Factual and Procedural Background
This appeal concerns the valuation for rating purposes of a modern headquarters office building, Ascot House, located within an office park near Maidenhead. The building was originally let in a "Category A" condition, which is a basic shell with mechanical and electrical services but without tenant-specific fit-out. Subsequently, the tenant carried out substantial fitting-out works to bring the building to "Category B" condition, including installation of partitions, kitchens, IT infrastructure, and other tenant-specific improvements costing approximately £3.4 million, of which £1.6 million was attributable to alterations and fit-out capable of use by other occupiers.
The building was entered in the 2017 rating list with a rateable value of £1,110,000. The ratepayer challenged this valuation, leading to a decision by the Valuation Tribunal for England (VTE) on 4 August 2021 that substituted a reduced rateable value of £875,500, largely based on the rent agreed for the building in its Category A condition with little allowance for the tenant's Category B fit-out. The Valuation Officer (VO) appealed the VTE’s decision.
The appeal was heard before the Upper Tribunal (Lands Chamber) with expert evidence on building costs, market operation, and valuation. An unaccompanied inspection of the property and comparable office parks was also undertaken.
Legal Issues Presented
- Whether the tenant’s fitting-out works to bring the building from Category A to Category B condition increase the building’s rateable value for rating purposes.
- If so, how should the value of the tenant’s fitting-out works be reflected in the rateable value, specifically whether the statutory decapitalisation rate must be used when translating capital costs into an annual rental equivalent.
Arguments of the Parties
Appellant's Arguments (Valuation Officer)
- The expenditure of approximately £1.6 million on tenant’s fit-out works that are capable of general market appeal must increase the rateable value of the building.
- The annual equivalent of the tenant’s fit-out cost should be calculated by amortising the capital cost using a discount rate of 7%, consistent with the lease terms and market rental streams.
- The rateable value should reflect a premium for Category B condition over Category A, supported by market evidence including lettings and expert testimony.
- The statutory decapitalisation rate applies only when using the full contractor’s basis of valuation, which is not the method applied here.
Respondent's Arguments (Ratepayer)
- The tenant’s Category B fitting-out works add no increase to the building’s rateable value because prospective tenants expect to carry out their own bespoke fit-out.
- Market evidence does not demonstrate that lettings of buildings in Category B condition command higher rents than those in Category A condition.
- If any value is to be attributed to the tenant’s works, the annual equivalent should be calculated by applying the statutory decapitalisation rate of 4.4% to the capital cost, as mandated by the Non-Domestic Rating (Miscellaneous Provisions) (No.2) Regulations 1989.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Edma (Jewellers) Ltd v Moore (VO) (1975) RA 343 (LT) |
Tenant’s expenditure on fitting out must be taken into account in rating valuation; issue focused on how to amortise capital expenditure. |
Supported the principle that tenant’s fit-out increases rental value; valuation must consider merits of expenditure and appropriate conversion to annual equivalent. |
| Dorothy Perkins Retail Ltd v Casey [1994] RA 391 |
Tenant’s improvements (e.g., air conditioning) confer a benefit that increases rental value; annualisation of capital cost must apply statutory decapitalisation rate. |
Recognised that fitting-out works increase rental value; statutory decapitalisation rate was applied in valuation. |
| Hewitt (VO) v Telereal Trillium [2019] UKSC 23 |
Explanation of the hypothetical landlord and tenant negotiation for determining rateable value. |
Guided the Tribunal’s approach to valuation, emphasizing the hypothetical negotiation and market-based rent determination. |
| Fir Mill Ltd v Royston UDC (1960) 53 R & IT 389 |
Minor non-structural alterations that do not change the general mode of occupation are to be taken into account in valuation. |
Supported the assumption that premises fitted out to Category B condition remain within the same occupation category for valuation purposes. |
| Williams (VO) v Scottish & Newcastle Retail Ltd [2001] RA 41 |
Approves Fir Mill principle; minor alterations and rebranding consistent with same use category. |
Reinforced approach to valuation of improvements as part of the hereditament. |
| Lambert v Woolworth [1939] Ch 883 CA |
Definition of tenant’s improvement as physical alteration improving the holding from tenant’s perspective. |
Used to interpret improvements in the context of lease renewals and valuation. |
| Godbold v Martin The Newsagent [1983] 2 EGLR 128 |
Distinguishes between tenant’s obligation to undertake works and mere permission; affects whether improvements are disregarded in rent review. |
Relevant to understanding the contractual context of tenant’s fit-out works. |
| Berry (VO) v Iceland Foods Ltd [2015] RA 201 |
Use of statutory decapitalisation rate when applying contractor’s basis valuation to part of a hereditament. |
Clarified that statutory rate applies only when contractor’s basis valuation is used. |
| Imperial College of Science and Technology v Ebdon (VO) [1984] RA 213 |
Historical disputes on decapitalisation rates under contractor’s basis valuation. |
Contextual background to statutory regulation of decapitalisation rates. |
| Morrison EF (GP) Limited v Assessor for Central Scotland [2004] RA 76 |
Tenant break options must be accounted for in analysis of inducements and rent valuation. |
Supported the Tribunal’s preferred approach to amortising rent-free periods up to break dates. |
| Allen (VO) v English Sports Council [2009] RA 289 |
Clarifies application of statutory decapitalisation rate and contractor’s basis valuation. |
Supported interpretation that statutory rate applies only when contractor’s basis is employed. |
| Hughes (VO) v Exeter City Council [2020] UKUT 7 (LC) |
Recent examination of contractor’s basis valuation steps and statutory decapitalisation rate. |
Used to explain the contractor’s basis valuation methodology and its application. |
Court's Reasoning and Analysis
The Tribunal began by setting out the statutory framework for rating valuation under the Local Government Finance Act 1988, emphasizing the hypothetical letting on the antecedent valuation date (1 April 2015) and the material day (1 April 2017). The valuation must reflect the rent a willing landlord and tenant would agree, taking into account the physical state of the hereditament on the material day.
The key question was whether the tenant’s Category B fitting-out works increased the rateable value beyond that of the building in Category A condition. The Tribunal rejected the respondent’s expert evidence that such works added no value, finding the VO’s expert evidence and common market sense more persuasive: tenants would pay a premium for premises already fitted out to their requirements.
The Tribunal reviewed extensive market evidence, including lettings of Category A and Category B offices, lease renewals, and rent reviews. It found consistent evidence that Category B offices generally command higher rents than Category A, with Category B rents typically exceeding £200 per sqm, compared to £165-£175 per sqm for Category A.
Regarding the valuation of the tenant’s fit-out works, the Tribunal analyzed rival methods of converting capital costs into annual rental equivalents. The VO’s expert used a 7% discount rate amortized over the lease term to the break date, resulting in a high annual premium, while the ratepayer’s expert applied the statutory decapitalisation rate of 4.4%, producing a much lower figure.
The Tribunal examined the statutory decapitalisation rate’s application and concluded it is mandatory only when the contractor’s basis of valuation is used to value all or part of a hereditament. Here, the valuation was not on the contractor’s basis but rather a comparative method with an adjustment for tenant’s works. Therefore, the statutory rate was not mandatory but could be adopted if appropriate.
Balancing the evidence, the Tribunal found the VO’s valuation overstated the premium for the fit-out, while the ratepayer’s was too low. Considering market evidence and the hypothetical negotiation, the Tribunal determined a reasonable rateable value for the building in Category B condition at approximately £1 million, or £212 per sqm.
Holding and Implications
The Tribunal ALLOWED the appeal by the Valuation Officer and determined the rateable value of the appeal property, Ascot House, at £1 million with effect from 1 April 2017.
This decision rejects the proposition that tenant’s Category B fitting-out works add no value to the rateable value of an office building. It clarifies that the statutory decapitalisation rate is not mandatory unless the contractor’s basis valuation is employed. The ruling thus provides guidance for valuing office buildings fitted out to Category B standard in the 2017 rating list and assists in establishing a more realistic approach to incorporating tenant fit-out works into rateable valuations.
No new binding precedent was set on the application of the statutory decapitalisation rate beyond the clarification of its limited mandatory scope.