding Motor Vehicle Sales;
Hire Shops, DIY etc (but excluding taxi businesses or those concerned with the hire of motor vehicles);
Dry/Wet Cleaners, excluding launderettes;



***INTERCHANGEpossible amongst these A1 uses.
A2 SHOPS (Financial & Professional Services) including:-
Banks;
Building Societies
Betting Offices;
Estate Agents;
Employment Agencies;
Professional services, other than Health or Medical.
***INTERCHANGEpossible amongst these A2 uses, and INTO all A1 uses.
A3 SHOPS (Food & Drink).
Hot Food Shops, "Take-aways";
Restaurants;
Cafes;
Snack Bars;
Wines Bars;
Public Houses.
***INTERCHANGEpossible amongst these A3 uses, and INTO all A1 and A2 uses.

The above is intended as a guide only - full reference should be made to the T & CP (Uses Classes) Order, SI 1987, No 764, as amended.

Appendix 2: Shopping flowcount: Sources of bias & variability

The validity of the data provided by SHOPPING FLOWCOUNT is obviously limited by the methods employed and hence due regard should be paid to possible sources of bias and variability in applying the data for particular purposes - in comparing sites within the same shopping centre and in comparing different shopping centres. Attention is drawn, in particular, to the following possible sources of bias and variability:-

(i) The figures given derive from counts made during two particular weeks in a year. They may, hence, be subject to seasonal variation, to variation due to weather conditions, to other local conditions (eg temporary traffic diversions), and to the occurrence of specific events (eg due to traffic movements and obstructions).

(ii) Estimates given for Friday and Saturday are based on four three-minute counts in either case. In as much as pedestrian flows vary from moment to moment, the data are therefore subject to normal statistical sampling error. While the magnitude of such error is considered to be relatively low, it has not been examined systematically and cannot, therefore, be stated in precise terms.

(iii) The count points covered in each shopping centre are enumerated at different times of the morning and afternoon sessions. The effects of possible variation by time of day/order in circuit are partly offset by rotating the order in which the counts are undertaken between the two weeks of fieldwork, but there may, nevertheless, be some residual bias due to this source of variability.

(iv) The estimates given for the whole week are approximate and are to be treated with due caution. The figures shown are grossed-up by a factor derived from the proportion of pedestrian movements found on Friday and Saturday out of the total for the six days Monday-Saturday found in five specific towns which may be more or less representative of the daily variation found in each shopping centre. Hence, estimates given for centres with relatively heavy weekend flows will tend to be overstated and those for centres with relatively light weekend flows will tend to be understated. In general, the extent of over-statement or under-statement will reflect such factors as the relative incidence of regular shoppers, occasional shoppers, tourists, and pedestrians passing through the shopping centre in connection with their work, the day (or days) of week recognised as half-closing day, and the extent of which such recognition is reflected in the business hours of individual traders.

(v) The figures given relate specifically to the count points identified. There is obviously no generally valid basis for inferring what levels of pedestrian flow would exist at neighbouring sites.

Appendix 3: The effect of rezoning

Appendix 3: The effect of rezoning

Appendix 4: Illustration of the effect of rezoning

Appendix 4: Illustration of the effect of rezoning