[2025] UKUT 224 (LC)

This is an appeal by way of re-hearing, not a review of the VTE’s decision, so we do not need to discuss in detail the approach taken by the President to valuing the Category B uplift. There is no argument before us that we should follow it. We think it is right to observe that we agree with the VO’s criticisms of the VTE’s approach. The selection of £10 per m² and £15 per m² for Liverpool and Manchester respectively was arbitrary and unevidenced, and it is not an approach that should be adopted for the future.

Should we accept the argument for the VO that in the absence of useful comparables a realistic approach to the assessment of the value of the Category B fitting out work is to look at the cost of that work to the tenant, seen either in the landlord’s contribution for that cost or in the tenant’s actual expenditure? As counsel for the VO argued, a cost-based approach is already adopted where comparables are not available; it is the basis of the contractors’ method, although that approach to valuation is far more sophisticated than simple amortisation.

The argument depends upon the proposition that true comparables will be rare. Mr Brankin alone among the expert witnesses had direct experience of the acquisition and fitting out of grade A office space. Between 2007 and 2021 he was the head of the VO corporate estate function with responsibility for a mixed, nationwide office estate comprising some 100,000m² of floorspace. During his time in that role he had completed about 30 acquisitions including one in Manchester (4 years ago) and another in Liverpool (10 years ago). His evidence was that typically the Grade A office market tends to trade in Category A fit outs, meaning that most buildings were offered to the market in that state. He said that this is especially the case with new buildings as landlords are unlikely to undertake speculative Category B fit outs other than for marketing purposes. Doing so would risk narrowing their market and involve more upfront investment, both of which would increase the landlord’s risk exposure.

Mr Bailey gave evidence to the same effect:

“… around the AVD of 1 April 2015, newly fitted Category B office space has not been offered to the market in the traditional sense.

The only transactions have been of second hand space coming to the market following some unforeseen circumstance or business failure of the previous tenant who had undertaken the fit out or, as with the subject case in Manchester, the landlord and tenant have agreed a deal whereby the tenant has to organise the fit out albeit funded by landlord capital contributions typically specified for Category A works with a further sum sufficient to cover Category B works, although not specifically directed by the landlord to be for those works.”

Mr Brankin provided useful evidence about the typical letting process for Grade A properties. He pointed out that it makes sense to keep the pool of prospective tenants as wide as possible by the landlord providing only the generic Category A fittings that everyone wants, and then allowing the tenant itself do the work required to fit out the property to Category B standard – which as we saw at the two appeal properties will be designed for that tenant’s own needs. Mr Brankin also said that from his perspective, having negotiated transactions involving different permutations of fitting out, he would always be concerned with the total cost of occupancy and that all inward and outward monetary flows would be factored in the business case for the project.

We accept the proposition that comparable market evidence for the value of the Category B uplift in newly fitted Grade A offices is necessarily going to be difficult, if not impossible, to find. None was found in the present appeals. It cannot be impossible to find realistic comparables but we accept that there will typically be far fewer than would be available for Category A lettings.

Having accepted that, we have no difficulty in also accepting that the amortised cost to the tenant of doing the Category B fitting out work itself may be the best, or at least very significant, evidence of the annual value to the tenant of the property in Category B condition.

This is easier to see in relation to the Mando Property, where the property was let in Category A condition and the ratepayer did the Category B fit out. What the tenant was prepared to pay for the property was the Category A rent plus the cost of fitting out to Category B standard. If that cost is amortised, at a rate reflecting the cost of capital over the estimated useful life of the fitting out or the term of the lease (whichever is shorter), then we can see the true rental cost of the property in Category B condition.

The Shoosmith’s property is a little more complicated because the tenant did the Category A works itself but the landlord made a capital payment that was intended to cover their cost; the same happened, according to the VO, for the Category B works. The ratepayer agreed that the way to find the Category A rental was to take the actual rent (adjusted to account for rent free periods) and not to follow the usual process of discounting the landlord’s contribution for the Category A works. According to the VO the same exercise can be done with the landlord’s second main capital contribution which is likely to have been for the Category B works (being very close to what the tenant actually spent, see paragraph 20 above). Alternatively, the Category A rent can be calculated with reference to comparables and then the cost of the Category B works amortised.

Accordingly, having accepted the VO’s argument in principle we turn to the market and valuation evidence. We look at the two properties separately, and consider for each first the VO’s calculation of rateable value by reference to the cost of the Category B fitting out work, and then the use of comparable evidence.