by Alex Stevens
The controversial subject of the value implications posed by the year to year assumption for rating purposes contrasts sharply with the vast majority of rental evidence, which is derived from longer leases subject to five-yearly upwards-only rent reviews.
The position in 1990 is substantially different from previous revaluations, particularly as the definition of rateable value has been altered specifically to mirror the market-place more closely. If these conclusions are correct the Government may well face a shortfall in revenue from non-domestic rates as it will probably have radically underestimated the scope for reductions in rate liabilities.
The definition of rateable value is given in section 2(1) of Schedule 6 to the Local Government Finance Act 1988, as amended by the Local Government and Housing Act 1989. It is:
… the rateable value of a non-domestic hereditament none of which consists of domestic property and none of which is exempt from local non-domestic rating 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 cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent.
The wording is closely related to that in previous legislation: indeed there has been no substantial change since the Parochial Assessments Act 1836. Subsequent legislation includes the Valuation (Metropolis) Act 1869, the Rating and Valuation Act 1925 and the General Rate Act 1967. All these Acts incorporate the year to year assumption with the exception of the Valuation (Metropolis) Act 1869, where the definition of gross value was “the annual rent which a tenant might reasonably be expected, taking one year with another, to pay for an hereditament”. This definition compares with the Parochial Assessments Act, where the definition is “the rent at which the (hereditament) might reasonably be expected to let from year to year free of all tenant’s rates and taxes…”.
The intention of making only minor alterations to the definition of rateable value must be to ensure that historic case law will continue to be relevant. Presumably it was considered that as this wording has been tested there would be little reason for the basis of rateable value to be substantially different from market rental evidence.
The major difference between the new definition and that in the 1973 list, when the General Rate Act 1967 was in force, is that the majority of properties used to be valued to gross value. This assumed that the landlord undertook to bear the cost of the repairs, insurance and other expenses. It is now assumed that the tenant does so, and this runs parallel with most transactions in the market-place, which are effectively leases on full repairing and insuring terms. This alteration should reduce the amount of adjustments required when analysing the rental evidence for rating valuations.
Meaning of “year to year”
It is essential, when undertaking rating valuations, to understand the meaning of the words “year to year” in the rating hypothesis.
It has been firmly established by case law that a tenancy “from year to year” is one that can be expected to last more than a year. It is thus necessary to envisage a hypothetical tenancy on this footing. The degree of flexibility will assist in achieving consistency, fairness and uniformity of assessments in one list for differing categories of hereditaments.
The year to year hypothesis was succinctly explained by Esher M R in R v South Staffordshire Waterworks Co (1885) 16 QBD 359, when he said “a tenant from year to year is not a tenant for one, two, three or four years, but he is considered as a tenant capable of enjoying the property for an indefinite time, having a tenancy which is expected will continue for more than a year, but which is liable to be put an end to by notice”.
This has been confirmed by subsequent case law and in Humber Ltd v Jones (VO) (1960) 53 R&IT 293, CA, it was said of the hypothetical tenant that “neither can he get a lease for a term of years short or long”.
Even where redevelopment is expected, it has been held that it cannot result in a reduction in rates unless there is statutory intervention such as a confirmed compulsory purchase order and the acquisition of land will take place shortly. This was the position in Dawkins (VO) v Ash Brothers & Heaton Ltd [9] 2 AC 366, HI, but even in these circumstances a reduction of 10% was only given by a majority decision as two judges dissented. This case can be contrasted with the Lands Tribunal decision in Burley (VO) v A&W Birch Ltd (1959) 174 EG 53, when a private landlord gave the tenant one year to quit as he was going to demolish the building. It was held that no reduction should be given.
The assumed term is generally different from that in the market-place. At the antecedent valuation date, April 1 1988, it was a landlords’ market. Consequently most of the leases granted at that time will at least require the unexpired term of the lease to be assumed at rent review, but in many cases will require that the minimum term to be assumed is 10 years or the term of the lease granted. As institutional leases are very often granted for a term of 25 years, subject to five-yearly rent reviews, the security of tenure will be greater than that implied in the rating hypothesis. I would, however, suggest that the reduction in rent for rating valuations, as compared with that in the market owing to the uncertainty of term, is probably too small to be perceived in value terms except by rounding down the valuation.
However, it would seem that the words “year to year” do not only require one to assume a reasonable expectation of continuance but also to value as if the rent were capable of being reviewed each year. In Smith v Churchwardens of Birmingham (1888) 22 QBD 211 part of the judgment was “you must assume a landlord willing to let and a tenant willing to take by the year”. This is why it has, and will continue to be, possible to obtain reductions in rates for the adverse affect of nearby building works, when they are intrusive and last more than six months from the date of the proposal. It is unlikely that similar deals could be negotiated in the market-place, even at lease renewal, as building works are often too transient when put in a five-year rent review setting rather than an annual one.
The Valuation (Metropolis) Act 1869 specifically referred to the “annual rent” and the definition of rateable value in the General Rate Act is “net annual value”.
The obvious comparison of the year to year basis required by the rating hypothesis is that of interim rents in lease renewal situations. They were introduced by the Law and Property Act 1969 to prevent tenants prevaricating at lease renewal and benefiting from the old rent continuing to be payable until after the court has determined the new rent, rather than the new rent being payable from the lease expiry date.
The interim rent usually results in a discount from the open market rent since two factors have to be reflected, which generally have a detrimental effect on value. They are:
(1) a year to year assumption;
(2) regard to the rent payable under the terms of the tenancy.
It is important to distinguish between the two, but if one looks carefully at case law reported between 1980 and 1987 discounts of between 10% and 25% have been given for the year to year assumption. It is perhaps significant that the largest discount of 25% was given when rental growth for the property concerned had been extremely rapid (Charles Follett Ltd v Cabtell Investments Ltd [7] 2 EGLR 88; (1987) 283 EG 195, CA).
I would also suggest that an interim rent is broadly similar to the rating hypothesis, as it is reasonable to assume continuance unless a hostile section 25 notice under Part II of the Landlord and Tenant Act 1954 has been served by the landlord to oppose the grant of a new lease.
This discount acknowledges that the rent will be capable of being reviewed each year rather than be set for a term of five years. Naturally the concession will be larger if the tenant’s expectation of rental growth is high. In the year to May 1988 the Investors Chronicle/Hillier Parker Rent Index for all commercial properties increased by a massive 36.2%. Rarely has such a high level of real rental growth been seen. It would be unrealistic for a tenant to anticipate growth to continue at that rate, but it is worth noting that if rents were expected to rise 20% each year for five years the theoretical concession for an annual rent, as compared with a rent fixed for five years, would need to be 36.4%. Clearly it is necessary to make an adjustment to reflect the year to year hypothesis.
A second comparison would be to look at what overage tenants pay for rent reviews less frequent than five years. Unfortunately this almost never happens in the market-place and, therefore, one can derive assistance only from agreements or determinations by experts or arbitrators. Regretfully, from the landlord’s point of view, it is extremely difficult to prove an overbid to a third party as there is likely to be a dearth of open market and rent review evidence. In my experience it is often accepted that the uplift given to the landlord is substantially less than if one assumed realistic growth rates, and calculated the theoretical uplift. This is partly because very often a tenant could not afford to stay in business if such a large uplift were made initially.
For this reason it would be unrealistic to expect a tenant taking a lease on a year to year basis to make a discounted bid of 36.4% when compared with the open market evidence. Nevertheless, I would expect a substantial adjustment to be made, and I have no doubt that it would be more than the somewhat unrealistic amounts of overage that are given at rent review for each year over five. In my experience, as a generalisation, one would expect only 1% for each year over five years if the review pattern was for 14 or 21 years. I suggest that a 4% downward adjustment when there was such a rapidly rising market would be a nonsense.
Although it would appear that sizeable discounts should be expected it is interesting to note that the Valuation Office have not conceded them in the past. I believe there are two explanations.
First, property rental inflation is a relatively new phenomenon and that is why 19th-century leases were granted for 999 years without review, reducing to 99 years without review by the early 20th century. Indeed it was not until the early 1960s that the 21-year review pattern gave way to a 14-year review pattern and in the late 1960s seven-yearly rent reviews became common. Five-year rent review patterns had only recently been introduced at the time of rating revaluation 1973. When valuing for rating purposes before 1973 it would not have been necessary to give the annual review assumption serious consideration. With little or no property rental inflation, a tenant would not adjust this rental bid for a year to year basis rather than a longer term. The previous revaluations had been in 1963 and 1956.
Second, previous revaluations had not been so scientific and precise as this one. After all it was not until 1983 that the K Shoe Shops Ltd v Hardy (VO) (1983) 269 EG 37, HL, decision concluded that the valuation date for the 1973 revaluation was April 1 1973. Without being certain of the valuation date it is impossible to value accurately. This time we have an established date of April 1 1988. Where no adjustment has been made from a basis directly derived from the open market letting or rent review evidence, I would suggest that the rateable value is too high.
Each case will have to be treated on its merits, having regard to local market conditions and other factors, but I would suggest that in most cases the reduction should be substantial.
If I am right, the resultant shortfall of income from non-domestic rates could prove embarrassing to the Government. It will not be possible to remedy the situation until 1995, since the uniform business rate is linked to the retail price index and thus there is no “clawback” remedy to rectify a large loss of rateable value.
