Factual and Procedural Background
This decision concerns two appeals by the Valuation Officer ("the VO") against decisions of the Valuation Tribunal for England ("the VTE") relating to rating assessments of Grade A office properties in The City of Manchester ("the Shoosmiths Property") and The City of Liverpool ("the Mando Property"). The central issue is the valuation of the "Category B" tenant fitting out works for rating purposes.
Grade A offices are typically let in a "Category A" condition, with landlords providing a basic fit out, leaving tenants to complete "Category B" fit out to their own specifications. The Tribunal had previously held in a related case that Category B fitting out adds value beyond Category A condition, a principle accepted by the VTE and not disputed on these appeals.
The VO appeals contend that the VTE undervalued the properties by adopting an inappropriate valuation method for the Category B fit out. The appeals focus on valuation methodology and evidence rather than points of law.
At the hearing, the VO was represented by Attorney Wigley KC and Attorney Walder. Expert evidence was provided on office market operations and valuations in Manchester and Liverpool. The respondents did not participate in the appeals. The Tribunal conducted site visits to both properties and examined comparable properties.
The Shoosmiths Property is part of an eight-storey office building in the Spinningfields area of Manchester, let in shell condition with the tenant undertaking Category A and B fit out works, partly funded by the landlord through capital contributions. The Mando Property is a single floor in an eight-storey Liverpool office building, let in Category A condition with the tenant responsible for Category B fit out.
The VTE allowed the ratepayer's appeals, reducing the rateable values for both properties by applying relatively low per square meter uplifts for Category B fitting out (£15/m2 for Manchester and £10/m2 for Liverpool).
The VO challenges both the Category A valuations and the methodology for valuing the Category B uplift, proposing higher valuations based on landlord contributions and amortised tenant costs.
Legal Issues Presented
- Whether the VTE erred in its valuation methodology for assessing the value of Category B fitting out works in Grade A office properties.
- Whether, in the absence of reliable comparable evidence, the value of Category B fitting out can be assessed by reference to the cost of the works to the tenant or landlord contributions.
- Whether the rateable values of the Shoosmiths and Mando Properties should be increased based on the VO's preferred methodology.
Arguments of the Parties
Valuation Officer's Arguments
- The VTE undervalued the properties by adopting arbitrary and unevidenced uplifts for Category B fitting out.
- In the absence of reliable Category B rental comparables, valuation should be based on the cost of the Category B fit out, reflected either in landlord capital contributions or tenant expenditure, amortised over the useful life or lease term.
- For the Shoosmiths Property, the landlord's large capital contribution of approximately £1.67 million should be treated as payment for the Category B works and used to calculate the uplift.
- The effective Category A rents should be higher than the VTE accepted, with the Shoosmiths Property valued at around £230 per m2 and the Mando Property at £80 per m2 before uplift.
- For the Mando Property, the amortised cost of Category B fitting out, combined with the effective Category A rent, supports a rateable value of approximately £54,000.
Ratepayer's Arguments
- The Category B fit out adds no value above the Category A condition for rating purposes.
- The VTE's lower valuation figures and uplifts should be upheld.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Dawn Bunyan (VO) v Acenden Limited [2023] UKUT 17 (LC) |
Establishes that Category B fitting out adds value above Category A condition for rating assessments. |
The court accepted the principle from Acenden and declined to depart from it, forming the basis for valuing Category B uplift in these appeals. |
| FR Evans (Leeds) Ltd v English Electric Co Ltd (1977) 36 P & CR 185 |
Defines the "rating hypothesis" as imagining a willing landlord and willing tenant negotiating rent for premises in their physical state on the material day. |
The court applied the rating hypothesis to assume premises were let in Category B condition, despite this rarely occurring in reality. |
| London County Council v Erith and West Ham (Churchwardens and Overseers) [1893] AC 562 |
Confirms that the actual occupier is to be regarded as being in the market for valuation purposes. |
Supported the assumption that the hypothetical tenant would value Category B fit out when determining rateable value. |
| Hughes (VO) v York Museums and Gallery Trust [2017] UKUT 200 (LC) |
Emphasizes the primacy of comparable evidence in rental valuation and the importance of adjustments to reflect statutory assumptions. |
The court acknowledged the difficulty in finding comparable evidence for Category B lettings but noted the principle that comparables are preferred where available. |
Court's Reasoning and Analysis
The court began by reaffirming the established principle from Acenden that Category B fitting out increases the rateable value above Category A condition. This principle was not disputed and thus formed the foundation of the analysis.
The court acknowledged the practical difficulty in applying this principle given the rarity of true Category B lettings in the market, which limits the availability of reliable comparable evidence. Grade A offices are typically let in Category A condition, leaving tenants to carry out bespoke Category B fit outs.
Given this evidential gap, the court considered whether cost-based valuation methods could be used, specifically the amortised cost of Category B fitting out as borne by the tenant or reflected in landlord capital contributions.
In relation to the Shoosmiths Property, the court accepted expert evidence that the landlord's second capital contribution of approximately £1.67 million was most probably for Category B works. The court found this interpretation more probable than treating the sum as an unallocated incentive.
The court accepted the VO's methodology of calculating rateable values by starting from headline rents, adjusting for concessions and landlord contributions, and adding back the capital contributions for Category B works to estimate the uplift. The court also considered comparable evidence for Category A lettings in Manchester, concluding that a value of £230 per m2 for Category A condition was more realistic than lower figures.
For the Mando Property, the court found the comparable evidence for Category B lettings sparse and unreliable but preferred it over cost-based calculations, which appeared to yield unrealistically high uplifts. The court concluded that a £30 per m2 uplift over the £80 per m2 Category A rent was reasonable, corresponding to a rateable value of approximately £54,000.
Overall, the court endorsed the VO's criticism of the VTE's arbitrary and unevidenced approach to setting uplifts, emphasizing the need for a principled and evidence-based method.
Holding and Implications
The appeals by the Valuation Officer were ALLOWED.
Specifically, the court ordered that:
- The rateable value of the Shoosmiths Property be restored to £640,000, reflecting a higher valuation than that adopted by the VTE.
- The rateable value of the Mando Property be increased to £54,000, calculated as the product of the floor area and a rate of £110 per m2, reflecting a reasonable uplift for Category B fitting out.
The court did not determine the precise Category B value for the Shoosmiths Property beyond restoring the 2017 list value, noting the list is closed and that further determination would have no legal effect. No new precedent was set; the decision reinforces the principle that cost-based valuation is appropriate where comparables are lacking and that arbitrary uplifts should be avoided.