England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF THE LANDS TRIBUNAL

		Royal Courts of Justice Strand London WC2
		13th October 1998

LORD JUSTICE SCHIEMANN:

1. This appeal from the Lands Tribunal concerns the rating of Petworth House and Castle Drogo owned by the National Trust. It raises once more a problem which has vexed the law of rating for over a hundred years. It concerns the method of ascribing a rateable value to properties for which no tenant could be found in the real world and which can not generate sufficient income to cover their maintenance costs. The case law indicates that while the existence of such a state of affairs may lead the Valuation Officer to come to the conclusion that the rateable value of the hereditament is nil it does not force him to do so. Each of these properties is owned by the National Trust. The Lands Tribunal ascribed a positive rateable value to each of them. The National Trust appeals.
2. For the purposes of the law of rating a rateable value has to be ascribed to properties. For present purposes the matter is governed by paragraph 2(1) of Schedule 6 to the Local Government Finance Act 1988:

"The rateable value of a non domestic hereditament ................ shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenants' rates and taxes and to bear the costs of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent."

3. This formula is commonly referred to as the rating hypothesis. The landlord, the tenant and the rent payable under this rating hypothesis I shall refer to respectively as the hypothetical landlord, the hypothetical tenant and the hypothetical rent.
4. There is a number of methods of arriving at rateable values. Usually it is possible to arrive at a hypothetical rent by discovering what rents are being paid for similar properties and making any necessary adjustments. That was not possible here because there was no rental market in similar properties. Sometimes one can make use of assessments for rates for comparable properties. That was not of much use in the present case. Sometimes one can value by reference to the capital value of the property on what is known as the Contractor's basis.

"The Contractor's basis of valuation proceeds on the hypothesis that the prospective tenant has a choice between renting the actual hereditament and constructing similar premises elsewhere of which he would be the owner. The question which the contractor's basis seeks to answer is how the prospective tenant would assess the annual equivalent of the capital cost of construction and ownership as compared with the alternative available to him of renting the hereditament on the statutory terms: Ryde on Rating and the Council Tax - Paragraph E 540." Liverpool Corporation v Chorley Assessment Committee and Withnell Overseers (1912) 1KB 270-293.

That was not regarded as appropriate by anyone in the present case.

5. Sometimes in the case of properties which are rarely if ever let it is appropriate to arrive at the annual value by a method of valuation known as the profits basis. This is a somewhat confusing name since profits as such are not rated and are not rateable. But the broad theory is that where a property can be used so as to yield profits then the hypothetical tenants would be prepared to pay a rent for the use of that property in order to be able to make those profits and that the level of rent would reflect the level of anticipated profits. The National Trust in the present case produced figures designed to show that no profits could be made from these properties and that therefore no hypothetical tenant would be prepared to offer any hypothetical rent for them.
6. A bird's eye view of the case which does no justice to the subtlety of the arguments but which helps set the scene reveals the following. The Tribunal broadly accepted that no profit could be made from these properties but held that an "overbid" would be made by the National Trust, who could be treated as a hypothetical tenant, to reflect the great historical and cultural value of these houses notwithstanding that there was no money to be made out of being a tenant of them. The Tribunal calculated the amount of hypothetical rent by taking 3% of the gross receipts of each property. Before us Mr Anderson Q.C. who appears for the Trust takes two broad points : the Tribunal should not have regarded this as an overbid case at all and in any event there was no basis for taking 3% of the gross receipts as a method of arriving at the overbid. Mr Holgate Q.C. who appears for the valuation officers submits that these are difficult valuation questions, that the Tribunal has great valuation expertise and this court should not interfere.
7. The findings of the Tribunal can be summarised as follows:

1. each of these properties was of national heritage importance,

2. each had an "annual deficit of expenditure over income",

3. the Trust had a motive for becoming a tenant of each of these properties, notwithstanding that the cost of repair and administration would make them unprofitable,

4. the Trust had, from other sources, sufficient monies to enable it to pay a rent ( referred to by the Tribunal as an overbid) over and above that which can be found by using the full profits basis of valuation,

5. what overbid the Trust would make was a matter of fact to be determined by the Tribunal,

6. no-one other than the Trust would make an overbid,

7. it would be both difficult and arbitrary to adjust a full profits valuation in order to arrive at the amount of any overbid, and

8. the appropriate method of arriving at the overbid was to take 3% of the gross receipts of each property.

8. The basis upon which the Tribunal proceeded appears from the following citation:-

"While we accept that we can find that Petworth and Castle Drogo have nil rateable values, we would be reluctant to make that decision in the absence of compelling evidence leading inescapably to that conclusion. We have three reasons for this view. First, as a matter of common sense, a hereditament which is in rateable occupation, and is of some value or benefit to the occupier, must normally have a rental value, which can only be reduced to nil in exceptional circumstances. ...................... The second reason why we would be reluctant to find nil rateable values for the appeal hereditaments is that it does not automatically follow that lack of profitability produces a nil assessment. ......................... Our third reason is that a nil assessment is, in effect, an exemption from rates, which is a matter for Parliament."

9. I accept each of the three premises there set out by the Tribunal but they do not in my judgment lead to the conclusion which the Tribunal drew from them, namely, that it should be reluctant to decide that the two subject properties had a nil rateable value. As to the first, on any basis the present cases are exceptional when compared to most of the hereditaments which need to be valued - in each case their owner paid huge sums in cash or kind to the National Trust in order to be shot of them. That differentiates them from the overwhelming majority of properties whose rateable value has to be decided. As to the second and third, once one accepts (as the Tribunal rightly accepted) that it sometimes follows from lack of profitability that there should be a nil assessment, then one must take it that Parliament has sanctioned that state of affairs in some cases. The challenge before the Tribunal was to find one or more tests capable of differentiating those cases where lack of profitability leads to a nil assessment from those where it does not. The three premises do not help to provide such a test.

THE CASE LAW BACKGROUNDTHE

10. Each party cited in front of us a number of cases in support of their submissions and the Tribunal relied on some of them. The cases set the legal background against which the Tribunal came to its decision. The starting point is the rating hypothesis. As to this Lord Justice Scott in Robinson Brothers (Brewers) Ltd v Houghton and Chester le Street Assessment Committee (1937) 2KB 445 said the following:

"The rent to be ascertained is the figure at which the hypothetical landlord and tenant would, in the opinion of the valuer or the Tribunal, come to terms as a result of bargaining for that hereditament, in the light of competition or its absence in both demand and supply, as a result of "the higgling of the market". p.470.

"Whilst the tenant is hypothetical and the landlord who is to let to the tenant is necessarily also hypothetical, the hereditament is actual - namely, the hereditament described in the valuation list with all its actualities. Two consequences follow. All the intrinsic advantages and disadvantages must be considered and weighed. It is just that particular hereditament which is supposed to be in the market with all its attractions for would-be tenants, to whatever kind of human emotion or interest or sense of duty they may appeal - economic, social, aesthetic, political (for example, in order to perform a statutory duty) - and also with all its imperfections and drawbacks which may deter or reduce competition for it ........................ the totality of opposing forces of demand and supply must be assessed and weighed in order to hit off the point at which the two opposing negotiators are to be deemed likely to strike their bargain." p.474

11. In Humber Ltd v James (1960) 6 RRC 171 (C.A.) Lord Justice Hodson said this:

"......................... (the formula) .......... provides the yardstick by which the value of the occupation of rateable hereditaments is to be measured, the measure being the amount paid for the premises let and vacant as a result of a bargain struck between a reasonable landlord and a reasonable tenant on the statutory terms as to length of tenancy and repairing obligations. The object is to ascertain for rating purposes the real value of the occupation. It is clear that it is necessary to set up some standard. The actual rent paid would not be an adequate standard for rating purposes, because it might be complicated by there being a small rent because of the payment of a premium, or perhaps because it was an old rent fixed a long time ago when the economic value of the hereditament was low."

12. That was a case where the hereditament was a car assembly works of a million square feet which had taken five years to achieve full production after a cost in tooling up of £1,500,000. The Lands Tribunal had said that -

"In the everyday world the tenant of a factory such as this would not consider for a moment a tenancy from year to year but rating is not the everyday world, it is the domain of a hypothetical tenant who is faced with the fact that, try as he may, he cannot become the owner of the premises he occupies, neither can he get a lease for a term of years, short or long."

13. However the Tribunal had gone on to say that he would not be satisfied that the rent offered and accepted in this hypothetical world would differ materially from the actual rent as agreed. The Court of Appeal was content to accept that finding of fact.
14. There are many statements to the effect that what is the hypothetical rent is a question of fact. For instance Lord Halsbury in Mersey Docks and Harbour Board v Birkenhead Assessment Committee (1901) AC 175 (H.L.)said this:

"I am not aware of any rule of law or any statute which has limited them as to the mode in which they shall arrive at [the hypothetical rent]. It is not a question of law at all - it is a question of fact. These questions have from time to time come before the courts, and have been argued as questions of law; but that is where, instead of doing what the statute has directed them to do, the overseers, or those who were acting on the part of the parish, have thought proper either to include something which by law ought not to be included, or to exclude something which ought to have been included."

15. Most of the cases relevant to this appeal are concerned with properties for which in real life there was no rental market. It is in relation to such properties that the doctrine of the overbid, which was crucial to the Tribunal's approach in the present case, has developed. The doctrine developed in the context of properties held for various local government purposes. There was at one time a view that such properties could not be rated because they were not in anyone's beneficial occupation or because the only entities which might be otherwise be hypothetical tenants had to be disregarded because their constitution prevented them from taking a tenancy or because in real life they would never take such a tenancy. That view is no longer supported by the authorities.
16. In London County Council v Erith (1893) AC 562 (HL) the hereditament consisted of land, pumping station and works which were owned by the LCC . It appears from the case that it was agreed:

"that if the land, outfall works and pumping station in question were not in the possession of the Appellants but in the hands of a private owner, and connected with the metropolitan sewage system, to be let to the Appellants as tenants, they would be willing to pay a yearly rent for the same for the purposes of being used as part of and in connection with the metropolitan sewage system, sufficient to support the gross and net rateable value as fixed by the Quarter Sessions."

Lord Herschell LC said this:

"The decision of this House in Jones v Mersey Docks 11 HLC 443 marked an epoch in the law of rating. Many of the earlier decisions are tainted with this vice, that they proceed upon the supposition that lands held for public purposes are on that account not rateable. This doctrine is now exploded, your Lordships' House having distinctly determined that the circumstance that land is held by a public body for public purposes does not affect its rateability."

17. Lord Herschell said, in relation to a statement by Blackburn J in Jones v Mersey Docks:

The learned judge, in my opinion, did not and could not have meant that it is essential to rateability that a particular occupier of the land can make a pecuniary profit by the use to which he is putting it. It is I think rateable whenever its occupation is of value."

18. In the Erith case it was found as a fact that if the works were disconnected from the metropolitan sewage system and in the hands of a tenant applied to any other purpose for which they might be available, their net rateable value would be £2,143. The Lord Chancellor stated:

"I must demur to the view that the question whether profit (by which I understand is meant pecuniary profit) can be derived from the occupation by the occupier is a criterion which determines whether the premises are rateable and at what amount they should be assessed."

"Owing to a statement made in the course of the argument at the Bar, I wish, in order to avoid possible misconception, to add a few words as to the method which ought to be followed when it is manifest that an owner would be willing to pay a higher rent than could be obtained from any other tenant^[1]. It was said that a practice prevails of taking five per cent on the cost, in the case of buildings, as a basis for arriving at the rental. Such a rule of thumb may be all very well where the premises would be likely to find competing tenants, but it is not by any means necessarily applicable where it is thought that the owner would be likely to give a higher rental than anyone else. It would often be obvious that he would never be willing to pay the rent arrived at in such a fashion, inasmuch as it would be more advantageous for him to become the owner. There are many other circumstances, too, which may affect the answer to the question what the owner of premises would have been willing to give, if instead of becoming the owner he had become the tenant of them. In all cases of the description of which I am speaking, the whole of the circumstances and conditions under which the owner has become the occupier must be taken into consideration, and no higher rent must be fixed as the basis of assessment than that which it is believed the owner would really be willing to pay for the occupation of the premises."

The case decided that real life owners could be hypothetical tenants even if in real life their constitution prevented them from being tenants rather than owners of the property.

19. In Morecambe and Heysham Borough Council v Robinson (1959) 5 RRC 164 (LT) and (1961) 1WLR 373 (CA) a rateable value of £1,000 was upheld by this court in relation to the foreshore, the sea wall, the esplanade and some ornamental gardens and public shelters. The Tribunal had held that although when the outgoings were subtracted from the incomings one arrived at a figure of less than £1,000 nevertheless:

"The value of the foreshore and promenade amenities to the town of Morecambe is such that the corporation would be prepared to suffer a moderate loss rather than permit this hereditament to remain unlet and unmanaged. I am quite sure that in hypothetical negotiations between a landlord and a tenant this fact would have its effect upon the rental value agreed."

In the Court of Appeal, as appears from the judgement of Holroyd Pearce LJ:

"The appellants have, during the hearing before this court, consistently conceded that there was evidence on which the tribunal could base its assessment of £1,000".

There were two grounds of appeal, neither of which is directly in point in the present case. The court held that it was open to the Lands Tribunal to approach the matter in the way that they had.

20. Another case in the Court of Appeal was Tomlinson (VO) v Plymouth Argyle Football Company Limited and Plymouth City Council (1960) 53 R and I T 297. That was a case where the Lands Tribunal holding was rejected by the Court of Appeal who sent the case back to the Lands Tribunal. The hereditament was a football ground in Plymouth. The football club was impecunious. The Lands Tribunal worked on the basis that there might be more than one hypothetical tenant. Pearce LJ said:-

"Here on the evidence it seems clear that the ratepayers were the only possible tenants and I can find no evidence that supports the possibility of any other. ............................ It is of great importance that one should ascertain the exact state of the market in an unusual hereditament of this kind. The hereditament is not hypothetical and must be valued as it is rebus sic stantibus; but the landlord and tenant are hypothetical. The court must not assume hypothetical tenants for the hereditament if there is in respect of that particular hereditament no reasonable possibility of such tenants existing."

Pearce LJ went on:

"In this case it is clear that there could be no hypothetical tenant other than the ratepayers for a league football ground with its large grandstand accommodation and other equipment needing some thousands of pounds to be spent annually in maintenance. There was no evidence that some tenant might be found for some alternative use and without such evidence it is wrong to assume it. But I certainly do not think that it follows, as the club argued, that it would make one bid of £500 and that the lessors would have to take it: nor, on the other hand, should one automatically assume on the facts of this case that the lessors would stand firm in insisting on a full rent of £2,250 if the ratepayers were not in a financial position to pay it. The evidence showed that their finances were in difficulties. It is true that the ratepayers had generous supporters and no doubt those supporters are a factor to be taken into account in considering whether the ratepayers could and would pay the rent; but it must be remembered also that generous supporters who are ready to come forward and help to meet any reasonable demands made on the ratepayers are apt to be alienated and unwilling to help if they think that those demands are unreasonable."

He pointed out that the court was dealing with a case where

"...it was important for the Tribunal to try to decide what in the "higgling of the market" would be the resulting rent of this special hereditament as a result of the probable negotiations between the lessors and the ratepayers. Each had powerful bargain arguments. The lessors needed a tenant for a valuable hereditament which demanded some thousands of pounds to be spent on it annually by way of repairs. On the other hand, the ratepayers' existence depended on their taking the hereditament. I cannot but think that they would have arrived at some reasonable compromise and that compromise would represent the rent. Nowhere in the case is there any reference to the bargaining power which the ratepayers had against the lessors by virtue of their being the only bidders for the hereditament and, indeed, the case was decided on the basis that they had no such power. That I think is bound to give an unreal picture of the rent which was likely to result and in my view that defect springs from the fact that the Tribunal assumed more than one hypothetical tenant where in fact it was clear that there would be only one".^[2]

21. In Scottish Exhibition Centre Ltd v Strathclyde Regional Assessor (1994) RA 209 the same sort of point came before the Lands Valuation Appeal Court in Scotland, whose members were Lord Clyde, Lord Prosser and Lord Cameron of Lochbroom. The issue there was the appropriate basis for the rating of the Scottish Exhibition and Conference Centre comprising some 50 odd acres of ground and buildings at Queen's Dock in Glasgow. That hereditament was given a net annual value of £1,275,000. The ratepayer contended that the Centre should be assessed on the revenue principle (the Scottish equivalent of a profits valuation) at nil. That contention was rejected by the Lands Tribunal and that rejection was upheld by the Court. The court accepted that what went on in the Centre could go on elsewhere. It stated that

"The Centre is being viewed by the local authorities, who have by far the greatest investment in it, not only on purely commercial considerations but also on its value to the local community. It is not an enterprise that has failed but is regarded as a major attraction which has brought large economic benefits^[3].In these circumstances it cannot be said that no hypothetical tenant would be prepared to pay any rent for the subjects. On the contrary they do have a value in respect of the social and economic benefits which they contribute. While the mere fact that a revenue method calculation produces a nil valuation is not by itself in general a reason for rejecting the method, it does not seem acceptable to use a method which leads to that conclusion in the circumstances of the present case. In my view the Lands Tribunal were correct to reject it."

Lord Clyde went on:

"Some reference was made in the course of the argument to the possibility of making an addition to a valuation on the revenue method, referred to in the English terminology as an overbid, to recognise the readiness of a local authority as being the most likely hypothetical tenant to pay something for the benefit to its constituents afforded by the subjects. No substantial submission was made towards the adoption of such a course in the present case and it is unnecessary to discuss the possibility beyond noting the lack of guidance available in a case like the present to restrain the arbitrary character of such a course."

22. That lack of guidance is an undoubted feature of the case law and is what made the task of the Tribunal and of this court in the present case so difficult. Lord Prosser agreed with the reasoning of Lord Clyde. He stated:

"If it appears that particular lands and heritages could not give an occupier any return, then prima facie he would pay no rent, regardless of whether his loss might be large or small, and regardless of whether the magnitude of his loss would depend on extraneous or individual matters Just as inherent non-profitability appears to me to suggest that the revenue principle might provide the appropriate means for achieving an accurate (i.e. nil) valuation, so inherent non-profitability seems to me to suggest, at least prima facie and in general, that the contractor's principle will not provide a reliable guide to an accurate valuation."

Nonetheless he was prepared to uphold the Lands Tribunal valuation saying:

"In this case, it seems plain, for the reasons indicated by your Lordship, that the subjects have a value in respect of the social and economic benefits which they contribute. Since the advantages of using the subjects take that form, it is no doubt true that the hypothetical tenant is not to be found in the commercial market at large but is effectively a local authority or a body supported by local authorities. If that is the hypothetical tenant, I see no reason for thinking that the rent the tenant would pay would be a direct reflection of the nil revenue directly obtainable from the subjects themselves. In such circumstances, the revenue principle appears to me not to be appropriate."

THE TRIBUNAL'S DECISIONTHE TRIBUNAL'S DECISION

23. The Tribunal stated that the following matters required decision:-

(1) Who is the hypothetical tenant?

(2) What are the characteristics of the hypothetical landlord and tenant and what matters would they have taken into account when fixing the rent?

(3) What is the correct method of valuation?

(4) What are the rateable values?

It is useful to summarise the Tribunal's findings on each of these matters. I have used italics to emphasise the crucial findings.

Who is the hypothetical tenant?

24. As to this the Tribunal said:

"The Trust acquired Petworth House in 1947 and Castle Drogo in 1974 and has occupied them for the purposes of conservation and public viewing. Both properties are mainly listed Grade I. They are notable historic houses, which form an important part of the Trust's portfolio of heritage or preservation properties. There is no evidence that an organisation other than the Trust, and lacking the national characteristics and resources of the Trust, existed or was available as a potential bidder for either property. On these facts we find that the Trust would have been the hypothetical tenants of Petworth and Castle Drogo and would have been the only bidder for these properties."

What are the characteristics of the hypothetical landlord and tenant and what matters would they have taken into account when fixing the rent?

25. As to this, the Tribunal said:

"In the real world the Trust can decline to acquire a property ... The consequence of our finding that the Trust is the hypothetical tenant is that agreement must be reached on a rent. That rent may be nil (a peppercorn) but the parties cannot fail to reach agreement. The Trust cannot walk away from the negotiations."

26. The Tribunal stated:-

"Our finding that the Trust is the hypothetical tenant of the appeal hereditaments is important for two reasons. First, the status, powers and duties of the Trust are relevant to their desire to rent these properties to fulfil their functions and their willingness to pay rent, notwithstanding their inability to run the properties otherwise than at a loss. This is relevant to the tenant's "overbid". The question is whether there is a motive for the Trust to pay a rent above that which can be justified by the income and expenditure from the hereditament? The second reason why the identity of the Trust is important is that is allows us to consider the financial position of the Trust. The question is whether the Trust has the financial resources to pay a rent for a loss-making property"

27. The Tribunal then embarked on an examination of the powers and duties of the Trust under various statutes and continued:-

"This brief summary of the organisation, powers and the duties of the Trust shows its unique position as the national body for the ownership and preservation of historic buildings and land. It is not a commercial organisation, even though it may be run on commercial lines in the interests of efficiency and economy. Its purpose is preservation, not profit, and this would influence the negotiations for the hypothetical tenancies of Petworth and Castle Drogo, two important buildings which the Trust would wish to preserve, maintain and administer in the national interest. There is therefore a motive for the Trust to pay a rent for each of the appeal hereditaments notwithstanding that the costs of repair and administration would make them unprofitable".

28. The Tribunal then passed from considering motive to considering what the Trust was able to pay. The Tribunal held that in deciding what the Trust was able to pay it could look at the total resources of the Trust and was not limited to the income produced by the hereditament. It did that and continued:-

"It is clear .......... that in 1988 it had a considerable income in excess of that derived from properties open to the public. This additional income was £33.947 million, more than three times the income generated by all the properties. It is of course impossible to use these figures in any scientific way to value the appeal hereditaments. They indicate, however, the scale of the Trust's resources and that it is unrealistic to calculate the Trust's rental bids solely on the income and expenditure from the particular properties, as Mr Cooke-Priest^[4] has done. This income may provide a guide to rental value but, once it has been decided that the Trust is the hypothetical tenant, it would be wrong to exclude from consideration the general financial resources of the Trust. Clearly, and notwithstanding the annual deficit of expenditure over income at the appeal hereditaments, the Trust had the ability to pay rent under tenancies of these properties in pursuance of their position as a national heritage and preservation organisation. Indeed, Mr Cooke-Priest conceded that the Trust could afford to pay rent for the appeal hereditaments but would not do so."

29. The Tribunal then held that no additional value to the Trust arising solely out of its past occupation may be taken into account when formulating its rental bids. That holding is no longer contentious.

What is the correct method of valuation?

30. The Trust contended that in order to arrive at the hypothetical rent the right course was to start by calculating the gross income from the property and to deduct therefrom the expenses of running the property and that if this threw up a negative balance (as it did in the present cases) one need (in the context of the present cases) go no further : no tenant would pay a rent for such a property and the owner would be delighted in return for a peppercorn rent to get rid of his upkeep obligations to the tenant. The Valuation Officers contended that the Trust would want to be associated with these properties because of their importance, that this would lead the Trust to make a positive rental offer and that appropriate approach was to establish the gross receipts from the property and then take 3% of those receipts as being the hypothetical rent.
31. The Tribunal stated that

"..it is ... entirely a question of fact as to which method of valuation is correct. The test is does it produce the rent which the hypothetical tenant would pay?"

It stated:

"The Trust has the motive and the financial resources to offer a rent for each of the appeal hereditaments above that which can be found by using the full profits basis. At the hearing this enhanced rental bid was referred to as an "overbid" and we adopt this term. In our view it would arise out of the desire of the Trust to occupy properties as nationally important as Petworth and Castle Drogo, and with the financial resources to do so. This desire or motive is a consequence of the Trust's special position, and privileges, as a custodian of historic buildings for the benefit of the nation. ........................ This overbid, based on special and unquantifiable benefits over and above any pecuniary benefit, is eminently a question of fact and its existence has been accepted by the courts and this Tribunal."

32. After an examination of a number of decisions the Tribunal continued:-

"In our view these decisions establish the principle that a hypothetical tenant's overbid may be taken into account where there is a motive for making such a bid and the financial resources to do so. The motive may be a statutory duty, a moral obligation, a public, social or economic benefit or the exercise of a power. The thread running through all these motives is public interest. In these appeals the motive of the Trust to make an overbid would be its special position as trustee for the nation of historic buildings, for preservation and viewing, and its wish to extend this trusteeship to Petworth and Castle Drogo due to their national heritage importance."

The Tribunal continued:

"The Trust, as hypothetical tenant of the appeal hereditaments, has the motive and resources to make an overbid to rent these properties but the question we must now answer is whether this can be calculated with any accuracy (or at all) using Mr Cooke-Priest's profits basis valuation? They show large net deficits and, even if they are corrected to reflect the Trust as hypothetical tenants rather than a preservation society (which is the basis of Mr Cooke-Priest's valuations), they would still yield deficits or, at most, a very small surplus."

33. The Tribunal reached the conclusion that it would be both difficult and arbitrary to adjust Mr Cooke-Priest's full profits valuations to reflect the Trust's overbid. They preferred the Valuation Officer's method of taking 3% of the gross receipts. Stating:-

"This method of valuation has the merit of simplicity. I can be used to reflect the hypothetical tenant's overbid or rental bid by varying the percentage yield. It has the disadvantage that it cannot take direct account of particularly onerous obligations, such as repairs, but can only do so indirectly by varying the yield."

34. They rejected the Trust's approach because it did not include any element for the overbid.

What is the rateable value?

35. The Tribunal started by holding that as a matter of law a hereditament which is in rateable occupation may have a nil value and that whether it has such a value is a question of fact. Neither of these propositions is contentious. The Tribunal then gave its three reasons for being reluctant to come to the view that these properties had a nil value. I have set those reasons out early in this judgment as well as why I reject them as leading to that conclusion. The Tribunal then stated

"It is against this background that we calculate the rateable values of the appeal hereditaments using a modified profits basis valuation."

The Tribunal then went on to consider a number of detailed matters on which however I do not propose to stay at this point in this judgement.

The sole hypothetical tenant

36. In due course questions of law were drafted by the appellants' legal advisers and posed for this court by the Tribunal. The most important issue between the parties arises out of the interaction between (1) the terms of the statutory hypothesis and (2) the fact that it was common ground that the only hypothetical tenant would be the National Trust and that the National Trust has in real life a policy of not taking an interest in a property without first securing from whatever sources are available sufficient funding to ensure that that property can be run without incurring regular deficits. This issue is at the heart of questions (1),(2),(3) and (6) which it is convenient to take together. They read as follows.

(1) Where the hypothetical tenant is the actual occupier, are the policies of the actual occupier towards the acquisition of properties to be ascribed to the hypothetical tenant in considering what rent the hypothetical tenant would be willing to offer under the statutory hypothesis?

(2) Where the hypothetical tenant is the actual occupier are the circumstances in which the actual occupier came to be in occupation of the hereditament relevant in considering what rent the hypothetical tenant would be willing to offer under the statutory hypothesis?

(3) Is the financial benefit to the hypothetical landlord of passing the repairing burden to the hypothetical tenant to be considered in determining at what rent the hypothetical landlord would be willing to let the hereditament under the statutory hypothesis?

....

(6) For the purposes of the statutory hypothesis, is the National Trust to be regarded, on the basis of its statutory functions and powers alone, as being willing to pay in excess of the rent which a commercial organisation would pay for the hereditament?

37. The parties are content to accept the Tribunal's finding that the National Trust was in beneficial occupation of the properties. That in itself, as the case law demonstrates, does not necessarily imply that the hypothetical rent would be other than nominal.
38. The parties are content to accept the Tribunal's finding that in the hypothetical market there would only be one hypothetical bidder and that this would be the Trust. The fact that a person is not empowered by its constitution to make a bid for a tenancy, as opposed to a freehold, does not prevent the Tribunal from considering it as a bidder: Erith. The fact that the National Trust has a policy of not in practice taking an annual tenancy of premises such as the subject hereditaments does not prevent it from being considered a bidder : that seems to me to follow from Humber Ltd v James.
39. The crucial and difficult question before the Tribunal was whether, when there is only one hypothetical bidder and one is concerned to find out at what level of bid the hypothetical parties would agree, one should take the known policies of the hypothetical bidder into account. Mr Holgate submitted and the Tribunal accepted that they should be ignored and that this followed from Erith and Humber Ltd v James: if one is to ignore a constitutional inability to take a lease and the commercial improbability of not taking an annual lease why should one not equally ignore a policy of only taking on properties with a substantial endowment?
40. The Trust had money at its disposal ("the external surplus") which it could constitutionally spend on an annual rent on each of the properties on the statutory terms. There was however absolutely no evidence before the Tribunal from which it could be deduced that the Trust would ever in the real world spend the external surplus on obtaining any interest, whether freehold or leasehold, in either hereditament unless the upkeep of that property was secured. All the evidence pointed firmly in the opposite direction. To this the Tribunal gave no weight. The Tribunal took into account the fact that in the real world the Trust wished to obtain an interest in heritage properties and that the Trust had money to spend but failed to give any weight to the fact, which it apparently accepted, that in the real world the Trust does not choose to spend the external surplus on properties which do not have an endowment. The decision does not reveal why it gave this fact no weight. In adopting this approach I am afraid that the Tribunal fell into error. Such an error is an error of law and can not be brushed aside by reference to the undoubted fact that the Tribunal has great valuation expertise. It is to be noted that one of the problems with the Tribunal's approach is that it is wholly unclear on what basis it decided that some of the Trust's external surplus should be regarded as available for rent of these subject hereditaments rather than any or all of the other hereditaments of which the Trust is, in real life, the owner. Nor is it clear what part of the external surplus the Tribunal regarded as being available for bumping up the hypothetical rent of hereditaments rather than for the other calls on that external surplus.
41. The statutory hypothesis compels one to assume that the subject hereditament is held on a lease on the statutory terms. Mr Holgate submitted that the statutory hypothesis also compels one to assume that the freehold of the subject hereditament would not be available to the Trust. I would accept that submission. He did not submit that the statutory hypothesis compels one to assume that in the real world no other property in the country would be available to the National Trust save on the statutory terms. I think he was right not to make this submission. The hypothetical bargaining to establish the hypothetical rent would take place in a world in which the Trust owned a number of properties, desired to acquire a freehold in a number of other properties around the country provided that they were fully endowed and was interested in acquiring the hereditament in respect of which the statutory hypothesis was being applied. In the real world one of the factors which the Trust takes into account in helping it choose which property to take is the financial drain on the Trust's resources which that property is likely to represent.
42. The statutory hypothesis is only a mechanism for enabling one to arrive at a value for a particular hereditament for rating purposes. It does not entitle the valuer to depart from the real world further than the hypothesis compels. The Tribunal rightly accepted that in some respects it has to stay in the real world. It looked at the hereditament as it was; it took the actual assets of the hypothetical tenant, in the present case the Trust, into account. In my judgment it erred, however, in failing to take two further matters into account - 1. that all the evidence pointed against any willingness on the part of the Trust to meet from its existing assets net outgoings in respect of any property in respect of which it was considering obtaining an interest and 2. that all the evidence suggested that the hypothetical landlords would be delighted to be relieved of the task of meeting the net deficit for each of these properties whilst retaining for themselves the freehold reversion and obtaining from the hypothetical tenant a covenant to keep them in repair. As Mr Anderson put it, every £1 of expenditure which the landlord will save is worth no less to him than every £1 of rent which he will receive. The Tribunal, although it had rightly posed for itself the question "what are the characteristics of the hypothetical landlord?" never stayed to answer it.
43. Had it done so, it would have found, in my view, no reason to suppose that the hypothetical landlord would have been in a position where he would have been able to drive the Trust to accept rental as well as repairing responsibilities. One must bear in mind that the hypothetical landlord in the present cases would be faced with a situation in which, on the Tribunal's findings, there are no other bidders for the tenancy. All this points to a nominal hypothetical rent.
44. Does the case law compel an opposite conclusion? Mr Holgate makes the fair point that there are a number of cases where a positive rent has been accepted as appropriate by the courts notwithstanding that there appeared to be only one hypothetical tenant. However, the cases in which an overbid has been attributed to local authorities are cases where there was material before the Tribunal or Court entitling it to conclude that the local authority would on the facts of those cases have been prepared to pay the hypothetical rent in order to secure a site in its area where it could carry out its statutory function. In the present case there was no such material. There are no cases which have been cited to us where, in the teeth of evidence that no overbid would be made, it has been held to be right to attribute a positive hypothetical rent to a hereditament. I therefore do not consider that the case law compels a conclusion that in the present cases an overbid must be assumed as a matter of law. I have already indicated that in my judgment there was no material entitling the Tribunal to come to the conclusion that as a matter of fact there would have been an overbid. However, I am not to be taken as holding that the mere fact that (in cases such as the present with only one hypothetical tenant) that hypothetical tenant gives evidence that he would never pay any rent is conclusive. I see force in Mr Holgate's submissions that this would have potentially very grave implications. In my judgment, the Tribunal may be entitled to conclude that the hypothetical tenant is lying. But in the present case if, which is not clear, the Tribunal did so conclude, then there was no evidential basis for such a conclusion.
45. The interaction of the statutory hypothesis and the real world takes place in a number of varying circumstances and I would be reluctant to lay down broad propositions of law in the abstract. But in the context of the present case, for the reasons which I have endeavoured to set out, I would answer the first and third questions posed by the Tribunal affirmatively and the sixth question negatively. To the second question as framed I would not give an answer: what happened in the immediate past may be relevant, what happened long ago is unlikely to be.
46. By way of postscript, I ought to mention a number of minor submissions made by Mr Holgate.

1. The Tribunal, although in its decision referring to the Trust's "inability to run the properties otherwise than at a loss", to the fact that "the costs of repair and administration would make [the hereditaments] unprofitable" and to "the annual deficit of expenditure over income at the appeal hereditaments", did at one point in its decision, when referring to Mr Cooke-Priest's valuations, state that if these were corrected to reflect the Trust as hypothetical tenant rather than a preservation society (which was the basis of Mr Cooke-Priest's valuations) "they would still yield deficits or at most a very small surplus". On the last six words Mr Holgate built a submission that, if this court were against him in his prime submission, then we should remit the case to the Tribunal for them to determine a value rather than merely substitute a nil value for the value determined by the Tribunal. I see some theoretical force in this submission but in my judgment the whole tenor of the Tribunal's decision coupled with the tentative reference to "at most a very small surplus" leads to the conclusion that to remit the case to the Tribunal would not be justified.

2. Mr Holgate correctly pointed out that the policy of the Trust in relation to acquisitions, known as the Chorley formula, which in substance requires that the Trust will not acquire a property unless at the same time the Trust is provided with endowments which will enable it to be kept up and maintained without raids on the Trust's other funds, permitted of exceptions to be made. He submitted that the Tribunal was entitled to come to the conclusion that in the case of the subject hereditaments such exceptions would be made. In my judgment there was no evidential foundation for any such conclusion. None has been suggested by Mr Holgate although he drew attention to the undoubted expertise of the Tribunal. That expertise, as it seems to me, is of no help in determining whether or not the Trust would in the instant cases have made an overbid. What is noteworthy, but not I accept conclusive, is that as a matter of history it was established that for each of the subject hereditaments a positive endowment was required and that another property, Pitchford Hall, which in the opinion of English Heritage was "a heritage entity of exceptional national importance" had not been acquired by the Trust because of the absence of an endowment.

3. Mr Holgate correctly pointed out that the Trust does not in the real world insist that the endowment be provided by the seller of the properties. It is happy when the relevant funds are provided by other sources such as the National Heritage Memorial Fund or English Heritage. However, there was no evidence that any such source, faced with a request by the Trust to help finance an annual tenancy of the subject properties on the statutory terms would have been prepared to come up with funds to help the Trust pay the hypothetical rent. The point is of no relevance.

47. It is substantially common ground that the only way in which a positive hypothetical rent could be justified in the case of the appeal hereditaments is by assuming an overbid by the National Trust. It will be apparent from the foregoing that I am of the view that there was no material before the Tribunal from which it was entitled to conclude that the National Trust would make any overbid and that in those circumstances the hypothetical rents should have been fixed as nil. I therefore consider that the appeals should be allowed and that there is no need to remit the cases to the Tribunal.
48. Since the remaining three questions posed by the Tribunal are concerned with the valuation techniques of establishing the amount of an overbid they do not fall to be answered. In the circumstances I shall consider them shortly. It is convenient to start with the seventh. This reads as follows:-

Did we err in law in accepting the Valuation Officers' assessment of a 3% rentalisation yield for the appeal hereditaments?

49. As posed, it highlights the problem to which Lord Clyde referred in one of the passages which I have cited from the Scottish Exhibition Centre case above where he drew attention to the arbitrary character of fixing the amount of the so called overbid. There is usually no conceptual difficulty in those cases where one or more authorities must, or wish to, provide a service and this involves the use of land which must then be rated and where there is a choice of sites. The hypothetical landlord has a certain bargaining power and so has the local authority - it can move elsewhere. Often in such a case if there is no rental market in that type of hereditament and there is no ascertainable profit in using the hereditament in the way in which the authority wishes to use it the contractor's basis of valuation will be a useful technique.
50. Where, however, there is no possibility of moving, for instance as in the Morecambe and Heysham case and the Plymouth Argyle case, the position, I accept, is more difficult. The valuation officers in the present cases suggested to the Tribunal that the appropriate method of arriving at the amount of the overbid was to start with gross receipts and then take a percentage. The Tribunal accepted this method, saying of it that:

"It can reflect, through the yield, the hypothetical tenant's bid, taking account of gross receipts, particular obligations and the tenant's overall financial resources."

51. Both the National Trust and the valuation officers are anxious for the court to lay down some guidelines which can easily be applied to National Trust and similar properties throughout the country. I can understand that desire. Moreover, I recognise that the case law does not, in cases such as the present, give much help to the valuer on valuation principles to be applied when arriving at the amount of an overbid. However, I do not feel it appropriate in an obiter dictum to discuss the question in the abstract. I content myself with recording my total inability as at present advised to understand the theoretical justification for arriving at the amount of the overbid by starting at the gross receipts figure rather than a profit figure. The fact that one can adjust the percentage of that gross receipts figure in order to arrive at the hypothetical rent does not detract from the arbitrariness of starting with that gross figure. Moreover the amount of the percentage reduction seems to me equally arbitrary. The resulting valuations give a wholly misleading picture of scientific rigour. One suspects that what the valuer does is to use his evaluation of all the facts of the case and arrive at an intuitive figure and then build a theoretical structure to justify it. I cannot see any rational hypothetical tenant, who (unlike the Trust) is prepared to make an overbid, using that theoretical structure to arrive at the amount of his overbid in his negotiations with the hypothetical landlord. Nor can I see the hypothetical landlord having such calculations in mind.
52. Mr Anderson had various detailed criticisms of the way the Tribunal arrived at its 3%. It suffices to say that I was not persuaded that the Tribunal had acted unfairly in the reliance it placed on some evidence admitted very late as to rentalisation yields.
53. The fourth and fifth questions are concerned with the appropriate method of arriving at the gross receipts figure in respect of the two appeal hereditaments. By its fourth question the Tribunal asks:-

(4) Are the actual revenues achieved and the actual costs incurred by the actual occupier in the relevant years to form the basis of calculating the net annual profit or loss which can be achieved by the hereditament?

54. This question arose because in arriving at a rent for Petworth it started from the same gross receipt figure of £200,000 as had been put forward by Mr Cooke-Priest but then added a further £25,000 in respect of receipts which in its view could have been obtained by fund-raising events and by improving car parking provision which would result in an increase in the number of visitors to the house. Mr Anderson submits that the Tribunal was not entitled to make this addition.
55. The parties agreed that the rateable value of the hereditament was to be determined by reference to the level of values at 1 April 1988. The figure of £200,000 was based on actual receipts over a the period 1986-1988. Mr Anderson submits that the Tribunal was not entitled to make the addition. He submits that where there is only one hypothetical tenant and it chose at the relevant time not to have fund-raising events or to improve the car parking, it was not open to the Tribunal to hold that, in the higgling between that hypothetical tenant and the hypothetical landlord, the former would proceed on the basis that it could increase its income from fund-raising events and increased car parking.
56. Mr Spratling who was the relevant valuation officer stated that there were two ways in which the total income could have been increased - first, wider advertising and the provision of more attractions for visitors and ,second, by charging for access to the park and organising fund raising events there. It was on this basis that he founded his case for the addition of £25,000
57. The Tribunal found that it would not be practicable to make a charge for normal entry to the park. The Tribunal came to its view that £25,000 should be added to the notional receipts on the basis of the fact that in the Management and Financial Review dated 16.12.1988 there was a reference to the drop in the number of visitors "due to the inability of the Trust to provide adequate car parking" and to the fact that a new car park had been constructed in early 1988 and this would be opened for the first time in the spring of 1989. Later Reviews mention that large scale fund raising events had been held in the park since 1989.
58. Mr Anderson submitted that it is wrong in principle in cases where there is only one hypothetical tenant who can be identified to attribute to that tenant greater financial acumen than was in truth displayed by that particular person. He submits that if the actual resources of the National Trust are to be attributed to the hypothetical tenant then so must its actual policies at the relevant time. Although, as appears from the material cited by the Tribunal those policies were in the course of changing during 1988 I can find no evidential foundation for the Tribunal's finding that the National Trust negotiating a hypothetical rent in April 1989 would have raised its bid on account of the possibility during the relevant rating year of raising extra funds through car parking or organising events.
59. The fourth question posed by the Tribunal is one which can not be answered in the abstract as a matter of law. One can conceive of situations where the actual costs and revenues achieved by an actual occupier are irrelevant or misleading and other cases where they are highly relevant. In the present case as I have indicated I consider that was no evidential basis for making the addition.
60. By its fifth question the Tribunal asks:-

Does the statutory formula require or permit that the actual revenues and costs in the relevant years be adjusted to reflect the revenues and costs associated with chattels displayed in the hereditament on the basis that they are not rateable?

61. The fifth question posed by the Tribunal arises out of the fact that each of the subject hereditaments had in it a valuable collection of paintings and other artefacts which increased the attraction of the place for visitors. The Tribunal correctly held that the rateable value should reflect the hypothetical rent of the land and building excluding any value attributable to the chattels. It accepted that some visitors may go to the properties , particularly Petworth, wholly or mainly to see the works of art on display. However, it declined to make specific reductions to the gross receipts for the presence of the chattels in the hereditaments. It gave three reasons for this.

"First it is not feasible to apportion receipts between the hereditament and the chattels. Secondly, in the assessment of other properties in the leisure and tourist class by a percentage of gross receipts, no adjustment has been made for chattels. Thirdly, the hypothetical tenant possessing associated chattels would pay more rent than he would without such chattels."

The Tribunal continued:

".......................... It is a fallacy to suggest [as Mr Anderson had] that, by including in the valuation revenue from persons visiting the hereditament wholly or mainly to see the chattels, this necessarily results in the assessment of those chattels and this revenue must therefore be specifically excluded. .............there are properties where the whole of the income is attributable to the chattels which form part of the undertaking carried on in the property. Perhaps the best example is a zoo."

62. I agree with the Tribunal. Part of the value to a hypothetical tenant of hereditaments such as the appeal hereditaments is that they provide a superb setting for artefacts of which some hypothetical tenants are possessed. In the present case the National Trust was in truth possessed of such artefacts and I see no reason why this factor should be ignored.
63. The Tribunal concluded:

"The value of the chattels at the appeal hereditaments should be excluded through the use of an appropriate rentalisation yield, which should produce the rent which the hypothetical tenant would pay solely for the hereditament. This may properly reflect the potential of the hereditament for the display of chattels."

64. I agree that the hypothetical rent should reflect the potential of the hereditament for the display of chattels. I have already indicated my disagreement with the use of "an appropriate rentalisation yield" in the present context.
65. In the result the appeal should in my judgment be allowed and the Tribunal be directed to substitute nil rateable values in respect of each appeal hereditament.

LORD JUSTICE PETER GIBSON:

66. Legislation in a number of areas of the law provides that in specified circumstances transactions are deemed to have occurred which in reality never did occur. In fiscal legislation that is in order to arrive at a valuation enabling a particular tax to be levied at an appropriate rate. Thus for inheritance tax on property comprised in an estate at death, for capital gains tax on a deemed disposal such as when a beneficiary becomes absolutely entitled to trust property as against the trustees, and for stamp duty on a voluntary conveyance the relevant legislation requires the hypothesis of a sale in the open market even if in the real world the property would not or even could not be sold. In compulsory purchase legislation the hypothesis of a sale is used to arrive at the appropriate level of compensation.
67. But as was said by Lawton L.J. in a case under the Land Compensation Act 1961, Trocette Property Co. Ltd. v G.L.C. (1972) 28 P. & C. R. 408 at p.420:

"It is important that this statutory world of make-believe should be kept as near as possible to reality. No assumption of any kind should be made unless provided for by statute or decided cases."

68. Hoffmann L.J., in a capital transfer tax case, I.R.C. v Gray [1994] S.T.C. 360 at p.372, said:

"It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable.... The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened."

69. For rating purposes there is a similar requirement of a hypothetical transaction, but of a letting rather than a sale, just as rent review clauses in leases frequently require the assumption of a hypothetical letting in the open market. The rateable value of non-domestic hereditaments is to be ascertained on the basis of para.2(1) Sch. 6 to the Local Government Finance Act 1988, namely that it is to be taken to be:

"an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year if the tenant undertook to pay all usual tenant's rates and taxes and to bear the costs of repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command that rent."

70. However, subject to the specific statutory provisions, the general principles which have been held to apply to statutory and other hypothetical transactions seem to me consistent with the rating authorities, which Schiemann L.J. has reviewed, and are pertinent to the rating hypothesis mutatis mutandis. In particular I would emphasise the necessity to adhere to reality subject only to giving full effect to the statutory hypothesis, so that the hypothetical lessor and lessee act as a prudent lessor and lessee. I would call this the principle of reality, which is, to my mind, of fundamental importance in this case. The absence of demand for a property, if reflected in the fact that there is no competition between would-be lessees but only a single would-be lessee in the market, may well have a depreciatory effect on the rent, as the statutory assumption of a letting necessarily entails that the hypothetical lessor cannot refuse to let at the best rent available on the market, and a prudent would-be lessee, who was not in the real world under an obligation or duty to take the letting, cannot be assumed to have been prepared to pay over the odds for the letting. When there is only one bidder, the hypothetical lessor is in a weaker bargaining position, and in the real world would have achieved an advantage for himself by obtaining the letting of a property so much a drain on his resources on terms that the lessee would be bearing the costs of repair and insurance.
71. On the facts found by the Lands Tribunal, the present is the rare case where the lessee has been identified as an actual person, the National Trust ("the Trust"). I confess that it seems somewhat surprising to me that the Lands Tribunal did so find, given the uncontradicted evidence of the Deputy Chief Agent for the Trust , Mr. McCarthy:

"The Trust does not lease houses for show. It does not pay, and never has paid, a rent for a show house and does not intend to do so."

72. However, the Trust does not challenge the identification of itself as the lessee in the hypothetical transaction, and we must proceed on the basis that it entered into the transaction, undertaking in addition to the payment of rates and taxes, to bear the costs of the repairs and insurance and other expenses as required by the statutory hypothesis.
73. But whilst we must accept the hypothesis that it did become the lessee, in assessing what rent the Trust would have paid for the letting, the warning of Lord Herschell L.C. in L.C.C. v Erith [1893] AC 562 at p.563 should be heeded:

"no higher rent must be fixed as the basis of assessment than that which it is believed the owner would really be willing to pay for the occupation of the premises".

74. By reason of the principle of reality it should not be assumed that the Trust would have departed from its actual policies save to the extent that the statutory hypothesis requires such departure. It was Mr. Cooke-Priest's evidence that the Trust would not pay a rent for the appeal hereditament. It is plain from the evidence that the Trust does not acquire properties except on a self-financing basis in relation to each property in accordance with the Chorley Formula. True it is that that policy was adopted in relation to the acquisition of freeholds (rather than taking a yearly tenancy) and was in terms which recognised the need for flexibility (though no evidence of any actual exception from the policy since the Chorley Formula was approved in 1976 has been given), but it would be contrary to reality to assume that because what was acquired was a yearly tenancy the Trust would be prepared to abandon its self-financing policy and pay more than a nominal rent when the terms of the statutory undertaking operate in so onerous a fashion in the particular circumstances of Petworth and Castle Drogo. The Lands Tribunal referred to the Trust's "inability to run the properties otherwise than at a loss." Mr. McCarthy's evidence was that if the Trust wished to acquire either property now, the endowment required would be considerable.
75. The Revenue accepted that no commercial organisation would pay a rent for Castle Drogo and I do not doubt that the same would be true of Petworth. However the Lands Tribunal concluded that the Trust would have been prepared to make an "overbid" because the Trust had a motive to pay a rent above that which could be justified by the income and expenditure from the hereditament and notwithstanding that the costs of repair and administration would make the appeal hereditament unprofitable. I have difficulty with the logic of that conclusion. The purposes, powers and duties of the Trust provide the reason why the Trust is a person who might be interested in acquiring the properties. But its policies, which cannot be said to be unlawful, did not require it to acquire any particular property however exceptional, still less to make any acquisition on terms which left it not self-financing. We know it refused to acquire Pitchford Hall, another exceptional property, for that very reason. Why should it be taken to have been prepared to pay more than a nominal rent for Petworth or Castle Drogo, particularly when, on the Lands Tribunal's finding, there were no other competitive bidders to force up the rent?
76. The Lands Tribunal also said that it could consider the financial position of the Trust, adding "The question is whether the Trust has the financial resources to pay a rent for a loss-making property." With respect, I doubt if that is a particularly relevant question. It is implicit in the statutory hypothesis that the lessee in the hypothetical letting is a person able to fulfil every part of the statutory hypothesis, including being able to honour the statutory undertaking. But it would seem to me wrong in principle to look at the actual income and reserves of the Trust in order to infer therefrom that it would have made an overbid to become the lessee of the properties. The lessee, however wealthy, cannot be taken to have bid more than the market rent. The question is not whether the Trust could, but whether it would, pay a rent for a loss-making property, given its self-financing policy in the real world. I can see no reason why it would, consistently with the principle of reality.
77. The conclusion that the Trust would make an overbid would appear to stem from the Lands Tribunal's declared reluctance to find that Petworth and Castle Drogo have nil rateable values. Three reasons are given by the Lands Tribunal. The first is that as a matter of common sense a hereditament in rateable occupation and of some value or benefit to the occupier must normally have a rental value which can only be reduced to nil in exceptional circumstances. That is no doubt true. But the question in the present case is whether, in view of the statutory undertaking and the evidence that the Trust would have required considerable endowments to take over the properties now, that reason has any application to these burdensome properties. I think not. The second is that it does not automatically follow that lack of profitability produces a nil assessment. Again, I agree. But it does not lead to the conclusion that a nil assessment may not be the correct result on applying the statutory hypothesis to an unprofitable hereditament. The third is that a nil assessment is in effect an exemption from rates which is a matter for Parliament. The Lands Tribunal said that it would hesitate before extending the jurisdiction to the creation of new exemptions by nil assessments, unless this was an inescapable conclusion on the facts. I question whether that is the right approach. Parliament has laid down the statutory hypothesis which it is the duty of the Lands Tribunal to apply in all cases, even if it leads to a nil assessment in some. Of course there will be cases where it is inappropriate to determine the rateable value on the basis of profitability. Scottish Exhibition Centre Ltd. v Strathclyde Regional Assessor (1994) R.A. 209 is a good example of such a case. The Exhibition Centre had been built largely with public funds to promote tourism, industrial development and employment in Scotland. Although it ran at a deficit it was regarded as a major attraction which brought large economic benefits. But this third reason does not justify the conclusion of an overbid in the case of these particular exceptional heritage properties.
78. Was there anything in the authorities or in the evidence to show that the modified profits basis was the appropriate basis for arriving at the rateable value in accordance with the statutory hypothesis? Certainly there is nothing in the authorities that lends support to the adoption of such a basis in a case such as the present. We were told that it is a basis used for profitable bingo halls, hotels and cinemas, in respect of which there is some evidence of a correlation in the real world between turnover and rents. There is no comparable evidence whatever in the case of loss-making heritage properties such as those in the present case.
79. But the chief objection, to my mind, to the adoption of that basis lies in its irrationality when it is applied to properties such as Petworth and Castle Drogo, where there is no demonstrated correlation whatever between gross receipts and rents, particularly given the huge costs of repairs and insurance. I recognise how convenient it would be for the Revenue if such a basis could be used to solve the difficult problem which it faces in relation to such properties, but it can obtain no support for such a basis from the legislation. I am wholly unable to see by what defensible process of ratiocination any prudent lessor or lessee would arrive at such a basis for the assessment of rents. The arbitrary nature of this basis is emphasised by the fact that the 3% figure asserted by the Valuation Officers supposedly reflects in some unexplained way the repairing liabilities in respect of the two hereditaments. The Lands Tribunal itself recognised that this basis had the disadvantage that it could not take direct account of particularly onerous obligations such as repairs but could only do so indirectly by varying the yield. But how the variation is to be quantified is left a mystery. Further that same yield is asserted for both properties even though they vary in a number of ways, not least because Petworth, in contrast to Castle Drogo, contains the finest collections of pictures and sculpture in the care of the Trust, and common sense would appear to dictate that many visitors would go to Petworth to see those non-rateable chattels rather than the rateable hereditaments themselves. It is surprising that the Lands Tribunal felt bound to accept what in truth was mere assertion by the Valuation Officers of the figure of 3%, when the duty of the Lands Tribunal was for itself to exercise a proper judgment as to the appropriate figure. In my judgment the modified profits basis in the context of cases such as the present is completely arbitrary with no firm reference point in the real world. It is absurd to think that in the real world the lessee of a heritage property would be agreeing a rent on the basis of gross rather than net income or, more realistically, the amount of the net loss after outgoings, such as repairs.
80. I of course accept that the finding by the Lands Tribunal on the rateable value of a hereditament involves a factual assessment which this court cannot upset save for some error of law. This court's proper reluctance to interfere is the greater when the Lands Tribunal in the present case consists of members of such experience, whose views on valuation matters in a full and careful decision deserve respect. But I have reached the clear conclusion that the Lands Tribunal did make errors of law in the present case, in particular in departing from the principle of reality in holding that the Trust would make an overbid, notwithstanding its actual policies in the real world, and in adopting the modified profits basis in the way that it did.
81. Of the questions of law posed for this court by the Tribunal, I would agree with all but one of the answers suggested by Schiemann L.J. To question 5 ("Does the statutory formula require or permit that the actual revenues and costs in the relevant years be adjusted to reflect the revenues and costs associated with chattels displayed in the hereditament on the basis that they are not rateable?") I would answer that it does so require.
82. The Lands Tribunal accepted that chattels have not been rateable since at least 1840 and that it is the hereditament which houses the chattels which is rateable. It accepted in principle that some visitors may go to Castle Drogo and in particular to Petworth wholly or mainly to see the chattels on display. It declined to accept Mr. Cooke-Priest's adjustments for the chattels of 60% (for Petworth) and 15% (for Castle Drogo) of the visitors' receipts as being unsupported by survey evidence, although it was the Revenue's view at the relevant time (i.e. in 1990) that some such adjustment should be made. Thus in the Valuation Office Agency's guidance provided for the 1990 revaluation an adjustment of 30-50% of gross receipts was said to be appropriate for historic houses save where the contents were non-existent, sparse or inconsequential, while the Practice Note supplied by the Agency for the 1995 revaluation advised that the adjustment for chattels of national importance was up to 40%, for chattels particularly connected with the property, up to 30%, and for chattels merely for showing the house, up to 15%. The Valuation Officers' evidence was that the Agency had more recently taken the view that no adjustment was appropriate.
83. The Lands Tribunal gave 3 reasons for not accepting that specific reductions should be made to the gross receipts for the presence of chattels in the hereditaments in accordance with Mr. Cooke-Priest's evidence. The first was that it was fallacious to suggest that the inclusion in the valuation of revenue from visitors who came wholly or mainly to see the chattels necessarily results in the assessment of those chattels. I regret that I am not able to follow the logic of this suggested fallacy. The argument deployed is a reductio ad absurdum : no one goes to a zoo to see the premises without the animals, or to a cinema without there being a film shown there; therefore all receipts of a hereditament must be taken into account regardless of the contents.
84. There are three obvious answers to this. First, a heritage property is not like a zoo or a cinema : many people do visit the property for reasons other than to see the chattels in it. Second, the statutory hypothesis is a letting of the rateable hereditaments which must be valued as vacant and available for letting. Lord Clyde in the Scottish Exhibition Centre case, supra, said at p.211,

"The receipts which a tenant may expect to enjoy in his occupation are obviously a relevant consideration in the calculation of a reasonable rent in respect of a variety of subjects. But in many cases those receipts will be attributable at least in part to considerations other then the lands and heritages which are to be valued, such as, for example, the expertise and business acumen of the particular occupier or the nature or character of moveable equipment in the premises or the quality of the goods or services which he provides. It would be inappropriate in such cases to calculate a rental value solely on the basis of receipts because such a valuation would reflect something other than the values of the lands and heritages themselves."

85. Third, if for example, a special exhibition of pictures added to the revenues and costs of Petworth, there could be little doubt but that the additional revenues and costs should be excluded from the assessment of the letting value of the unfurnished hereditament by the measure of net revenues, even though Petworth always had the potential for housing such exhibitions. Subject only to the problem of quantification, there is no reason in principle why the revenues and costs in respect of the exceptional collections of chattels on permanent display at Petworth should be treated differently, given the apparent acceptance by the Lands Tribunal of the fact that part of the revenues of Petworth was obtained from visitors who came wholly or mainly to see those chattels. The quantification problem is one capable of resolution by valuation expertise.
86. The Lands Tribunal said that any income solely attributable to chattels could be better reflected by adjusting the rentalisation yield than by an arbitrary apportionment of income, thereby failing to recognise that such adjustment would in itself be arbitrary, and in any event it failed to make any such adjustment. Such apportionment had for a number of years been treated by the Revenue itself as both appropriate and feasible.
87. The second reason given by the Land Tribunal was that Mr. Cooke-Priest's allowances of 60% for Petworth and 15% for Castle Drogo were solely matters of opinion unsupported by evidence such as visitors surveys. True it is that the allowance for Petworth was greater than that suggested in the Revenue's guidance, but that reflected the exceptional quality of the collections there. The amount of the adjustment was surely a matter of valuation expertise of the type with which rating experts are very familiar. For example adjustments are made to actual receipts to reflect the fact that members of the Trust do not pay to enter Trust properties.
88. The third reason was that the example assessments put forward by the Valuation Officers to support their rentalisation yield were all on an unapportioned basis. But the Lands Tribunal itself accepted that little weight could be given to this evidence, and the fact that they were on an unapportioned basis does not justify a similar basis in the case of the heritage properties the subject of the appeals, without further examination of the circumstances of those assessments.
89. I am therefore unable to accept the reasoning or conclusion of the Lands Tribunal in relation to this question. In my judgment the statutory formula requires that the hereditaments themselves, without the chattels, should be assessed and where the net profits basis is the basis used for that assessment, the revenues and costs attributable to the chattels should be deducted from the actual revenues and costs.
90. For the reasons which I have already given as well as the reasons given by Schiemann L.J. I would allow these appeals.

THE VICE-CHANCELLOR:

91. Lord Justice Schiemann has described the problem that is presented in this case. I agree with his analysis of the problem and with the conclusions he has reached. I agree also, with the judgment and conclusions of Lord Justice Peter Gibson. There is a minor point, relating to chattels and to the answer to question 5, on which my Lords are in disagreement and on which I, too, have reservations.
92. The problem arises out of the difficulty in applying the statutory formula for determining rateable value, set out in paragraph 2(1) of Schedule 6 to the Local Government Finance Act 1988, to a case in which, in the real world, there would be nobody prepared to pay a positive rent on taking the subject property for a tenancy from year to year on full repairing terms.
93. Having correctly concluded that the National Trust's occupation both of Petworth House and of Castle Drogo was, for rating purposes, beneficial occupation, the Lands Tribunal treated the National Trust as a potential bidder in the hypothetical negotiation for the grant of the hypothetical tenancy postulated by the statutory formula. On the findings of fact made by the Tribunal, the National Trust would have been the only bidder for the properties:-

"On these facts we find that the Trust would have been the hypothetical tenants of Petworth and Castle Drogo and would have been the only bidders for these properties". (p.26 of the Decision).

94. It seems to me that an approach which treats an actual individual or company as the only, and therefore as the successful, bidder in the hypothetical negotiation for the yearly tenancy is bound to run into unacceptable illogicalities
95. The statutory formula requires the assumption that a tenant could be found to take the property on the yearly tenancy. In a case in which there are no comparable properties being sold and purchased, let alone any being let on yearly tenancies, the first requirement must be to try and identify the characteristics of the individual or company who might be willing to take a yearly tenancy of the property.
96. In the case of Petworth and Castle Drogo the Tribunal concluded that the hypothetical tenant would have to be an organisation with a specific interest in historical houses and with a willingness to spend money on their preservation. The National Trust was, the Tribunal concluded, the only organisation with the requisite interests, purposes and resources. It proceeded to treat the National Trust as the hypothetical bidder. But the evidence before the Tribunal established that the National Trust would not in fact, ever take a yearly tenancy of an historic property. Nor would it take on any historic property without the provision from some outside source of an endowment fund either to meet or to go some way towards meeting the net outgoings that ownership of the property and responsibility for its maintenance and repair would bring with them. But these facts the Tribunal ignored. It did so because the statutory formula demands that the hypothetical negotiations for the yearly tenancy should be successful. If only one potential bidder has been identified, a conclusion that that bidder would not be willing to take the yearly tenancy is not one that is permissible. The statutory formula insists that the tenancy is taken up. The Tribunal's solution to this logical dilemma was to set to one side the facts that showed the National Trust would not have taken the yearly tenancy and, having done so, then to ask itself, by reference to the National Trust's purposes and resources, what rent the National Trust would be willing to pay.
97. In my judgment this approach cannot be right. It loses sight of the fact that the tenancy prescribed by the statutory formula is a hypothetical tenancy. The landlord is a hypothetical landlord. The tenant is a hypothetical tenant. The negotiations are hypothetical negotiations. The one and only element that is not hypothetical is the subject property, to be taken in its actual state, rebus sic stantibus. The error, in my judgment, comes from treating the prospective tenant in the hypothetical negotiations not as hypothetical, but as a specific, identifiable individual or corporation. It is the mix of hypothesis with reality that produces the difficulties.
98. The National Trust's actual ownership, occupation and use of Petworth and of Castle Drogo show that an organisation devoted to the preservation of historic houses and with the resources to undertake the financial burden that responsibility for these houses carries with it would be a potential prospective tenant for the purposes of the statutory formula. The National Trust is an obvious model for such an organisation. The National Trust's existence in this country and its acquisition and ownership of historic houses justifies the application of the statutory formula to determining the rateable values of Petworth and of Castle Drogo respectively on the footing that an organisation such as the National Trust would be a potential bidder. But it does not, in my opinion, justify treating the National Trust as the actual bidder. It is known that the National Trust's actual policy would preclude it from being a bidder. There is, the Tribunal found, no other organisation in this country with similar characteristics and resources to those of the National Trust that could be regarded as a potential bidder. But, for my part, when considering the rateable value of properties for which there is no demand, and therefore no market in the ordinary sense, I cannot accept that it is right or necessary to try and identify actual individuals or organisations who might be willing to join in a bidding contest for the property.
99. In my judgment, the hypothetical tenant in the present case would, on the findings of fact made by the Tribunal, be an organisation for which the National Trust could stand as a model. It would be, so to speak, a hypothetical National Trust. But it would not actually be the National Trust.
100. The question for the Tribunal was not, in my judgment, what annual rent the National Trust would have been willing to pay for the two properties, but what rent a hypothetical organisation whose purposes were the preservation of historic houses and whose resources were adequate for taking on these properties would have been prepared to pay. The answer to this question would have to take into account in respect of each property the net annual receipts that could be obtained from a reasonable exploitation of the property's potential and the annual expenditure that would have to be undertaken in the maintenance, repair and general preservation of the property. It is, in my opinion, important to notice that the statutory formula, unlike its predecessor in Section 19 of the General Rate Act 1967, places the burden of repair and maintenance on the hypothetical tenant. Each of the properties with which we are concerned appears to require an annual expenditure on repair and maintenance which would leave the hypothetical tenant heavily out of pocket.
101. The facts as found by the Tribunal, regarding the annual receipts that might be obtained from each property and the annual expenditure currently being spent on the maintenance and repair of each property, make it quite unreal, in my judgment, to suppose that the hypothetical tenant would be prepared to pay any rent at all. The hypothetical tenant, the hypothetical National Trust, would be accepting the obligation to meet a considerable annual deficit. Why should any hypothetical tenant be willing to add to that deficit by paying a positive rent? Why would not the hypothetical landlord be willing to grant the yearly tenancy at a nil rent in order to escape the annual deficit resulting from the cost of keeping the property in repair?
102. The Tribunal, taking the National Trust as the actual tenant, concluded that the National Trust's purpose of preserving historic houses would have led it to be willing to pay at least something by way of a positive rent. For the reasons I have given I do not regard an approach that treats the National Trust as the actual tenant, as opposed to the model for the hypothetical tenant, as being correct. But assuming that approach is correct, there cannot, in my opinion, be any justification for ignoring the abundant evidence that the National Trust would not have been willing to pay any positive rent. The Tribunal did not express any disbelief of that evidence nor was there any apparent basis for the Tribunal doing so.
103. It cannot, in my judgment, be right to treat the National Trust as the actual bidder and then to ignore evidence about the National Trust relevant to the amount of the rent that the National Trust would be willing to offer. The statutory formula requires the assumption that the hypothetical landlord and the hypothetical tenant reach agreement on the amount of the rent. It does not require the assumption that the National Trust, treated as the actual bidder, would agree to pay rent at a level which the evidence shows it would never agree to pay.
104. So whether the National Trust is treated as the actual bidder or, as I would prefer, the model for the hypothetical bidder, the facts established in evidence and accepted by the Tribunal are inconsistent with any conclusion other than that the annual rent at which each of these properties would be let on the hypothetical annual tenancy would be nil.
105. In my judgment, for these reasons and those in the judgments of Lord Justice Schiemann and Lord Justice Peter Gibson, this appeal must be allowed. Save in respect of question 5, I am in agreement with the answers they propose to the questions posed by the Tribunal.
106. As to question 5: "Does the statutory formula require or permit that the actual revenues and costs in the relevant years be adjusted to reflect the revenues and costs associated with chattels displayed in the hereditament on the basis that they are not rateable?": I would answer that the statutory formula does not require but does permit.
107. It is correct, as Lord Justice Peter Gibson has pointed out, that the statutory hypothesis is that the subject property be let on a vacant possession basis, empty of furniture, furnishing and objects d'art. But the suitability of a stately home as a showplace for pictures and other artistic objects is a part of its characteristics. In the case of Petworth, its association in the public mind with beautiful things and the well justified expectation of the public that it will continue to house beautiful things are, in my opinion, as much part of its characteristics as are the beauty of its setting and of its architecture. The fact that the visitors to Petworth, whose money at the gate produces the annual revenue, come to see both the house and its contents does not, in my opinion, by itself require any adjustment of the revenue so as to separate out the part attributable to the contents from the part attributable to the house. If it were possible to show that some part of the revenue was specifically attributable to the contents, the position would be different. But, generally, visitors will simply pay their entrance fees to see the house and its contents. So I would answer question 5 in part by saying that the statutory formula does not necessarily require the adjustment referred to.
108. However, if there are particular items in the contents of Petworth in respect of which specific, identifiable, additional costs are incurred and which lead to specific, identifiable, additional revenue being received, the statutory formula should, in my view, be applied by excluding those additions from the annual revenues and costs. An example might be a Turner exhibition. Suppose for, say, two months Petworth were to house an exhibition of Turner pictures, with a resulting increase in visitors, in revenue and in costs, the statutory formula should ignore those increases. For that purpose appropriate findings of fact would, of course, be necessary.
109. In my judgment, therefore, if the fact finding authority, be it the Valuation Officer or, on an appeal, the Lands Tribunal, were able to identify particular revenue and costs as being attributable to particular chattels, those revenues and costs should be left out of account in applying the statutory formula. But not otherwise. So I would answer question 5 by saying that the statutory formula does permit the adjustment of the annual revenues and costs. But on the findings of fact made by the Tribunal in this case, the Tribunal was in my judgment, correct in making no adjustment.
110. Since the manner in which I would answer question 5 corresponds in part with the answer given by Lord Justice Schiemann and in part with the answer given by Lord Justice Peter Gibson, but with neither wholly, it is fortunate that the answer to this question does not affect the result of the appeal.

Order: Appeals allowed with costs. Leave to appeal allowed with costs condition (Not part of approved judgment]

Note 1   My emphasis    [Back]

Note 2    Pearce LJ continued “For those reasons I would refer the case back to the Lands Tribunal in order that it might assess the value on the basis of a rent which would be arrived at between the lessors and the ratepayers, the ratepayers being the only bidders in respect of the hereditament.”    [Back]

Note 3   I> My emphasis    [Back]

Note 4   The Trust’s valuer    [Back]