Case No. UKUT-24-(LC)

56.In terms of the general purpose of the rating valuation hypothesis, it is useful to keep in mind the classic statement of this purpose in Poplar Assessment Committee v Roberts [1922] 2 AC 93. At page 104 Lord Buckmaster described the purpose of rating valuation in the following terms: “Just as the tenant is hypothetical, so also is the rent; it is only used as a standard which must be examined without regard to the actual limitation of the rent paid by virtue of covenant as between landlord and tenant, and also, as I regard it, to statutory restrictions that may be imposed upon its receipt. From the earliest time it is the inhabitant who has to be taxed. It is in respect of his occupation that the rate is levied, and the standard in the Act is nothing but a means of finding out what the value of that occupation is for the purposes of assessment. In my opinion, the rent that the tenant might reasonably be expected to pay is the rent which, apart from all conditions affecting or limiting its receipt in the hands of the landlord, would be regarded as a reasonable rent for the tenant who occupied under the conditions which the statute of 1869 imposes.”57.In the same case Lord Parmoor explained the essential principles of rating law in the following terms, at page 119:“It has long been recognized, as a matter of principle in rating law, that to make actual rentals the basis of rateable value would contravene the fundamental principle of equality, both between the rate contributions from individual ratepayers, and between the totals of rate contributions levied in different contributory rating areas. In effect the result would be to make the amount on which the occupier of property is liable to pay rates dependent in many cases on the contractual relationship between a particular landlord and tenant, whereas it is dependent in all cases on a statutory direction applicable on the same principle to all hereditaments, and intended to insure equality of treatment as between the occupiers of rateable property and the rating authority.”58.In Hewitt v Telereal Trillium Ltd [2019] UKSC 23 [2019] 1 WLR 3262, at [32], Lord Carnwath JSC described the Poplar case as providing an authoritative and uncontentious statement of the general approach to rating valuation. 59.Turning specifically to the statutory valuation exercise, there is a considerable body of case law which sets out principles relevant to the valuation exercise. In particular, this case law addresses the question of how, in the valuation exercise, one applies the matters referred to in paragraphs (a) and (b) of paragraph 2(7) of Schedule 6; namely matters affecting the physical state or physical enjoyment of the relevant hereditament and the MCO of the relevant hereditament.60.It is an established principle of rating law that a hereditament is to be valued as it in fact existed at the material day. In SJ&J Monk v Newbigin [2017] UKSC 14 [2017] 1 WLR 851 Lord Hodge JSC explained this principle, which he identified as the reality principle, in the following terms, at [12]:“12 For many years and long before Parliament enacted Schedule 6 to the 1988 Act, it had been an established principle of rating law that a hereditament is to be valued as it in fact existed at the material day. This principle, which in the past was described by the Latin phrase, rebus sic stantibus (i e as things stand), and is often referred to as “the principle of reality” or “the reality principle”, was stated by Lord Buckmaster in Assessment Committee of the Metropolitan Borough of Poplar v Roberts[1922] 2 AC 93,103, thus:“although the tenant is imaginary, the conditions in which his rent is to be determined cannot be imaginary. They are the actual conditions affecting the hereditament at the time when the valuation is made.”Similarly, in Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1937] AC 419, 437, Lord Maugham, when explaining the legal context in which the Rating and Valuation Act 1925was enacted, said:“The hypothetical tenant was assumed to be a tenant from year to year with a reasonable prospect of continuing in occupation; but the hypothetical rent which the tenant could give was estimated with reference to the hereditament in its actual physical condition (rebus sic stantibus), and a continuance of the existing state of things was prima facie to be presumed.”61.Also important is what Lord Hodge went on to say, at [13], citing an earlier exposition of “the reality principle”, by Lord Pearce and Lord Wilberforce:“13 In Almond v Ash Brothers & Heaton Ltd [1969] 2AC 366, in which the House of Lords held that the Lands Tribunal had been correct to take account of an existing demolition order in assessing the hypothetical rent, Lord Pearce stated, at p 382:“one must assume a hypothetical letting (which in many cases would never in fact occur) in order to do the best one can to form some estimate of what value should be attributed to a hereditament on the universal standard, namely a letting “from year to year”. But one only excludes the human realities to a limited and necessary extent, since it is only the human realities that give any value at all to hereditaments. They are excluded in so far as they are accidental to the letting of a hereditament. They are acknowledged in so far as they are essential to the hereditament itself.”In the same case, Lord Wilberforce described the reality principle thus, at pp 385—386:“The principle that the property must be valued as it exists at the relevant date is an old one . . . The principle was mainly devised to meet, and it does deal with, an obvious type of case where the character or condition of the property either has undergone a change or is about to do so: thus, a house in course of construction cannot be rated: nor can a building be rated by reference to changes which might be made in it either as to its structure or its use.”In this passage Lord Wilberforce referred to each of what is generally regarded as the two limbs of the reality principle, namely the physical state of the property and its use.”62.In explaining the continued importance of the reality principle, Lord Hodge also made reference, at [14], to the decision of the Court of Appeal in RF Williams (Valuation Officer) v Scottish & Newcastle Retail Ltd [2001] EWCA Civ 185:“14 The reality principle continues to be a fundamental principle of rating and is manifested in Schedule 6 to the 1988 Act, in particular in paragraph 2(6)(7). In Scottish & Newcastle Retail Ltd v Williams [2001] LLR 732 the Court of Appeal upheld the decision of the Lands Tribunal that the reality principle meant that it was assumed that a hereditament was in the same physical state as upon the material day, save for minor alterations, and could be occupied only for a purpose within the same mode or category of purpose as that for which it was occupied on the material day. Thus in that case two public houses in a shopping centre had to be valued as public houses and not as retail units.”63.This brings us to Scottish & Newcastle, which was identified by both counsel as the key authority in the present case. In oral submissions Mr Wilcox identified the case as the leading authority on the correct approach to the determination of the MCO of a hereditament. We did not understand Mr Williams to dissent from this characterisation of the case.64.Scottish & Newcastle was a decision of the Court of Appeal which was concerned with the valuation, for rating purposes, of two units in a shopping centre. One of the units comprised a pub. The other comprised a pub and a licensed café-bar. The rents the units commanded, as licensed premises, were a good deal lower than would have been achievable for shops in the same position. The valuation officer contended that the units should be valued by reference to their potential for more lucrative use as shops. The Court of Appeal upheld the decision of the Lands Tribunal (as it then was) that the units could not be valued, for rating purposes, by reference to their potential use as shops. 65.The only substantive judgment in the Court of Appeal was given by Robert Walker LJ (as he then was), with whom Hale and Aldous LJJ agreed. In order to understand why the dispute in Scottish & Newcastle arose, it is useful to have in mind the rival figures for the rateable value of each property, depending upon whether the properties could be valued by reference to their potential for use as shops or only by reference to their existing use. As Robert Walker LJ explained, at [4] and [5]:“4.The essential difference between the parties is whether these two sets of licensed premises ought (as the Buckinghamshire Valuation Tribunal decided, and as the valuation officer contends in this court) to have been valued so as to take account of their more lucrative potential as shops, or ought (as the Lands Tribunal decided, and as Scottish and Newcastle and Allied Domecq contend in this court) to have been valued simply for what they were. That way of putting the issue oversimplifies a complex matter on which this court has had the benefit of a careful and thorough decision of the Lands Tribunal, examining case-law going back to the eighteenth century. But it gives a general indication of the difference between the parties.5.What is at stake has been quantified in money terms by agreement between the parties, and the difference is striking. It was agreed that if the valuation officer’s contentions were fully upheld the rateable values ought to be £132,000 for the Rose and Castle and £210,000 for the City Fayre/City Duck. If on the other hand the ratepayers’ contentions were fully upheld the values would be £29,500 and £50,000 respectively. The former values were adopted by the Valuation Tribunal. The latter values are adopted in the orders of the Lands Tribunal now under appeal.”66.In relation to the assumption as to the mode or category of occupation of the relevant hereditament (the MCO), as that expression is used in paragraph 2(7)(b) of Schedule 6, and after reviewing the authorities, Robert Walker LJ concluded as follows, at [68]-[70]:“68. In my view the Lands Tribunal was plainly right in concluding that Parliament has, in paragraph 2(3) to (7) of Schedule 6 to the 1988 Act, recognised that “mode or category of occupation” is a material factor in valuation for rating purposes, so confirming that the rebus sic stantibus principle has a second limb, user, in addition to its first limb, physical condition. Indeed Mr Holgate did not dispute this. 69. In my view the Lands Tribunal was also plainly right in rejecting the formulation in Midland Bank v Lanham (“all alternative uses to which the hereditament in its existing state could be put in the real world, and which would be in the minds of competing bidders in the market, are to be taken as being within the same mode or category ”). That formulation is either self-contradictory, or at best reduces the second limb of the rule (recognised in para 2(7)(b) of Schedule 6) to a pale reflection of the first limb (recognised in para 2(7)(a)). 70. Mr Holgate criticised the formulation in Fir Mill as unhelpful in that it was referring only to general categories of use. He urged the court not to treat its language (“a shop as a shop, but not as any particular kind of shop; a factory as a factory, but not any particular kind of factory”) as if it were a statutory text. I would certainly not treat that as a statutory text. But Parliament’s adoption of the expression “mode or category of occupation” must be taken as recognising that the formulation in Fir Mill is on the right lines, even if its precise scope has to be worked out on a case by case basis.”67.Robert Walker LJ thus confirmed, as Lord Hodge has also confirmed in Monk, that the reality principle has now been given statutory effect; specifically in paragraph 2(7) of Schedule 6. Robert Walker LJ also confirmed the two limbs of the reality principle; namely physical condition (now recognised in paragraph 2(7)(a) of Schedule 6), and user (now recognised in paragraph 2(7)(b) of Schedule 6).68.Robert Walker LJ also gave useful guidance, at [71], on how far the second limb of the reality principle (user) goes, in terms of the width of what can be assumed in relation to the MCO of a hereditament:“71. It may be useful to note some situations in which the second limb of the rule, understood in this way, does not assist a ratepayer in obtaining a lower valuation. It does not assist a ratepayer who leaves half of his business premises empty, or otherwise runs his business in an half-hearted or inefficient manner; that does not go to the category of the business occupation, but to the way the particular business is run. Nor does it cast any doubt whatsoever on the decision in Robinson Brothers (Brewers) [1937] 2 KB 445, that a brewer interested in acquiring a tied house should be regarded as in the market for an hypothetical tenancy of a free house; again, that goes not to the category of business for which the premises are occupied, but to the way the business is run.”69.In relation to the first limb of the reality principle (physical condition), Robert Walker LJ also explained, at [74], what can be assumed, in terms of allowing for the possibility of minor alterations to the relevant hereditament: “74. Turning to the first limb of the rule, I consider that the Lands Tribunal was clearly right, following Fir Mill, to allow for the possibility of minor alterations in the hereditament on the occasion of its hypothetical letting. The absurdity of any other view appears vividly from the circumstances of these appeals, with numerous very well-known retail chains seeking to establish their identities and brand loyalties by distinctive fascias and fittings installed in uniform, featureless units. The first limb cannot be applied so rigidly as to prevent (for instance) Burger King being considered as a possible bidder in competition with McDonald’s (which occupies a large unit just opposite the City Fayre/City Duck).”70.As can be seen, the Court of Appeal were confronted, in Scottish & Newcastle, with rival decisions of the Lands Tribunal, as it then was, on what it was permissible to assume, in terms of the MCO. The rival decisions were Midland Bank plc v Lanham (Valuation Officer) [1978] RA 1 LT and Fir Mill v Royton UDC (1960) R.R.C. 171. Robert Walker LJ approved the decision in Fir Mill, to which we should make direct reference.71.Fir Mill was concerned with the valuation, for rating purposes, of five hereditaments which comprised two cotton spinning mills, a weaving mill and two parts of another very old weaving mill which was in four different occupations. The case was regarded as a test case for hundreds of similar cotton mills in Lancashire. The essential issue was whether each mill was to be valued as a cotton mill, disregarding the rent which a tenant might reasonably be expected to pay for the premises if put to some other use. The ratepayers contended that the reality principle, or the rebus sic stantibus rule as it used to be known, applied not only to the current physical condition of the relevant premises, but also to their current manner of use, and had the effect that the relevant premises should be valued on the basis that they could only be used as cotton mills. The primary argument of the valuation officer was that no restriction on use should be assumed, so that the premises could be valued on the basis of whatever was their most valuable use. The alternative argument of the valuation officer was that if a restriction on use should be assumed, the assumption should be that the properties were used for the same general purpose as the existing use on the material day. The Lands Tribunal accepted the alternative argument of the valuation officer. The Lands Tribunal decided that the correct assumption was that the relevant properties were to be valued as if they could be used as a factory, but that it did not have to be assumed that they were used as any particular kind of factory. 72.The Lands Tribunal summarised their conclusions on the correct application of what is now referred to as the reality principle in the following extract from their judgment, cited with approval by Robert Walker LJ in Scottish & Newcastle, at page 185 of the report: “In our opinion only two assumptions are permitted. The first assumption is that the hereditament is vacant and to let - vacant in the physical sense and in the sense that the existing business has ended and any process machinery has been removed. The second assumption - and here we accept counsel for the respondents‟ second proposition - is that the mode or category of occupation by the hypothetical tenant must be conceived as the same mode or category as that of the actual occupier. A dwelling-house must be assessed as a dwelling-house; a shop as a shop, but not as any particular kind of shop; a factory as a factory, but not as any particular kind of factory. Some alteration to an hereditament may be, and often is, effected on a change of tenancy. Provided it is not so substantial as to change the mode or category of use, the possibility of making a minor alteration of a non-structural character, which the hypothetical tenant may be assumed to have in mind when making his rental bid, is a factor which may properly be taken into account without doing violence to the statute or to the inference we draw from the authorities.”73.We were also referred directly to the decision of the Lands Tribunal in Scottish & Newcastle (RA/480/1993 & RA/484/1993). Without making extensive reference to this decision, it is useful to set out what the Lands Tribunal said at [152], in relation to the operation of the reality principle: “152.The conclusions that we have come to can be stated shortly. The rebus sic stantibus rule identifies for the purpose of valuation the hereditament, the physical changes which may be made to it, and the mode or category of occupation. The rule rests on the concept that what has to be determined in rating is the value to the occupier of his occupation of the hereditament, measured by the rent on an assumed yearly tenancy. In carrying out a valuation under the rating hypothesis the following assumptions are to be made about the hereditament:(a)That the hereditament was in the same physical state as on the material day. Alterations which the hypothetical tenant might make to the hereditament may be taken into account if, taken overall, they are minor. All other prospective alterations to the hereditament are to be ignored.(b)That the hereditament could only be occupied for a purpose within the same mode or category of purpose as that for which it was being occupied on the material day. Any prospective change of use outside that mode or category is to be ignored. In determining to what mode or category a particular use belongs it is the principal characteristics of the use and the methods of valuation commonly applied by rating surveyors to which regard must be had; and shops, offices and factories serve as examples. Some uses may not fall within any such broad category, however, and are to be regarded as sui generis.Any evidence relating to the rents or assessments of other hereditaments may be taken into account provided it is relevant to the valuation. There is no rule that evidence relating to another hereditament is irrelevant if that other hereditament is in a different mode or category of occupation.”74.It should be noted that this paragraph did not receive unqualified approval in the Court of Appeal. As Robert Walker LJ noted, at [73]:“73.I do respectfully differ from the Lands Tribunal as to its view (para 152(b) of the decision) that in determining mode or category of occupation regard should be had to “the methods of valuation commonly applied by rating surveyors”. That seems to me to put the cart before the horse. Rating surveyors adopt different methods of valuation because the differences between business premises makes that appropriate. In this case the different methods adopted for public houses and shops reflect the fact that they are in different categories of business use.”75.This seems to us to support the point, which was stressed to us by Mr Wilcox in his submissions, that the identification of the MCO of a hereditament is a separate and prior process to the determination of what a hypothetical tenant would pay by way of annual rent for the relevant hereditament. For that reason the method of valuation adopted must depend upon the nature of the hereditament to be valued, including the MCO. The process cannot be reversed, by using a method of valuation to identify the MCO.76.Subject to this qualification, we think that the following points can be taken from the guidance provided by the Lands Tribunal in their decision in Scottish & Newcastle, at [152]:(1)In determining to what MCO a particular use belongs, it is the principal characteristics of the use to which regard can be had.(2)Shops, offices and factories are examples of categories of MCOs.(3)Some uses may not fall within any such broad category, and are to be regarded as sui generis. 77.In his submissions, and on the basis of the case law, Mr Wilcox made the following points on the operation of the reality principle:(1)There are two limbs to the reality principle, which operate independently and must be taken as they are in reality. They should not be collapsed into each other. (2)The use limb requires the valuation of the relevant hereditament in its MCO on the material day even if, in the real world and as in Scottish & Newcastle, the incoming tenant would convert the relevant property to some more lucrative use. (3)The reality principle is subject to the repairing assumption in paragraph 2(1)(b) of Schedule 6, but the repairing assumption cannot affect the MCO. In other words the repairing assumption cannot be used to change the MCO of the relevant hereditament.78.So far as the first point is concerned, and while we would be wary of any rigid compartmentalisation of the two limbs of the reality principle, we accept (i) that each limb should be given effect, (ii) that each limb must be taken as it was in reality on the material day, and (iii) that the two limbs should not be collapsed into each other.79.So far as the second point is concerned, we accept this point, which is clearly articulated in Scottish & Newcastle.80.So far as the third point is concerned, we also accept this point, which reflects what was said by Lord Hodge, in Monk. It is clear that the MCO of the relevant hereditament must be determined before the repairing assumption is applied. The repairing assumption cannot be applied in order to create an MCO which did not, in reality, exist on the material day. As Lord Hodge explained, at [22]:“22 In a helpful intervention, the Rating Surveyors’ Association and the British Property Federation submitted that, where works were being carried out on an existing building, the correct approach was to proceed in this order: (i) to determine whether a property is capable of rateable occupation at all and thus whether it is a hereditament, (ii) if the property is a hereditament, to determine the mode or category of occupation and then (iii) to consider whether the property is in a state of reasonable repair for use consistent with that mode or category. The first two stages of that process involve the application of the reality principle. At the third stage the valuation officer applies the statutory assumption in paragraph 2(1)(b) if the reality is otherwise. In my view, this is a helpful approach where a building is undergoing redevelopment. But it is subject to the useful practice, which I discuss in para 31 below, of reducing the rateable value of a building, which is incapable of rateable occupation because of such temporary works, to a nominal figure rather than removing it from the rating list altogether.”81.We have not, in this section of our decision, set out all of the case law to which we were referred. The above review is not intended to be exhaustive, but rather to be sufficient to identify what we regard as the principal authorities in the appeal. Keeping in mind the guidance provided by all of the legal materials to which we have been referred, we turn to our discussion of the issues in the appeal.