[2025] UKUT 163 (LC)

That leaves three properties with potentially useful rents; item 2 (Amazon, Swallowdale Lane), item 4 (Royal Mail, Unit Two, The Island) and the rent on the Property itself. Item 4 was let in February 2010 and the subject of a rent review on 10 February 2015, a few weeks before the AVD. However, the review clause stipulates that the reviewed rent is to be the higher of 107.75% of the passing rent or the open market rent, whichever is higher. The VOA supplied information which shows the February 2015 rent to be precisely 107.75% of the passing rent and we therefore conclude that the market rent is less than the £82.90 per m² shown in the table. The question is by how much? We cannot conclude that it must be either the same or higher than the 2010 rent as there is no evidence to support that view. It only tells us that the open market rent is no more than £82.90 per m², an outcome that is of very limited use.

The appellant sought to bring two further properties to the Tribunal’s attention, namely Gist at Swallowdale Lane and Iron Mountain at Pennine Way. We do not consider either to be comparable to the Property and discount them entirely.

We are therefore left with the two rents used by Mr Hawkins. At this point, and before we reach any conclusions about whether a tone exists, we need to scrutinise those rents to establish the correct analysis. We will deal firstly with the rent on the Property. We summarised the terms of the letting in paragraph 10. Both parties used the same methodology in their analysis but made assumptions which led to different results. The analyses were based on the annual equivalent (AE) of a rental cashflow (quarterly in advance) discounted to present value at 8.5%. The annual equivalent is determined by the application of Years Purchase (YP) at the same percentage for the required period, depending on whether the incentive is being spread over five or ten years. The discount and AE rates were agreed between the parties and reflect a nationally utilised approach by the VOA. Mr Hawkins produced two figures, namely £47.94 per m² and £56.47 per m² based on spreading the whole benefit of the rental concessions over five and ten years respectively. He made no allowance for a notional fitting out period but his preferred approach involved the averaging of the two outcomes resulting in a figure of £52.21 per m².

Mr Steel also provided us with two analyses. The first treated all of the rental concession as an incentive and was based on an AE spread over 10 years. The second was based on the same premise but with 6 months of the rent free period treated as a fitting out period and therefore ignored for the purposes of the calculation. The outputs from these endeavours were £56.21 per m² and £60.89 per m² respectively.

Mr Hawkins, in making no allowance for a fitting out period, said that he had been unable to find any licences for works to the Property and had concluded that a fitting out period was unnecessary. Mr Steel said, without evidence, that it was standard practice in the market to allow for fitting out by giving occupiers a fitting out period and such period should not be treated as a concession because in many cases the property could not be occupied during fitting out. He drew attention to instructions in the VOA Rating Manual (“the Manual”) which themselves referred to (now outdated) RICS Guidance (UKGN 6 Analysis of commercial lease transactions), both of which accorded with his position. The UKGN 6 says the following:

“4.1.3

The principle of granting a rent-free period to reflect the time required for fitting out the property to suit the tenant’s reasonable needs is common practice in many markets. Therefore it may not normally be regarded as an incentive. It represents a balance between the landlord’s need to secure an income from as early a date as possible and the tenant’s need not to have a rent liability until the property can be occupied.

4.1.4

What is considered a reasonable length of time for the fitting out will vary according to the extent of the works, the size of the property in question and local market practice. Where specialist fitting out is involved, the time taken may go beyond a normal fitting-out period and an element may not be considered to be part of the reasonable fitting-out period.”

The Amazon property is a little easier to analyse. The headline rent is £1,193,392 from 22 October 2013 with 10 months rent free. This property dates from 2007 and had been previously let. It is not known how much of the original occupier’s fitting out was left but letting particulars from 2013 show it as being ready to accept the incoming tenant’s racking.

Both experts used the same methodology as for the Property except that Mr Hawkins treated the whole of the rent free period as an incentive. Mr Steel on the other hand excluded three months as a customary fitting out period. The term of the lease was five years which meant that there were two outcomes, Mr Hawkins at £59.82 per m² and Mr Steel at £65.71 per m². These figures exclude the value of plant and machinery.

The Tribunal is not bound by what is written in the Manual. It amounts to instructions for Valuation Officers. We sensed a tension in some of Mr Steel’s responses to questions from the Tribunal between the contents of the Manual and his duty as an expert witness. Although we were satisfied that he was earnest in his approach we are not convinced that an unquestioning adoption of a notional fitting out period is appropriate in every case. Rather, the use of such a method should be facts dependent. In the case of the Property there was no consensus that fitting out works had been done but the installation of racking would not be a matter undertaken over a weekend. Likewise, the construction of offices would require weeks of work. We therefore conclude that Mr Steel’s approach is likely to be correct and some recognition of a fitting out period is appropriate. We note that only 2% of the floor area of the Property was occupied in the first three months, which lends weight to the notion that fitting out was occurring. We therefore adopt a three month fitting out period, reducing the true rent free concession to six months.

We adopt the same rationale for the Amazon building.

The remaining question is over what period should the incentive be spread? Mr Hawkins’ compromise resulted in a period of 7.5 years and was based on an average of the positions likely to have been taken by the landlord and tenant. Mr Steel considered it inappropriate to amortise the incentive over five years due to the size of the concession. At the hearing Mr Hawkins said that the lengthy phased occupation of the Property resulted from a transfer of business from an existing fulfilment contract. It is possible that by securing a significant rental concession the appellant was seeking to avoid a double overhead, namely paying for the contract and rent on the property. In that scenario the concession constitutes an inducement to take the lease ahead of the optimal time.

We have no evidence that the market at the AVD was any showing signs of growth and the hypothetical parties would not be certain that the concessionary rent would grow to the level of the headline figure by the first review. We therefore conclude that the rental concession should be spread over the term of the lease, namely ten years.

It is useful at this juncture to consider the impact of our conclusions on the analysis of the rent paid for the Property. Using the methodology adopted by the parties but ignoring three months of the rent free period and amortising the concession over ten years we arrive at an analysis of £57.43 per m². This figure represents the rent for the Property taking account of the rental concessions but devoid of any rateable plant and machinery. The equivalent figure for the Amazon unit in Swallowdale Lane is £65.71 per m². We agree with Mr Hawkins that the Amazon unit is superior to the Property and this undoubtedly accounts for the differential between the two.