Virtual reality – rating valuations based on imaginary tenants

The Supreme Court judgment in Telereal Trillium v Hewitt [2019] UKSC23 will be interesting for all those involved in non-domestic rating valuations, as it involves the valuation of an unoccupied property in a saturated market.

Background

The property in question is Mexford House, a three-storey office block in the North Shore area of Blackpool. The property was completed in 1971 and occupied by various government departments between 1972 and 2008.

On 1 April 2010, the non-domestic rating list for the borough of Blackpool came into force under Section 41(2) of the Local Government Finance Act 1988 (LGFA 1988). By this time, Mexford House was vacant. For the purposes of the 2010 rating list, the valuation was based on an estimate of the property’s open market rental value made by the Valuation Office Agency (VOA) two years earlier (known as the antecedent valuation date (AVD)).

Under schedule 6, paragraph 2(1) of the LGFA 1988, the valuation officer must determine a value that shall be taken as equal to the rent at which the property might be reasonably let from year to year.

With effect from 1 April 2010, the VOA valued Mexford House at £490,000, as the valuation officer believed that there were other office buildings in the same area (of like quality and age, also owned by public sector tenants) for comparable sums. The Valuation Tribunal did not agree with this figure and reduced it from £490,000 to £1.

The parties were already in agreement that “nobody in the real world would have been prepared to occupy the property”

The valuation officer, Hewitt, appealed the decision to the Upper Tribunal (Lands Chamber). A hearing took place based on fact and law. During Hewitt’s cross-examination, the Tribunal accepted that at the time of the AVD (1 April 2008) nobody in the real world would have been prepared to occupy the property and pay a positive rent. This prompted the parties to sign a joint position paper (JPP), agreeing that the rating hypothesis required the assumed existence of a hypothetical tenant.

The Upper Tribunal then had to decide whether, under the same hypothesis, the value should be assessed based on the ‘general demand’ shown by the occupation of similar office properties. The JPP set out that, if the answer was yes, the correct rateable value would be £370,000; if it was no, then the value would be £1.

The Upper Tribunal answered positively, allowing the appeal and fixing the rateable value at £370,000. The ratepayer Telereal Trillium, disagreed, claiming that the Upper Tribunal was wrong to assume a demand for Mexford House which did not in reality exist. Telereal Trillium appealed to the Court of Appeal. The Court of Appeal agreed with Telereal Trillium that there was no realistic demand for the property and that “in the absence of any actual demand, there is no principle of law which requires such demand to be assumed”. Consequently, the rateable value was reduced back down to £1.

The valuation officer then appealed to the Supreme Court.

Supreme Court decision

Hewitt’s appeal was allowed by a majority of three to two, with Lord Carnwath giving judgment for the majority and Lord Briggs offering a dissenting judgment.

Before reaching the Supreme Court, the parties were already in agreement that “nobody in the real world would have been prepared to occupy the property”, due to market saturation at the AVD (1 April 2008), although there were similar properties in the area which were let for significant rents. This main issue was addressed and restricted by the terms of the JPP.

Lord Carnwath began by noting that the court must take the JPP as it stood – that is to say, they should not look beyond it for additional evidence not referred to by the Tribunal.

Much like the Upper Tribunal and Court of Appeal, the issue for the Supreme Court was whether to take into account the general demand for property in an area when ascertaining a property’s rateable value – notwithstanding there being no actual tenant willing to pay a positive rent. In considering this, Lord Carnwath approved of the Upper Tribunal’s reliance on London County Council v Church Wardens and Overseers of the Poor of the Parish of Erith in the County of Kent [1893] AC 562, in which the court held that when there is no market for the use in question, “the true test is whether the occupation is of value”. The Supreme Court considered that whether the building is occupied or unoccupied, or the actual tenant has not been identified at the relevant date, is not critical.

In the absence of other material evidence, the Supreme Court concluded that there was no reason why the value of rent should not be assessed on the general demand for other office properties with similar characteristics. Even in a saturated market the rating hypothesis should assume a willing tenant who is sufficiently interested to enter negotiations in order to agree a rent on the statutory basis.

Lord Reed and Lord Lloyd-Jones agreed with Lord Carnwath, restoring the rateable value for Mexford House to £370,000.

In their dissenting opinion, Lord Briggs and Lady Black came to a different conclusion. On the JPP, they agreed with Lord Carnwath that the court could not go behind it, but they felt that it required the Upper Tribunal to make “a rather unreal choice”. The fact that similar properties existed with substantial rents should have prompted an inquiry into whether one or more of those tenants would be prepared to relocate to Mexford House for a reduced – but still more than nominal – rent.

It would be rare for the evidence to show that there was no demand at all for a property, especially when similar ones were being let at substantial rents. However, the rating hypothesis does not have to depart from reality just because is no demand, as long as theoretically the property in question can offer beneficial occupation.

Comment

Although in this case the property could not attract a tenant due to a saturated market, other factors can affect a property’s potential rateable value and a variety of assumptions can be made.

The decision in Mexford will not be welcome news for those who own vacant, hard-to-let buildings, who should consider other options to legitimately mitigate their rates liability.