[2025] UKUT 224 (LC)

The statutory basis of valuation for rating is found in paragraph 2(1) of Schedule 6 to the Local Government Finance Act 1988. A rateable value is an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year on a date which in the present appeals is agreed to be 1 April 2015 (the antecedent valuation date, or AVD), on the assumption that the property is in a state of reasonable repair immediately prior to being let and on the basis that the tenant undertakes to pay all the usual tenant's rates and taxes and to bear the cost of the repairs, insurance and other expenses necessary to maintain the property in a state able to command that rent. By paragraph 2(6) and (7)(a) of Schedule 6 matters affecting “the physical state or physical enjoyment of the hereditament” are taken to be as they were on the “material day”, which is the date on which the 2017 rating list came into effect or the date, if later, when the hereditament was entered into the rating list; accordingly, 1 April 2017 for the Mando Property and 6 June 2017 for the Shoosmiths Property.

The statute refers to assumptions, and those assumptions together constitute the “rating hypothesis”. The authorities and legal principles relating to the rating hypothesis are well-established and we do not need to set them out. They were discussed in detail in Acenden in order to resolve the question of whether Category B fitting out works raised the rateable value of the property above its value when let in a Category A condition.

What makes that question difficult to answer is the fact that Grade A (i.e. high quality) offices are generally not let in a newly completed Category B condition. As explained in Acenden (see paragraph 2 above) the landlord will fit out the premises to Category A standard because each tenant has its own requirements for Category B fitting out; so the property will be marketed in Category A condition, leaving the tenant to make it his own. Thus at the Mando Property, we saw a large open plan working area with a couple of meetings rooms, small pods available for informal discussion spaces, and a well-equipped open plan kitchen with seating opening on to a very attractive roof terrace with tables. The Shoosmiths Property was much bigger and typical of a modern law firm, with open plan offices, meeting rooms, client spaces, a post room and so on.

Yet the rating hypothesis requires us to assume what does not happen in reality, namely that the premises are let by a willing landlord to a willing tenant in the physical state in which they were on the material day, i.e. fitted out to Category B standard, even though in the real world that may not be the way the deal is done; in FR Evans (Leeds) Ltd v English Electric Co Ltd (1977) 36 P & CR 185, Donaldson J explained that we are to imagine:

“a hypothetical person actively seeking premises to fulfil needs which these premises could fulfil. … He is a willing lessee and is quite prepared to take the subject premises at the right price.”

Importantly, the actual occupier is to be regarded as being in the market (London County Council v Erith and West Ham (Churchwardens and Overseers) [1893] AC 562). In summary, the rating hypothesis requires us to imagine that the landlord has fitted out the building to Category B standard in a way that meets the tenant’s needs, so as to make the hypothetical tenant a willing tenant. And in circumstances where the Category B works would typically have cost a 6 or 7-figure sum, then of course the tenant would pay more for premises already fitted out to his requirements than he would pay for premises on which he was going to have to spend that sum.

Hence the decision in Acenden.

That decision was followed by the VTE. Although Miss Wigley KC and Mr Walder devoted a considerable proportion of their skeleton argument to supporting the principle decided in Acenden, namely that Category B fitting out work lifts the value of the property above its Category A value, we do not need to rehearse their arguments. There is no argument before us that we should depart from the principle in Acenden. We are not bound by it, but in the absence of argument that we should depart from it it would not be proper for us to do so, and even if we could we see no reason to do so.

The only issue therefore in the present appeals is how to put the Acenden principle into practice. How is the Category B uplift to be valued?

A practical difficulty highlighted by the Tribunal in Acenden was the absence of comparable evidence of value for properties let in Category B condition. It is well-established that comparable evidence should be used where possible; as the Tribunal (Mr Martin Rodger KC, Deputy Chamber President and Mr Peter D McCrea OBE FRICS FCIArb) put it at paragraph 113 of (Hughes (VO) v. York Museums and Gallery Trust [2017] UKUT 200 (LC):

“The best evidence of rental value is provided by rents for comparable properties agreed in the open market. The greater the adjustments required to be made to mirror the statutory valuation assumption or other differences, the less reliable a guide the comparable may be, but valuation by the comparative method always has the advantage over other methods of being rooted in evidence of the behaviour of real landlords and tenants in the market in which it is to be assumed the subject premises are being let. Regard may also be had to evidence of comparable assessments, which in most cases are likely to be based on evidence of lettings in the market.”

Yet the rating hypothesis requires us to assume a situation that rarely happens in practice. Grade A offices let in Category B condition are generally sub-lettings, or lettings following a business failure where the property is back in the landlord’s hands with the Category B fit-out still in place, and so properties relied upon as comparables have to be treated with caution. In such cases the Category B fitting out may be dated and not meet the precise requirements of the new occupier. In Acenden itself there was only really one useful Category B comparable; the Tribunal commented that it would have benefited from more evidence but as the appellant points out the nature of the rating hypothesis itself means that such comparables are unlikely to be available.

That is the position in the present appeals, and the issue of principle that we have to decide is whether, faced with an absence of comparables, the value of the Category B fitting out work can be assessed by looking at its cost, as reflected either in what a landlord has paid the tenant to do that work or in what the tenant has spent on it.