Discussion
43.If there is a rent passing on the subject hereditament at the AVD, that would ordinarily be a good starting point from which to assess rateable value. But here we have a rent not only of the hereditament, but of the whole of the appeal building. While Mr Wanderer’s adjustments can be reviewed and if necessary adjusted, in reality the analysis is of limited assistance. Although it can probably be taken that the hypothetical landlord of the appeal property is that of the appeal building (otherwise there would be a flying freehold of the upper floors) the same cannot be said for the hypothetical tenant, who cannot be assumed to be the same tenant as one taking a lease of the whole building after adjustments are made to his or her assumed liabilities as Mr Wanderer has done.44.Secondly, the leases significantly depart from the terms of the notional letting under the rating hypothesis. The tenant has no security of tenure as the leases were contracted out of the relevant provisions of the Landlord and Tenant Act 1954, and the landlord can recover possession on one month’s notice. The tenant’s ability to assign the lease is prohibited, and subletting is extremely restricted. It is therefore debatable whether the tenant can assume a letting from year to year with a reasonable prospect of continuance as required under the rating hypothesis.45.Mr Byrne was rightly sceptical of the usefulness of the letting, but he agreed that if it were to be analysed, Mr Wanderer’s approach was logical, removing from the headline rent of the whole building elements for insurance, rent and rates liabilities. But there is an unresolved circularity in Mr Wanderer’s approach, arguing as he does for a nominal rateable value, but in doing so using the 2010 list rateable value to generate a rates payable figure of £58,255.46.In my view, if the exercise were to be conducted, only a nominal figure should be attributed to the upper floors. By the end of the hearing, it was common ground that they attracted very little value. They are in disrepair, having been vacant since Marks and Spencer relocated and are partly inaccessible. The photographs show dated accommodation. 47.If I deduct from the headline rent of £70,000 an average of the insurance figures (£4,250), a nominal rent and rates liability for the upper floors (say £1,000) and for the moment using Mr Wanderer’s rates for the ground floor/basement (£58,255), a net rent of around £6,500 per annum or thereabouts is arrived at. 48.We know that Leading Labels were paying £10,000 for 50% of the space – which can be taken to be 50% of the ground floor and basement, since the upper floors were unoccupied. Leading Labels’ rent was inclusive of all outgoings, so perhaps a net rent of £6,500 is about right. But it would not take much of an adjustment to tip the net rent into negative territory. However, as I say I am sceptical as to the usefulness of the method at all.49.If the net rent is negative, resulting in a rateable value of £1, the question is whether the appeal property was simply unlucky – the property without a tenant willing to pay a significantly positive rent when the music stopped and the limited pool of tenants in this game of market musical chairs had sat elsewhere – or whether the wider evidence demonstrates, as Mr Wilcox submitted, an utterly turgid market in which there was no longer any general demand for large stores in the town centre.50.Of course, under the rating hypothesis we must assume that a letting takes place. There was no question that, unlike the appeal building maybe, the appeal property had reached the end of its economic life. This appeal turns on whether there is sufficient evidence of general demand to indicate that the hypothetical tenant would pay a positive rent, and if so at what level. Mr Byrne accepted that, in principle, if there were no general demand, a nominal rateable value may theoretically be appropriate. 51.As Lord Carnwath explained in Hewitt v Telereal Trillium [2019] UKSC 23 (at 58):“…even in a “saturated” market the rating hypothesis assumes a willing tenant, and by implication one who is sufficiently interested to enter into negotiations to agree a rent on the statutory basis. As to the level of that rent, there is no reason why, in the absence of other material evidence, it should not be assessed by reference to “general demand” derived from “occupation of other … properties with similar characteristics”.52.In this appeal, we do have a small number of nearby properties which have reasonably similar characteristics to the appeal property. 53.First, 3-6 Coventry Street, let in August 2013. While nearly two years before the AVD, neither expert made any adjustment for movement in rental values over time. That is to my mind significant. Mr Wanderer makes an adjustment of 10% to reflect the rent review cap. I agree with him that there is some value in certainty, but I think he has over-valued the level of that certainty in circumstances where it would have been highly unlikely that the cap would have been breached. Comparing a lease with a rent review cap with one where there is no cap, I accept that a tenant would be prepared to pay, and a landlord would expect to receive, some recognition of the cap in the initial rent. But having regard to the market circumstances at the time, and given that neither valuer thinks that rental levels were on the rise, I would not put that at more than 2.5%.54.The exclusivity clause presents a conundrum. Again, comparing a lease with such a clause with a lease without, similar comments apply. I agree with Mr Wanderer that it is what is in the mind of the parties when the lease was entered into that is relevant. But the wrinkle is that one of the ‘triggering’ competitors, B&M, were already in place because their previous lease of 1-6 St George’s Mall dates to 2006. It is not clear to me whether a lease renewal ‘triggered’ the rent reduction for 99p Stores at 3-6 Coventry Street. If it did, that would only have been from 2016, rather than from the start of the lease.55.It is possible that 99p Stores were seeking to prevent B&M moving within the centre – that would clearly have counted as a triggering event – and the other listed retailers from coming in. So again, I agree in principle with Mr Wanderer that some reflection should be made, but I think he has overcooked it. On closer examination, the landlord has some leeway under the exclusivity clause; it does not apply to any assignment or subletting by existing tenants within the centre, which would clearly have put the landlord in a difficult position. It only applies to new lettings undertaken by the landlord. And it only applies to any such new lettings before 25 August 2018, being the end of the fifth year of the term. The landlord’s hands are untied in the second five-year period. However, the clause is clearly of value to the tenant to prevent competition directly within the centre. In my judgment the clause would attract a 10% addition to the rent.56.As for the amount by which the rent should be adjusted to reflect the inclusive service charge, the evidence is inconclusive. 3-6 Coventry Street forms part of the Swan Centre, but its main entrance is on Coventry Street. There is a rear access into the Centre and, I assume, some form of loading facility, but the main footfall into the unit will not require access into the centre. The service charge heads were not available in evidence, but it is probable, in my view, that the liability for service charge for the unit would have been less, pro-rata, than the units within the Centre itself, e.g. B&M’s unit at 1-6 St George’s Mall, which we know was subject to a service charge cap, of £32,292, equating to £1.75 per sq ft. The cap would suggest that the headline service charge would be something more than £1.75 per sq ft. but reflecting the location of the unit, with only rear access into the centre, I would estimate the amount which the landlord would be prepared to absorb from the rent for the headline service charge would be £2.50 per sq ft, or say £49,500.57.Both experts deducted percentages from the headline rents. In my view they should be applied to the base rent, as they are extra items of rent to reflect the advantages to the tenant. In other words, using my combined 12.5% for rent review cap and exclusivity clause, the correct calculation is base rent + 12.5%, rather than the numerically different final figure less 12.5%. Therefore, the calculation is £80,000/1.125, arriving at £71,111. Allowing for the service charge inclusion of £49,500, in my judgment the true net rent on 3-6 Coventry Street is in the order of £21,500 per annum, or say £11.75 per sqm.58.Turning now to 1-6 St George’s Centre, the experts agreed that the net rent after the deductions for rent-free period and service charge holiday was £44,878. That isn’t right. The term of the lease is from 18 August 2016 to 31 December 2019, so say 3.3 years. The 15-month rent and service charge holidays were agreed at £165,365. If spread equally over a term of 3.3 years, the deduction would be £50,110, and the net resulting rent would be £49,889 rather than the £44,878 which the experts agreed. 59.The main dispute was in respect of the dilapidations waiver. In my view Mr Wanderer’s analysis is questionable for three reasons. First, there was a schedule of condition in place which would probably reduce the tenant’s dilapidations liability. Secondly, we only have the landlord’s view as to the capital value of the works, but we have nothing from the tenant’s representative to counter it. Thirdly, even if the capital value is right, it is likely (as Mr Wanderer subsequently accepted) that that the tenant could resist a claim for dilapidations, relying on section 18 of the Landlord and Tenant Act 1927, especially, on the appellant’s case, rents were static and the market sluggish, because it is questionable as to the effect on the landlord’s reversion.60.But again, is a lease with a part dilapidations waiver more valuable to the tenant than one without? We only have an untested figure from the landlord. I am conscious that this was a short lease, with a fifteen-month rent and service charge holiday. The landlord was evidently keen to keep B&M in place, and might have been willing to write off a substantial dilapidations sum. 61.I am not satisfied that there is an entirely reliable way of devaluing this comparable, but am more persuaded by Mr Byrne’s view than Mr Wanderer’s. Doing the best I can with the evidence, If take 40% of the landlord’s quoted £255,000, and devalue it equally over the term of 3.3 years, say £31,000 would be deducted from the rent, resulting in a net rent of £18,889, or just over £11 per sqm. Arguably, that analysis favours the appellant, and it is possible the deduction for dilapidations should be lower.62.1 High Street is, by common consent, a less useful comparable than those above. I agree with Mr Wanderer’s analysis of spreading the rent-free period over the first five years, bringing the rent down from £60,000 to £48,000. But I do not accept that the tenant’s 80% rates relief should entirely be treated as an overbid. A more proportionate analysis would be to take say half - £25,000 – to arrive at a net rent of say £23,000, or £15 per sqm. But that assumes the unit is capable of analysis on an overall basis – the experts agreed that a zoned approach would be adopted. While neither valuer asked me to place significant weight on the transaction, given the general dearth of evidence, to my mind it helps fill in a fairly empty canvas.63.I should add that I found nothing of use in the two freehold transactions, save for background information, including that 1 Worcester Street remained available and to let for some years.64.On any view, the evidence in this appeal is patchy. An analysis of the rent on the appeal property is questionable. 3-6 Coventry Street analyses at £11.75 per sqm, based on fairly heavy assumptions as to service charge. 1-6 St George’s Mall analyses at just over £11 per sqm, but again without total confidence. And 1 High Street shows £15 per sqm, but on a unit which should really be zoned rather than valued overall.65.It is entirely unsurprising that the parties cannot agree what the answer should be.66.Standing back, I accept Mr Wilcox’s submission that there is no evidence of a letting that is on sufficiently conventional terms to not require adjustment of varying degrees of effort, to convert them to the statutory hypothesis. Putting aside that of the appeal building for the moment, all three lettings involve significant inducements – be they rent review caps, exclusivity clauses, service charges included, dilapidations waived or rent-free periods. But I am satisfied that there is evidence of positive rents being paid, even after these inducements and that, despite Mr Wilcox’s attractive submissions, there was general demand for large stores. 67.I agree with Mr Byrne that the deconstruction of the headline rent of the appeal building to ascertain the net rental of the appeal property is not persuasive. In the light of an analysis of the limited evidence, in my judgment a fair approach is to value the appeal property by applying £11 per sqm, thus £17,776 but say £17,750 RV. 68.The appeal is therefore allowed, and I determine a rateable value of £17,750 with effect from 1 April 2017.P D McCrea FRICS FCIArb 21 June 2022