Non-domestic rating – Valuation – Net internal area – Ratepayer installing internal staircase between three floors of demised office premises – Valuation Tribunal for England excluding area taken up by staircase from net internal area for purposes of rating valuation – Whether staircase area to be brought back into account by end adjustment for tenant’s improvements – Whether similarly to be included under doctrine of “minor works” – Appeal dismissed
The ratepayer held three 10-year leases of office premises spread over three floors of a building in London EC2M. The appellant valuation officer entered those premises in the 2010 non-domestic rating list with a rateable value of £1.7m with effect from June 2011. On appeal by the ratepayer, it was agreed that the rateable value should be reduced to £1.45m to take into account the effect of ongoing construction works to an adjacent property and the Crossrail project. It was further agreed that the premises should be valued at a rate of £370 per m2. The Valuation Tribunal for England (VTE) went on to consider the ratepayer’s argument that the rateable value should be reduced by a further £10,000, to exclude from the net internal area of the premises the space occupied by a private internal staircase between the three floors.
The ratepayer had installed the staircase for security reasons as part of fitting-out works carried out before it moved into the premises, with the landlord’s consent but with an obligation to reinstate at the end of the term. The rent was not adjusted to take account of the staircase, although it would be taken into consideration on the first rent review. The staircase occupied a total floor area of 55.07m², or 1.2% of the total demise, and was in place and in use at the material day.
The VTE held that the floor area of the staircase should be excluded and the rateable value reduced accordingly. It rejected the appellant’s contention that the value of the staircase should be brought back into account as a tenant’s improvement by adding an end adjustment of 1.20%. It noted that, under section 3.14 of the RICS Code of Measuring Practice (6th ed), stairwells were to be excluded and further held that the premises had to be valued in accordance with the “rebus sic stantibus” rule, such that matters affecting the physical state or enjoyment of the hereditament were to be taken to reflect the premises as they stood at the material day.
The appellant appealed. In addition to the arguments that it had advanced before the VTE, it contended that the “doctrine of minor works” applied so that the area of the staircase was to be valued as offices as if the staircase had been removed.
Held: The appeal was dismissed.
It was common ground that the measurement of the premises should be based on the sixth edition of the code, which was effective from September 2007. The staircase was to be excluded as a “stairwell” within the meaning of section 3.14 of the code. Although the term “stairwell” was not specifically defined in the code, it had to mean the space taken up by the staircase, and it was irrelevant for that purpose whether or not the staircase itself was enclosed. The VTE was therefore correct in determining that the area occupied by the staircase should be excluded from the net internal area.
The staircase did not fall to be included, pursuant to note 5 of the code, as a part of the demised usable space that came within an exclusion only because of subsequent conversion by the tenant. Note 5 applied when dealing with valuations for the purpose of rent reviews or lease renewals. In that context, it would not usually be appropriate to exclude from the net internal area demised usable space converted by the tenant to an excluded category because almost all contractual rent review clauses, and the statutory provisions with regard to lease renewals, contained a specific disregard of the effect on rent of tenant’s improvements. The rating hypothesis was fundamentally different. For rating purposes, the hereditament was to be valued rebus sic stantibus, as it stood in its actual physical state at the relevant date, in accordance with para 2 of Schedule 6 to the Local Government Finance Act 1988, and not, as set out in note 5, as demised.
No end adjustment should be made for the staircase as a tenant’s improvement. The staircase was in place at the material day, and was therefore part of the hereditament that was available and to let. The question of whether the opportunity to install a staircase would be in the prospective tenant’s mind when formulating its bid for the premises was therefore irrelevant. An end adjustment would only be appropriate if the agreed rate of £370 per m2 was based on the rental value agreed for the actual letting of the premises to the ratepayer in their unimproved condition, and if the hypothetical tenant was to be assumed to have the same requirements as the ratepayer or to be willing to pay more for the premises with the staircase than without. There was no evidence that that was the case. It was further relevant that the ratepayer had not been obliged to install the staircase, there was no adjustment to the rent for the works until the first rent review and there was an obligation to reinstate at the end of the term: Edma (Jewellers) Ltd v Moore (VO) [1975] RA 343 distinguished.
For the same reasons, the staircase could not be brought into account under the doctrine of minor works, under which the physical state of the premises was to be taken to reflect minor alterations that a prospective occupier would consider making when formulating its rental bid. Since the staircase was present on the valuation date, there was no question of the hypothetical tenant paying to install it. Nor was it likely that an incoming hypothetical tenant would pay to remove the staircase after taking the hypothetical tenancy and regard the cost of doing so as an expense that it could ignore when negotiating the rent. The staircase would be of some utility even to a tenant who would use the building in a more conventional manner than the ratepayer. Moreover, the removal of the staircase would no doubt require the landlord’s consent, which would probably be available only at the price of an obligation to reinstate on vacating the premises. There was nothing in the appellant’s evidence to justify a finding that a hypothetical tenant would contemplate behaving in that way.
The valuation exercise was simpler than the appellant had appreciated. The hereditament to be valued in its actual condition included a staircase, the presence of which reduced by 55.07m² the net internal area to be taken into account. The critical question was whether the hypothetical tenant wishing to take a tenancy of the premises for general office use would pay more than the agreed main office rate of £370 per m² for the hereditament because of the presence of the staircase or, in other words, whether the presence of the staircase added value to the premises. That was a matter of valuation dependent on evidence. Not every alteration carried out to suit the needs of a particular tenant would add value to the premises, from the perspective of the general tenant. The appellant had adduced no comparable evidence to show that the hypothetical tenant would pay more for the premises with the staircase than without it: Wilson-Smith (t/a Crumpet Ltd) v Attrill (VO) [2011] UKUT 287 (LC); [2011] RA 499 distinguished.
Jonathan Davey (instructed by the legal department of HM Revenue and Customs) appeared for the appellant; the ratepayer did not respond to the appeal.
Sally Dobson, barrister
Click here to download the transcript of Re Manning (VO)’s appeal