by Alex Stevens
In this article I examine the difficulty of assessing the rateable value for hereditaments within enterprise zones once their status is lost.
The implications of the loss of the 10-year rate exemption will be considerable and add substantial financial burdens both to the owners and occupiers of most commercial and industrial property. Owing to the hypothetical situation which the valuer is asked to envisage when assessing the rateable value, there will be scope to introduce many and varied arguments when discussing rating appeals with the valuation officers.
Benefits enjoyed by enterprise zones
The concept of enterprise zones was introduced by Schedule 32 to the Local Government, Planning and Land Act 1980. The idea of the zones was to revitalise tracts of derelict or underused land where it was felt that private-sector initiatives alone were unlikely to regenerate the area.
In order to encourage development, enterprise zones were given benefits for a period of 10 years which included:
(1) Exemption from rates on industrial and commercial property.
(2) Exemption from development land tax.
(3) 100% allowance for corporation and income tax purposes for capital expenditure on industrial and commercial buildings.
(4) Exemption for employers on training levies.
(5) A simplified planning regime.
(6) The remaining government controls to be processed more speedily.
(7) Applications from businesses in enterprise zones for some customs facilities were to be given priority or, in some instances, relaxed.
(8) Government relaxation of requests for statistical information.
(9) Industrial development certificates were waived.
Valuation assumptions
All these advantages have to be ignored when assessing the rateable value because the Valuation for Rating (Former Enterprise Zones) Regulations 1991, which came into force on March 20 1991, specifically amended the definition of rateable value and directs the valuer to assume “that on the relevant day no area has been designated as an enterprise zone”.
The rateable value ” … shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant’s rates and taxes and to bear the costs of the repairs and insurance and other expenses (if any) necessary to maintain the hereditament in a state to command that rent”.
The valuation date for rating purposes is April 1 1988 and this will be amended only when there is a revaluation, which should be in 1995.
Introduction of rates
There are 21 enterprise zones in England and Wales and a further three in Scotland. A few of the earlier zones, including Corby, Dudley, Lower Swansea Valley, Salford/Trafford, Tyneside and Wakefield, have already lost their rates exemption. Almost all will lose their exempt status prior to the next revaluation and the Isle of Dogs will be brought into the rating list in April 1992. The loss of status will result in all occupiers being liable for rates and the owners of empty office and retail property becoming liable to pay 50% of the occupied rate after a three-month period of grace. With the huge oversupply of new accommodation which exists in many enterprise zones, a number of developers are likely to be faced with hefty rate bills.
The machinery for entering a hereditament into the rating list is that, shortly after the enterprise zone status is lost, the valuation officer will alter the rating list and he then has a duty to inform the ratepayer of the alteration within six weeks. There is then a limited period of six months in which to make any appeal from the date of the notice of alteration. Thereafter, appeal rights are restricted to exceptional specific circumstances.
Assessing the rateable value
Although the antecedent valuation date is April 1 1988, the valuer is asked to have regard to the physical circumstances as at the date of the alteration to the rating list in addition to disregarding the enterprise zone designation.
The problem has been further exacerbated by a recent Lands Tribunal decision Shearson Lehman Brothers Ltd v Humphrys (VO) [1] 32 EG 67; [1991] 33 EG 98; [1991] 34 EG 71 where the Lands Tribunal further widened the accepted definition of rebus sic stantibus to include “all that could reasonably affect the mind of the intending tenant”. When applying this wording the members of the tribunal were specifically looking at the Broadgate development in an incomplete state and having regard to the tenant’s perception of how the rental bid might be affected, knowing that the development in the immediate vicinity would be completed shortly and that numerous other phases were planned.
I do not believe that the Lands Tribunal modification of the rebus sic stantibus rule will materially affect rating valuations, as the definition of rateable value includes the words “year to year” even though case law has made it clear that the term envisaged is not merely for one year but an indefinite period. The tenant would thus make a rental bid for only one year, albeit with an expectation of continuation, and thus events foreseen by the tenant more than one year away would not affect value.
Enterprise zones will have altered substantially since April 1 1988 and so rent, even if one attempts to adjust it for tax and other monetary advantages, will not be a conclusive guide. The valuer must, for instance, consider the oversupply of accommodation referred to earlier. More-over, comparing values of property immediately outside the enterprise zone would be a misleading exercise. This is because most property outside zones is likely to be older (new investment would have been channelled into the zones rather than its surrounds) and, second, values outside the zones are likely to have been adversely affected by the designation of the zone. An example of the difficulty of valuation is that the enormous concentration of offices found within the Isle of Dogs has no comparable situation and so valuations will be a matter of opinion and judgment. It will not be possible in such instances to look at the immediate area for values. The effect on values outside the zones was carefully examined in the case of Clement (VO) v Addis [8] 10 EG 129, where it was held that section 20 of the General Rate Act 1967 was broad enough to entitle the valuer to have regard to intangible as well as tangible matters. The implications were so widespread that the Secretary of State for the Environment immediately overturned the decision by introducing section 121 of the Local Government and Finance Act 1988 which restricts the valuer to having regard to physical changes rather than intangible matters when considering what constitutes a material change of circumstance.
A valuation by analysing April 1988 rents and then deducting for the benefits of rates exemption, training levies and any capital allowances that an occupier may be able to obtain either directly or indirectly, would then have to be adjusted for differences in physical circumstances that took place between April 1988 and the valuation date. Complex leaseback deals have been set up to enable tenants to benefit from capital allowances and details of rents will be virtually impossible to work out because the amount of detail and interpretation of what is a rateable improvement will make the task complex. The picture may be further complicated by rent release grants available within areas controlled by development corporations, some of which overlap with enterprise zones. These grants partially mitigate the effect of an increased rent where the tenant expands into larger premises. I believe that the number of adjustments required to the rent will make the valuation inaccurate and questionable if pursued in a purely scientific manner.
It is certainly my experience from the limited rateable values in existence in former enterprise zones that the valuation officers themselves appear to have largely ignored the rents within the zones. However, I believe that in some instances they have analysed comparable rents outside the zone and then made an addition. I assume this is to reflect that the surrounding areas, where investment was not encouraged, generally saw their values depressed. I do not think this approach is sound and believe it is necessary for valuers to broaden their search for evidence beyond the immediate locality. Certainly there are no constraints imposed on the valuer in geographical terms under the rating hypothesis. It was successfully argued in Shrewsbury School v Shrewsbury Borough Council and Plumpton (VO) (1960) 176 EG 143 that evidence of other public schools outside the rating area was permissible and thus good evidence. This was examined in Shearson Lehman Bros Ltd, referred to earlier, where it was concluded that the best evidence was in a different rating area.
Recently the draft rating list for the Isle of Dogs Enterprise Zone was published, giving 1,204 entries in Tower Hamlets and five in the London Borough of Newham. Our preliminary investigations suggest that the valuation officer has had regard to rents paid at the antecedent valuation date and then made a deduction to reflect the saving in rates until the zone expires on April 25 1992. Since 1988 the infrastructure has improved and this material change in circumstance has to be considered under the rating hypothesis. However, a huge amount of new office space, including Canary Wharf (which is not included in the draft list), has also been built and I believe that the economic consequences resulting from that physical change can be considered. I would expect the increased supply of space to more than offset the benefits of the improved infrastructure and, consequently, the assessments need further adjustment.
Valuations are extremely complex in most enterprise zones and the complexity has been exacerbated in the Isle of Dogs by there being virtually no comparable nearby prestigious offices. It is necessary to weigh up all the advantages and disadvantages in location, infrastructure, age, prestige, other amenities and ability to attract labour etc. The valuations will require the valuer to exercise skill and judgment, rather than rely on scientific comparisons.
Discrepancy in rateable values
Property immediately outside enterprise zones, and that within, may have widely different rateable values, even when comparable, owing to the necessity to ignore the existence of the zone for those properties within it and physical changes at the appeal date. Furthermore, for properties built prior to April 1990 in depressed areas, with high rate poundages in 1989-90, there is likely to be a transitional adjustment downwards when calculating the rates payable. There will be no transition for properties in enterprise zones and, in order to qualify, the property has to be entered in the valuation list and rating list as at March 31 1990 and April 1 1990 respectively. Although the properties were entered in the valuation list where they existed prior to March 31 1990, the DOE decided not to include them in the new rating list until such time as rates became payable. Transition downwards has not been announced for the 1992-93 rate year and, indeed, it may be abolished. If it does continue, hereditaments in enterprise zones will continue to enjoy an advantage to which their neighbours are not entitled.
Conclusions
I can conclude only that the legislation has left the valuer with an extremely difficult task when assessing the rateable value and that, whether inadvertently or not, the abolition of enterprise zone status will not immediately leave occupiers of comparable property in the zone paying the same rates as those immediately outside. Skill and judgment will be required by the valuer owing to the hypothesis to be assumed being so far divorced from the actual market-place.
