British
and Irish Legal Information Institute
Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
England and Wales Lands Tribunal
You are here: BAILII >> Databases >> England and Wales Lands Tribunal >> Scottish & Newcastle Retail Ltd v Williams (VO) [2000] EWLands RA_480_1993 (22 February 2000)
URL: http://www.bailii.org/ew/cases/EWLands/2000/RA_480_1993.html
Cite as: [2000] EWLands RA_480_1993
[New search] [Printable RTF version] [Help]
- Under the law of rating it is established that every hereditament must be valued (on the basis of an assumed tenancy from year to year) taking account of its existing use and physical state. The requisite assumptions as to use and physical state comprise two limbs of what is known as the rebus sic stantibus rule. Although the existence of the two limbs of the rule is established, there is, however, controversy as to their nature and, in particular, as to whether (and, if so, to what extent) prospective changes that a possible tenant might make in the use or the physical state of the hereditament can be taken into account.
- (At the start of the hearing we raised with counsel whether the latinism "rebus sic stantibus" could not usefully be replaced by something in English, but they did not think it could be. As simply the name of a rule, the contents of which depend not upon the meaning of the Latin words themselves but upon the decisions that interpret it, rebus sic stantibus serves no function that could not be performed by some substitute words. The abbreviation "rebus" that is frequently used has the merit of brevity and the demerit of meaninglessness, and we do not think that the English version of it - "the things rule" - has much to commend it. The term used in Scotland - "the actual state rule" - could, we believe, usefully be adopted, and we hope that in future it may be. To use it in this decision, however, might be distracting, and so, for the present, we stick to the words "rebus sic stantibus".)
- These appeals concern two units in the central Milton Keynes covered shopping centre. The centre was opened in 1979 and contains in the region of 100,000 sq metres of retail space divided between about 160 individual traders, including department stores, the major retailers, banks and other financial institutions, building society offices, restaurants/cafés and two public houses. The appeals relate to the two public houses. One, the Rose and Castle public house, was entered in the 1990 valuation list as "Public House and Premises" and the other, the City Fayre / City Duck, as "Public House, Wine Bar & Premises". The values ascribed to them in the list reflected the valuation officer's view that, vacant and to let on the rating hypothesis, these premises would have commanded the same rents as retail shops, because the potential tenants would have included retailers who would look to strip the units down to their shells and then fit them out and use them as shops. The issue between the parties is whether this is the proper approach to valuation. The appellants contend that the hereditaments should be valued in their existing physical state as public houses and that they should not be assessed at the rents that they would have commanded if they were to be let as shops. Rateable values are agreed on the alternative bases advanced by the parties: for the Rose and Castle £29,500 if the appellants are correct and £132,000 if the respondent is correct; for the City Fayre / City Duck £50,000 on the appellant's basis, £210,000 on the respondent's. The appeals thus raise in a very stark fashion the dispute on the two limbs of the rule.
- That the differences between the valuations are so great is a reflection of the very considerable increase in shop rents in the Milton Keynes shopping centre since it was opened in 1979, and the very much lower increase in the rents of public houses. Both premises, although each occupies a shell no different from that of the shops in the centre, are let on leases of 35 years and 25 years respectively that provide that the rent on the 5 yearly reviews is the rent "for use as a public house" (in the case of the Rose and Castle) and "for licensed purposes" (in the case of City Fayre / City Duck). Both leases are the original leases of the premises, and it appears that when they were granted in 1979/1980, the difference between shop rents and pub rents was small. The City Fayre / City Duck hereditament was the subject of a Lands Tribunal appeal in 1985 (Couper (VO) v Aylesbury Brewery Co Ltd (1985) 275 EG 255, to which we make fuller reference later), and from this it can be inferred that shop values in the centre were higher than pub values by a factor of perhaps 1.33 in the 1973 valuation list, compared with a factor of over 4 times in the 1990 list.
- In the 1990 rating lists the accepted method for valuing public houses was a type of profits basis known as the overbid method. Under this method a rental bid under the rating hypothesis is assumed to be made in the light of the fair maintainable profitability of the public house. It starts with the actual trade of the public house and then proceeds by a series of steps involving valuation judgment. The values that are agreed in respect of the subject hereditaments if they are to be valued as public houses are arrived at by using the overbid method. Shops were normally valued on the basis of their floor area using the zoning method. A "zone A" price, expressed in terms of £s per square metre, is applied to the first 8.8 metres of depth from the frontage, and a price at half the zone A price is applied to the next 8.8 metres (zone B), and then the price is halved again for zone C (if one is taken) and again for the remainder of the sales area. An adjustment is then made to reflect advantages (in particular a return frontage, if there is one) and disadvantages. The zone A price reflects the value of the position of the frontage as a trading location for retailers. Restaurants were valued either on the basis of an overall price per square metre or, if occupying premises in a shopping street, on the zoning method. The values agreed on the assumption that the subject hereditaments are to valued by reference to shop or restaurant values are arrived at on the zoning method.
- During the first 10 years of the existence of the Lands Tribunal, from 1950 to 1960, decisions revealed a difference of approach on the rebus sic stantibus rule relating to use. Some cases were decided on the basis that in estimating the rent at which the hereditament might reasonably be expected to let any use that a prospective tenant might have in mind could be taken into account, provided that no structural alteration of the premises was required to put it to such an alternative use. In other cases it was held that the hereditament must be valued at the rent that it would command for its existing use and the fact that a higher rent might be paid for some other use was to be disregarded. There appears to have been a consistency in the decisions in ruling out of account prospective changes to the structure of the hereditament.
- In 1960 a three-member Tribunal (Sir William FitzGerald QC, President, Mr J A F Watson FRICS and Mr J R Laird FRICS) in Fir Mill Ltd v Royton UDC and Jones (VO) (1960) 7 RRC 171 addressed the controversy and made this pronouncement (at 185):
- Following the Fir Mill decision the approach which it established was generally followed, but there were some decisions on the part of surveyor members that failed to do so. The controversy had evidently not been laid to rest, and in 1977 a distinguished surveyor member, Mr J H Emlyn Jones FRICS, sought to grapple with it. In Midland Bank v Lanham (VO) [1978] RA 1 at 26 he put forward his solution, which was that, although the hereditament was to be valued rebus sic stantibus in terms of its existing mode or category of occupation,
- Thus, on this approach, the mode or category of occupation was not determined by whether the hereditament was a dwelling house or a shop or a factory, as Fir Mill had decided, but by the range of possible uses which the market would take into account, so that the rental value could be assessed having regard to all such possible uses. As far as the physical state of the hereditament was concerned, the member suggested (at 21) that the prospect of structural alterations could be taken into account if this enhanced the value of the hereditament:
- Both Fir Mill and Midland Bank were decided on their facts in a way that ruled out the possibility of an appeal on the important statement of the law that each decision contained. There are thus no decisions of the Court of Appeal or the House of Lords that are directly in point, and, 40 years after Fir Mill, the controversy continues.
- For the appellant ratepayers, Mr David Widdicombe QC said that the principles decided in cases stretching back to the 18th century were as follows:
- He referred to the following cases in support of these basic propositions:
- Mr Widdicombe submitted that the rebus sic stantibus rule was fundamental to the law of rating. It was, he said, restated - and correctly restated - in the Fir Mill decision, in the passage which we have quoted above. The first limb of the rule - that structural alterations to the hereditament are not allowed - was, Mr Widdicombe said, confirmed by Lord Wilberforce in Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366. In order to see what alterations had to be left out of account it was necessary to establish what constituted the hereditament. He referred to British Bakeries v Gudgion (VO) (1969) 16 RRC 56 and Lewis Vintners v Speight (VO) (1984) 272 EG 1177 as showing that full height partitions had been held to be part of the hereditament. He submitted that in Fir Mill the Lands Tribunal had not used the word "structural" in a technical sense but in its ordinary or common sense meaning. In particular it was not confined to "load-bearing". He referred to the following Lands Tribunal cases in which items had been held to be structural, and therefore not capable of alteration for the purposes of the rebus sic stantibus rule:
- Mr Widdicombe also referred to the following Lands Tribunal cases in which items had been held to be non-structural and therefore susceptible of possible alteration within the rule:
- On the second limb of the rebus sic stantibus rule - the mode or category of occupation - Mr Widdicombe identified some 20 cases decided by the Lands Tribunal between 1955 and the Fir Mill decision in 1960. Those cases, he said, did not present a consistent view of the second limb of the rule, and they were clearly superseded by the 3-member decision in Fir Mill. After Fir Mill in 1960 and before the decision in Midland Bank, the cases, with few exceptions, followed and applied Fir Mill. Mr Widdicombe drew attention in particular to Liverpool Corn Trade Association Ltd v Pritchard (VO) (1962) 9 RRC 358, in which Mr R C Walmsley FRICS held that a news room in a corn exchange should be assessed by reference to office values; Croydon Corporation v Hardiman (VO) (1962) 9 RRC 382, in which Mr Erskine Simes QC held that a show house on a newly-developed housing estate should be valued as a house; Duckworth (VO) v Manchester Corporation (1970) 16 RRC 235, where Sir Michael Rowe QC, President, held that a bus turning and loading point was not in the same mode or category of occupation as a general car park; London Transport Executive v Croydon LBC and Phillips (VO) (1974) 19 RRC 299 in which Mr Douglas Frank QC, President, and Mr W H Rees FRICS held that LTE bus garages were not in the same mode or category as warehouses or industrial hereditaments; James v Clee (VO) (1976) 20 RRC 304, in which Mr Walmsley FRICS concluded that a shop and flat used as an office should be valued as an office; and Henriques v Garland (VO) (1977) 20 RRC 341, in which Mr V G Wellings QC held that a shop used as a house should be valued as a house.
- In 1977 came the decision of Mr Emlyn Jones FRICS in Midland Bank. That case concerned a hereditament consisting of parts of a building which had been built as offices some 16 years before the relevant date. The ratepayers occupied the ground floor and basement as a branch bank and the rest of the hereditament (the first, second and fourth floors and part of the seventh floor) as a bank training school. The remainder of the building was used as offices by a number of different occupiers. It was agreed that in their existing physical state the fourth and seventh floors were capable of being used as offices and it appeared to the member that only very minor alterations were required to the first and second floors to enable those floors also to be used as offices. The valuation officer accepted the local valuation court's decision that the first and second floors should be valued at something less than office value, but he contended that office value should be applied to the fourth and seventh floors. The member concluded (at 28-9):
- Before reaching that conclusion the member had referred to and discussed a large number of authorities in considering the scope of the rule on mode or category of occupation. He said (at 22):
- He reconciled this view with the principle that the hereditament was to be valued rebus sic stantibus in terms of its mode or category of occupation by promulgating (at 26) the proposition we have quoted above:
- Mr Widdicombe's criticisms of the Midland Bank decision were stringent. He said that the proposition we have just quoted was not advanced by either the parties and that it did not appear that they were invited to make submissions upon it. The member's conclusion on the facts - that there would be no competing bid from prospective office tenants that would affect the rent of the of the premises as a training school - in any event made the proposition obiter. Mr Widdicombe examined each of the authorities referred to in the decision. He drew attention to the fact that R v Everist was not among the cases referred to. Those that the member relied on, he said, were not cases in which rebus sic stantibus was in issue, and it was wrong to treat selected passages from them as though they were statements about the rebus sic stantibus rule. None of them contradicted the rule. There was no reason why the need to take into account all the characteristics of the hereditament should be taken to negate the rule. Mr Widdicombe also drew attention to the fact that in Westminster City Council v British Telecommunications Plc [1985] RA 87, Mr Emlyn Jones had expressed his Midland Bank proposition in different terms, saying (at 101):
- Mr Widdicombe referred to the following decisions of the Lands Tribunal post Midland Bank, many of which, he said, were at odds with Fir Mill:
- Mr Widdicombe also referred to two Scottish cases and to Armour on Valuation for Rating (Fifth Edition 1985 by J J Clyde QC and J A D Hope QC, Consultant Editor Lord Mackay of Clashfern) which together showed, he said, that the English Law and the Scottish Law on rebus sic stantibus were the same. The Tribunal in London Transport Executive v Croydon LBC and Phillips (VO) (1974) 19 RRC 299 (Mr Douglas Frank QC, President, and Mr W H Rees FRICS) had been correct to cite from Scots Law. In Assessor for Stirlingshire v Myles and Binnie 1962 SC 530 it was held that an office should be valued as an office and not as a shop. Lord Patrick at 534 summarised the law, in a passage cited in Armour, as follows:
- Mr Widdicombe noted that in Hong Kong the Midland Bank test had been held to be wrong by the Hong Kong Lands Tribunal in Lai Kit Lau Mutual Aid Committee v Commissioner of Rating and Valuation (unreported), but the Tribunal had been reversed on this point (wrongly, Mr Widdicombe said) in the Hong Kong Court of Appeal (Commissioner of Rating and Valuation v Lai Kit Lau Mutual Aid Committee [1986] HKLR 93).
- Mr Widdicombe referred to the fact that under the Town and Country Planning (Use Classes) Order 1987 and the Town and Country Planning (General Permitted Development) Order 1988 changes of use can be made without the need for planning permission. He submitted that the only relevance of planning law to rating is if it restricts the operation of the rebus sic stantibus rule in a particular case. It cannot, he said, enlarge it.
- Finally, Mr Widdicombe placed considerable emphasis on two decisions of this Tribunal relating to public houses. The first of these was Couper (VO) v Aylesbury Brewery Co Ltd (1985) 275 EG 255, the case which concerned the City Fayre / City Duck hereditament in the 1973 valuation list. The City Fayre part of the premises was then called Jemimah's and the valuation officer's case was that this part should be valued by reference to shops and restaurants, while the rear part should be valued as a pub by the direct method. In rejecting this contention, the member (Mr J H Emlyn Jones FRICS) said at 256:
- Mr Widdicombe said that there had been no factual change of circumstance since that decision that would justify a different approach on the present appeal; and, if that was right in relation to the City Fayre / City Duck, it must also be right in relation to the Rose and Castle.
- The second case was Jones (VO) v Toby Restaurants (South) Ltd [1992] RA 87. It concerned a public house in a shopping street. The valuation officer contended that the building was used as a restaurant and ought to be valued on the same basis, the zoning method, as other premises in the shopping street. The Tribunal (Mr C R Mallett FRICS) found that the hereditament was used as a public house and could not be used for any other purpose without significant changes to its physical state. That, in his view, was fatal to the valuation officer's case. Mr Widdicombe submitted that the case was on all fours with the present appeals.
- On behalf of the respondent valuation officer Mr Holgate submitted that the object in valuing the hereditament is to have regard to all intrinsic characteristics and to exclude all extrinsic characteristics. In relation to the mode or category of occupation, any alternative use to which the hereditament could be put without alteration can be taken into account if it would produce a higher rent than that for the actual use; and he based himself on the approach put forward in Midland Bank. It would be logical he said, to apply the same approach to the question of alterations, so that any potential physical alterations of the hereditament, whether structural or non-structural, may be taken into account if the effect of the potential for them is to increase the value of the hereditament above its existing use value. Any potential change to the physical state must not, however, be assumed to have been carried out at the material day. Moreover physical changes which, taken as a whole, are so substantial as to make the altered property a materially different hereditament cannot, he said, be taken into account.
- Mr Holgate's starting point was the rating hypothesis. Under the statutory provisions, the rateable value was the rent for the hereditament (1988 Act Schedule 6 para 2(1)), and not an amount related to the characteristics of the occupier. He drew attention to the fact that under para 2(5) and 2(6) the para 2(7) matters are to "be taken as they are assumed to be" on the day when the list must be compiled or on the material day. This wording was new. It was not in the predecessor provision, section 20 of the General Rate Act 1967. While it did not alter the law on rebus sic stantibus, it provided scope for its interpretation. Para 2(7)(a), which refers to "matters affecting the physical state or physical enjoyment of the hereditament", does not specify that the premises must be taken to be in as in fact they were on the material day. Para 2(7)(b) provides no criteria for determining "mode or category of occupation", and does not provide that only the actual user can be taken into account.
- Under the rating hypothesis, the actual occupier is one potential bidder, but the object is not to assess what the actual occupier would pay under the hypothetical tenancy (and Mr Holgate referred to R v London School Board (1886) 17 QBD 738 at 740, approved in LCC v Erith Parish [1893] AC 562). Indeed, he said, there was no basis either in statute or in the case law for saying that the rateable value must be the value of the beneficial occupation to the existing occupier. It must be assumed that the letting is from year to year with a reasonable prospect of continuance (Dawkins v Ash); and the premises must be valued as if vacant and to let (LCC v Erith Parish [1893] AC 562 at 588) in the sense that the existing business has ended, the premises are physically vacant and the process machinery has been removed (Fir Mill at 185). Restriction on use in a lease governing the actual occupation and restrictive covenants are irrelevant to the rating hypothesis (Byrne v Parker (VO) [1980] RA 45; S & P Jackson (Manchester Ltd) v Hill (VO) (above)). Statutory restrictions are an intrinsic feature of a hereditament and are to be taken into account. Thus a public house licence is germane (Robinson Bros), and planning controls are relevant if they would prevent premises from being put to a particular use. However, where a permission has been obtained or is likely to be obtained (or permission is unnecessary because of permitted development rights or the operation of the Use Classes Order) the Tribunal may have regard to the absence of any planning fetter when assessing rateable value (Irving Brown and Daughter v Smith (VO) [1996] RA 53 at 67). In the present case the ambit of the A3 Use Class and the existence of permitted development rights which authorise a change from A3 to A1 are relevant in that context only. No reliance, however, was placed upon principles of planning law in order to determine the ambit of the "mode or category of occupation".
- Mr Holgate submitted that the early authorities (from R v St Luke's Hospital in 1760 to Great Western and Metropolitan Railway Companies v Kensington Assessment Committee [1916] AC 23) provide no real guidance as to how the rebus sic stantibus rule should now be understood, whether as to its ambit or purposes or its origin. He analysed each of the cases in some detail. He identified, as the main authorities leading to Fir Mill and Midland Bank, Metropolitan Water Board v Chertsey Union Assessment Committee [1916] AC 337, Port of London Authority v Orsett Union [1920] AC 273, Poplar Assessment Committee v Roberts [1922] 2 AC 93, Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1937] AC 419, Robinson Brothers (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445, and Dawkins v Ash.
- He particularly relied on the analysis in the judgment of Scott LJ in Robinson, an analysis which had been accepted by the House of Lords ([1938]) AC 321) and which, he said, provided strong support for the formulation in Midland Bank. Thus:
- Mr Holgate also relied strongly on Dawkins v Ash as showing that potential changes in the physical state of the hereditament (in that case demolition of part of it) were a material consideration which a valuer was legally obliged to take into account. In substance, he said, whether particular alterations are within the scope of the rebus sic stantibus rule is an economic inquiry. Alterations, whether structural or non-structural, may be taken into account if their potential is to increase the value above its existing use, provided the alterations are not so substantial as to produce a different property. In considering whether they would have this effect they should be considered together with the mode or category of the occupation. Any alteration that would not change the intrinsic character of the hereditament can be taken into account.
- Mr Holgate criticised the conclusion of the Lands Tribunal in Fir Mill in relation to mode or category of occupation. He said that no legal source was given for the assumption that the mode or category of occupation must be the same as that of the actual occupier, and no bases or criteria were given for defining modes or categories for the purposes of rating valuations. He submitted that the formulation in Midland Bank was correct.
- Mr Holgate in addition referred to:
- A consideration of the issues in this case must start from the relevant statutory provisions. Under section 43(1) of the Local Government Finance Act 1988 -
- Thus, under this provision, liability to the rate arises in respect of the ratepayer's occupation of a hereditament. This basis of liability is the same as that which arose from 1601 to 1967 under section 1 of the Poor Relief Act 1601 and from 1967 to 1988 under section 16 of the General Rate Act 1967; and there is no dispute that what constitutes occupation under the 1988 Act is the same as under the earlier legislation. Similarly what is a hereditament for the purposes of the 1988 Act is the same as previously. Under section 64(1) a hereditament is anything which, by virtue of the definition in section 115(1) of the General Rate Act 1967, would have been a hereditament for the purposes of that Act. Section 115(1) defined "hereditament" as "property which is or may become liable to a rate, being a unit of such property which is, or would fall to be, shown as a separate item in the valuation list".
- Rates are payable on the basis of the rateable value of the hereditament, and under Schedule 6 para 2(1) of the 1988 Act (as amended) the rateable value -
- Provision is made in the 1988 Act for the assessment of the values of all hereditaments by reference to a common date - the antecedent valuation date, a day specified by the Secretary of State for the Environment by order in relation to the list: Schedule 6 para 2(3)(b). Certain specified matters, however, are to be taken as they are assumed to be on the day when the list must be compiled or, in the case of an alteration to the list, on the prescribed material day: Schedule 6 para 2(5) and (6). The prescribed matters (set out in para 2(7)) are:
- In general the prescribed material day in relation to an alteration is the day on which a change in any of the matters occurred. This provision for valuing hereditaments by reference to the "tone of the list" appeared originally (in terms that are different in some respects) in the Local Government Act 1966 section 17, which shortly afterwards became section 20 of the General Rate Act 1967. We shall refer to it later.
- Finally it must be noted that under the Non-Domestic Rating (Alteration of Lists and Appeals) Regulations 1993 regulation 4A an interested person may make a proposal to alter the list on grounds which include - "(b) that the rateable value is inaccurate by reason of a material change of circumstances"; and regulation 3 defines "material change" of circumstances as a change in any of the matters specified in Schedule 6 para 2(7) of the 1988 Act.
- The older cases on which Mr Widdicombe relied were, as he pointed out, cited as authorities in the first edition of Ryde on Rating (1900) in a passage on the rebus sic stantibus rule which was carried forward without significant alteration into subsequent editions. Mr Holgate submitted that these cases provide no guide to the ambit or purposes or origin of the rule. We take them in date order. In R v St Luke's Hospital (1760) 2 Burr 1053 Lord Mansfield, delivering the opinion of the court, said at 1063-4:
- The issues in the case were whether the hospital was rateable at all, and whether the principal of it was the rateable occupier. It was argued on behalf of the overseers that it was not in the power of private persons, by applying their property to the use of a charity, to discharge from liability to rates. This was the argument that was addressed in the passage we have quoted, and, as Lord Atkinson said in Liverpool Corporation v Chorley Union Assessment Committee [1913] AC 197 at 209, the wider statement of Lord Mansfield was clearly obiter.
- In R v Gardner (1774) 1 Coup 79, Lord Mansfield said (at 84):
- The case concerned land forming part of what was then Catherine Hall, Cambridge. It had formerly contained five houses, which had been demolished, and the land had become part of the college. The point in issue was whether the master and fellows were liable to be rated for part of the land, containing a wall and gates and now forming part of the college court, and an area outside the wall and planted with trees. It was argued on their behalf, firstly, that no corporate body was ever rateable and, secondly, that the areas yielded no profit and so were for that reason not rateable. Both arguments were rejected. Counsel for the overseers argued that the areas in question rendered the situation more healthy, so that in the sense they yielded a profit to the college. In the passage quoted what Lord Mansfield was evidently saying was that these areas, including the walls and gates, were to be rated as they were, according to such value as they might have as part of the college.
- In Kempe v Spence (1779) 2 Black W 1244, the issue was whether land in Ringmer allotted to the plaintiff under an enclosure Act in substitution for rights of common in that parish but appurtenant to land in the parish of South Malling was assessable to rates in Ringmer rather than in South Malling. It was held that it was. Among the arguments which De Grey CJ, giving the judgment of the court, rejected was that the Act should not be read so as to produce injury to the parish of South Malling through the reduction in the value of the land that had lost its appurtenant rights of common. He observed that the same thing could have been done by agreement between the parties:
- In R v Mast (1795) 6 TR 154 the ratepayer contended that his mill-house, mills and adjoining land should not be assessed at a value which reflected improvements that he had carried out. The contention was rejected, Lord Kenyon CJ saying (at 155-156):
- R v Liverpool Exchange (1834) 1 Ad & E 464 concerned a room in the exchange building used as a news room. It was supplied with newspapers and other publications, and persons other than the proprietors of the exchange were admitted to it on payment of an annual subscription. By statute the proprietors were required to provide two or more rooms as public rooms for use as public rooms for transacting business relating to trade and commerce. The news room was one of the rooms so provided. Used as a public news room it had a higher annual value than it would have had if had been let simply with reference to its situation, size and accommodation as a news room and without reference to the revenue it attracted from the public. The ratepayers contended that it should be assessed at that lower value. The contention was rejected by the court. Littledale J, having noted the cases cited in argument, said (at 474):
- In R v Everist (1847) 10 QB 177 the hereditament was a brickfield. One contention of the ratepayer was that, despite its use as a brickfield, the land ought not to be rated at a value higher than that of ordinary agricultural land in the parish. Alternatively it was argued that, if an addition had to be made for the land containing brick earth, the sum per acre ought not to exceed the value of the best garden ground in the parish. Lord Denman rejected both these suggested bases of valuation, saying (at 207):
- It is to be noted that in all but one of these cases (Gardner, Mast, Liverpool Exchange, Everist) the argument on behalf of the ratepayer was that he should be assessed at a value that was lower than the value to him as occupier of the hereditament in its existing state, and in none of the cases was any argument advanced that he should be assessed at some higher value than this if the hereditament would command such higher rent. While, therefore, these older authorities provide authority for the existence of a rule that the hereditament is to be valued as it is and in relation to its actual use, they are in our judgment of no assistance in determining the question whether prospective changes in the use or the structure of the hereditament can be taken into account.
- Both counsel placed reliance on dicta in the judgment of Lord Denman CJ in R v Grand Junction Railway Co (1844) 4 QB 18. Mr Widdicombe relied in particular on a passage at 43 where the Chief Justice said:
- For his part Mr Holgate drew attention to the words at 36-7:
- The case concerned the proper basis for assessing the railway and land of a railway company within a certain parish, and in particular whether, as the company argued, it should be assessed solely on the basis of the tolls that it received from other operators and the notional tolls from its own operations, or whether its ability to make profits from the fares of its own goods and passengers should be taken into account. In the passage relied on by Mr Holgate Lord Denman CJ was explaining his judgment in an earlier case, R v London & South Western Railway Co (1842) 1 QB 558, in which a similar issue had arisen. In that case, although the Act made provision enabling other operators to use the railway and for the payment of tolls for such use, in fact the company had a monopoly of all the traffic upon it. Its contention was that it should be assessed on the basis of the notional tolls attributable to its own operations rather than by reference to its ability to make profits from its operations as a carrier. The court rejected this contention. Lord Denman, having noted (at 580) the proviso in the 1836 Act which declared that the principles of rating were left unaffected he considered, by reference to the authorities, the principle upon which the company would have been rated if the Act had not been passed. Then at 584 he said:
- It is clear from this passage, therefore, that when in the Grand Junction Railway case Lord Denman made his observation that "what in point of fact might be in future " was "very fit to be taken into account when making the calculation as to quantum," he was referring not to prospective changes in the nature of the occupation or the physical state of the hereditament but to trading conditions. His remark related solely to the factual monopoly of the London & South Western Railway. The prospect of the monopoly being lost was a factor to be taken into account in the assessment. This distinction between possible changes in trading conditions (which could be taken into account) and possible changes in the nature of the occupation (which could not be taken into account) is in fact the essence of the judgment, and at 588 Lord Denman said:
- In the Grand Junction Railway case Lord Denman CJ, having explained his judgment in the London & South Western Railway case, went on (at 38-9):
- Thus, when the change of use occurs, the rate is to be altered to reflect the higher value of the new use; but there is no suggestion that the potential for such a profitable new use is to be reflected in assessing the value of the existing occupation. Indeed, in an age before planning restrictions, an attempt to take account of all potential alternative uses in assessing rateable value would have been unthinkable. Take the typical street of houses, all owned by a single landlord, and all let on terms that required that they should be used as dwellinghouses only. Each of them taken individually would command a much higher rent if let for the purposes of trade, although if one or more of them were to go over to a commercial use the overall rental value of the street would be diminished - hence the restriction in the leases. For the purposes of the rating hypothesis the restriction on use would have to be ignored. But clearly that would not mean that each house was properly to be assessed on the basis of the higher rent that it would command if let for a commercial use.
- Mr Widdicombe also relied on dicta in two other railway cases, North and South Western Junction Railway Co v Brentford Union Assessment Committee (1888) 13 App Cas 592, and Great Western and Metropolitan Railway Cos v Kensington and Hammersmith Assessment Committees [1916] AC 23. In the former, Lord Halsbury LC said at 593-4:
- In the latter case Lord Parmoor said at 54:
- The point at issue in each case was similar. The former concerned a railway line which constituted a link between the systems of a number of railway companies, and the dispute was as to whether it should be assessed as forming part of the systems of those companies or as an independent line. The House of Lords held that this was a matter of fact for the arbitrator.
- The Great Western and Metropolitan Railway case concerned the valuation of a railway line of which the companies were the joint owners and occupiers under a conveyance confirmed by Act of Parliament. The issues were whether the line, which made no profits but had a contributory value as a feeder to the appellants' systems, should be valued by reference to this contributory value; and whether the railway had a competitive value on the hypothesis that the partnership between the two companies might be dissolved and one of them given running powers over part of the other's system. The House of Lords held that the contributory value should not be taken into account and that the question of a competitive value did not arise since it depended on the assumption of facts which did not exist and might never arise.
- Mr Holgate said that the dicta relied on in these two cases have no relevance to the issues with which we are concerned since there was no question in either case of some use alternative to that of the actual occupier. The use in both cases was as a railway and no possible alternative use arose. He is clearly right in the sense that there was no issue on the question of mode or category of use in the post Fir Mill sense, but the dispute in each case concerned the assumption that might for the purposes of valuation be made on the way in which the railway lines might be used. These two cases, and the dicta relied on, seem to us, therefore, to give clear support to the existence of a rebus sic stantibus rule as to use, and they are consistent with the decisions in the Grand Junction Railway and the London & South Western Railway cases, which do in our view provide authority for the proposition that prospective changes in the nature of the occupation of the hereditament are not to be taken into account. Those cases also establish the basis of the rule. It derives from the principle that what has to be determined is the value to the occupier of his occupation of the hereditament. We consider this principle later in this decision.
- In support of his argument that it is all the attributes of the hereditament, potential as well as existing, that must be taken into account, Mr Holgate relied, as we have noted, on a number of authorities. The first consisted of certain passages in Metropolitan Water Board v Chertsey Union Assessment Committee [1916] AC 337. The case concerned land of the Board that contained an intake from the river Thames and a pumping station. As an unproductive, or indirectly productive, part of the undertaking (which would have been valued on the profits basis) it needed to be valued on the contractor's basis by applying an appropriate rate of interest to its capital cost. There were two issues. The first was whether an addition needed to be made to the cost of the land and the works to reflect the enhanced value to the Board in relation to the use made by them of the works and the special fitness of the land in this respect. The second issue (which is of no relevance for present purposes) was whether the rate of interest to be taken should reflect the financial position of the occupier.
- The House of Lords rejected the contention of the Assessment Committee that an addition to the cost of the land and works needed to be made to reflect the special fitness of the land for the Board's purposes. They held that any such special value would have been reflected in the cost of the land. Thus Lord Loreburn said (at 346):
- The passages upon which Mr Holgate relies are these. In the speech of Lord Atkinson at 349:
- The last two passages were relied on by the member in Midland Bank. With the exception of the passage from Lord Parker of Waddington, none of these extracts, and certainly none of the speeches in which they are contained, do in our view suggest that the special suitability or adaptability of a hereditament for a use different from that of the occupier is material in the assessment of rateable value. The point at issue in the case was whether the special suitability of the land for the purposes of the Board had properly been reflected in the valuation, and each of the law lords held that it had been. Thus the passage from Lord Parker of Waddington continues:
- No question arose in the case as to the fitness or adaptability of the land for some purpose other than that of the Board and, to the extent that Lord Parker of Waddington was suggesting that the potential for adapting the hereditament for some alternative use was material, his remarks were obiter.
- Another short passage on which Mr Holgate placed reliance, as the member in Midland Bank had done, was that from Lord Buckmaster in Port of London Authority v Orsett Union Assessment Committee [1920] AC 273 at 305:
- The case concerned the valuation of a portion of Tilbury Docks which formed part of the undertaking of the Port of London Authority. The undertaking was valued on the profits basis and the point in issue was whether, in reaching the hypothetical rent on that basis, an allowance could properly be made for tenant's profits. The House of Lords held that it could. The passage from Lord Buckmaster is taken from the paragraph in his judgment where he is summarising the effect of the decision in Sculcoates Union v Kingston-upon-Hull Dock Co [1895] AC 136 - that statutory restrictions (in that case prohibiting the taking of tolls for the use of railway and tram lines forming part of the dock system) are properly to be taken into account in valuing a hereditament.
- That paragraph was referred to in argument in Poplar Assessment Committee v Roberts [1922] AC 93 at 98; and, with evident reference to it, Lord Buckmaster said this at 103-104:
- The Poplar case concerned a beerhouse with living accommodation, the rent of which was restricted under the Increase of Rent and Mortgage Interest (Restrictions) Act 1920, and the issue was whether the statutory restriction was to be left out of account in valuing the hereditament. The House of Lords held that it should be since the effect of the Act was to restrict not the value of the occupation to the occupier but the amount of rent which the landlord could demand of the particular tenant. Each of the three law lords who formed the majority on this point based their conclusions on the principle that what had to be assessed was the value of the occupation to the occupier - Lord Buckmaster in the passage we have quoted; Lord Atkinson at 107; and Lord Parmoor at 118 and 120.
- Mr Holgate drew attention to Lord Atkinson's statement at 107 that the hypothetical tenant would take account of many things -
- Mr Holgate also relied on the speech of Lord Parmoor at 120-121:
- In the light of the point in issue in the case and the emphasis put by the law lords on the need to value the occupation of the occupier, we do not think that these passages are to be read as suggesting that prospective changes in the use or physical state of the hereditament are to be taken into account.
- Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1937] AC 419 concerned a cotton mill which had ceased production. It contained motive machinery and plant, process machinery and plant, and some loose chattels. The ratepayers sold the stores and let the basement, and they left the rest of the mill in charge of a caretaker with the intention of selling or leasing it and the contents. They were assessed on the basis of their occupation of the mill for the purpose of storing the process plant and machinery and the loose chattels. They argued that the process plant and machinery fell within section 24(1)(b) of the Rating and Valuation Act 1925, notwithstanding that it was being stored rather than used in an operational factory, and so should be left out of account in valuing the hereditament. The House of Lords, reversing the Court of Appeal on this point, accepted this argument. Mr Holgate relied on a passage in the speech of Lord Maugham. Having referred to section 1 of the Parochial Assessment Act 1836, Lord Maugham said (at 436-7):
- Mr Holgate drew attention to the final words of this passage. If a continuance of the existing state of things was only prima facie to be presumed, evidence that things would or might change could displace the presumption, so that prospective structural alterations could be taken into account. The member in Midland Bank apparently placed a similar reliance on the passage. For our part we do not think that it is sufficiently clear that that was what Lord Maugham meant to attach great significance to it. In particular it is unclear whether the "existing state of things" was intended to encompass the actual state of the hereditament, to which he had referred in the immediately preceding words. If it was intended to, it may be that an indication of what he had in mind by "prima facie" is to be derived from a later passage in which he considered whether Staley v Castleton Overseers (1864) 5 B & S 505 and Harter v Salford Overseers (1865) 6 B & S 591 were correctly decided. At 438-439 he said:
- The choice, as he states it, is to "hold to the doctrine that the valuation must proceed on the actual physical state of premises at the time" or "to suppose an imaginary severance of fixtures". It may be that "prima facie" was inserted to allow for the possibility of a notional severance of the tenant's fixtures and was intended to have no more than this narrow purpose. As we have said, however, we think that it is impossible with any degree of confidence to attach to Lord Maugham's final words in the first passage quoted the significance which Mr Holgate urges.
- Mr Holgate placed strong reliance on Robinson Bros (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445, in particular the judgment of Scott LJ which was expressly approved by the House of Lords ([1938] AC 321). We have quoted above the specific passages he relied on. He derived from them the proposition that the valuation is an economic inquiry which must take into account all the intrinsic characteristics of the hereditament. The potential to use the hereditament for a different purpose and the scope for altering it physically are, he says, intrinsic characteristics of the hereditament, and the bid of a would-be tenant who proposed to change the use or to alter the hereditament physically would be part of the totality of the demand to be taken into account in the economic inquiry. The assumption is not that the change in use or physical state has taken place at the time of valuation, but that the tenant could make the change at any time thereafter and would accordingly pay a rent that reflected this. In particular the bid of a prospective tenant who would alter the hereditament physically before entering into occupation can be taken into account.
- In our judgment there is no justification for attributing to Scott LJ in the principles he set out in Robinson this particular approach to the rebus sic stantibus rule. The issue in the case was whether the competitive bids from brewers could be taken into account in assessing the annual value of a public house. Concluding that they could, and differing on this from the court below, Scott LJ set out at [1937] 2 KB 468-469 the steps by which he reached his conclusion, and he started with:
- We do not read the other numbered steps that follow as intended to qualify this basic principle in any way. The economic inquiry to which the lord justice refers is an economic inquiry into the value of the occupation of the hereditament rebus sic stantibus. No question arose in the case about potential change in the use of the hereditament or in its physical state, and it is in our view clearly wrong to attribute to the lord justice the view that such potential changes were part of the intrinsic qualities that fell to be taken into account. It is to be noted that about a year earlier, in Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1936] 1 KB 585, Scott LJ had expressed himself in this way (at 643):
- The decision of the Court of Appeal in that case was, of course, reversed by the House of Lords, but not for reasons that would seem to impinge upon this statement of principle. It is in our view inconceivable in the light of what he said in Townley Mill that, in explaining the steps by which he reached his conclusions in Robinson that the brewers' bids were to be taken into account, Scott LJ was intending to lay down principles that could in any particular case produce a rateable value in excess of the rent that the existing occupier would pay to occupy the hereditament in its existing state for the purposes for which he was in fact occupying it.
- Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366 was strongly relied on by both Mr Widdicombe and Mr Holgate. Part of the ratepayers' factory premises was compulsorily acquired in pursuance of a road widening scheme. They remained in occupation of it under an annual tenancy from the acquiring authority. At the date of the proposal the expectation was that it would be demolished for the purposes of the scheme in about a year. The issue was whether this prospect of demolition could be taken into account in determining the rateable value. The House of Lords by a majority held that it could be.
- Dawkins v Ash contains, in our view, a clear statement of the two limbs of the rebus sic stantibus rule where in the paragraph at 385G -386A Lord Wilberforce says that a building cannot "be rated by reference to changes which may be made in it either as to its structure or to its use". In concluding that the imminent demolition of part of the hereditament by the local authority could be taken into account in valuing it, Lord Wilberforce was aware that this might be seen as making inroads into the rebus sic stantibus rule. He said at 385D-E:
- In holding that it could be taken into account, Lord Wilberforce was not suggesting that changes that a tenant might make to the structure of the hereditament or to its use could similarly be taken into account. Indeed in the paragraph from which we have quoted (385G-386A) it is clear that he was not doing so. Nor does his reference to planning restrictions, as an example of the disadvantages that the tenant might take into account, carry any such suggestion, since planning restrictions (for instance, conditions in a planning permission) may control aspects of use that would be unaffected by the rebus sic stantibus rule. In essence, we believe, Lord Wilberforce's reasoning related not to changes as to the structure or use of the hereditament that a tenant might effect, but to external factors. Thus he referred to the prospect of a motorway, an airport, an open prison or an open space. Similarly Lord Pearce, in drawing what he saw as the essential distinction between factors essential to and factors accidental to the hereditament, was addressing himself to external factors. Lord Pearson, the third member of the majority in favour of affirming the decision of the Court of Appeal, also, it seems to us, approached the matter in this way. He said (at 393):
- The appropriateness of taking into account a supervening event, the prospect of which may make the occupation of the hereditament less valuable, has no bearing in our judgment on whether it is appropriate to take into account the higher rent that a tenant would pay in contemplation either of occupying the hereditament for a different purpose from the existing use or of carrying out alterations to it. We do not find, therefore, in Dawkins v Ash anything to support Mr Holgate's arguments. On the contrary we believe that it affirms "the accepted structure of the law of rating" in relation to the valuation of the hereditament in terms of its current use and physical state.
- Fir Mill concerned five hereditaments, three used as cotton weaving mills and two as cotton spinning mills. It had long been the practice to treat cotton mills as a separate class of hereditament with assessments that reflected the state of the cotton industry. The ratepayers contended that this was the correct approach in law, the cotton mills being assessed at the rents which people in the cotton trade wanting to use them as cotton mills might reasonably be expected to pay. On behalf of the respondent valuation officers two alternative propositions were advanced. Firstly it was contended that it should be assumed that the premises were let subject to no limiting condition other than that the tenant should use the premises in a tenant-like manner. The alternative proposition (at 182) was that -
- The Tribunal concluded as follows, in the passage (at 185) that we have already quoted:
- The decision then continued (at 186):
- In the event this conclusion did not affect the decision in the case because the Tribunal found (at 196-7) that the rental evidence showed that cotton weavers paid as much rent as other industrialists and they inferred that the same was true for cotton spinners. Thus, had they found for the ratepayers on the basic point of law, their decision would still have been the same.
- The wording of the last paragraph we have quoted from the decision is somewhat surprising, but it was clearly not intended to alter or to qualify the clear statement of approach in the immediately preceding passage. We take the view that the formulation in Fir Mill is consistent with the authorities; and we consider below the rationale for the reference to "mode or category of occupation" and the incorporation of those words in statute.
- Midland Bank v Lanham (VO) was the decision of a distinguished surveyor member of the Tribunal. What the member sought was an explanation for what he saw as an apparent paradox - that on the one hand there was a requirement that the value of the occupation should be the value to the existing occupier and, on the other, that there was a need to take into account all the characteristics of the hereditament. He reconciled these two requirements by concluding that all competitive bids for the hereditament that would be made in the real world could be taken into account - including bids from those who would use the premises for a different purpose from that of the occupier or who would propose to carry out structural alterations to it. It was those bids that the actual occupier would be in competition with, and therefore the rent that would be fixed as the result of those bids would represent the value of the occupation to the existing occupier.
- The member's formulation of the rebus sic stantibus rule was a new one, and it was not apparently one on which counsel had made submissions. The member saw the need to use the language of Fir Mill, but in using it he gave to it a meaning that was quite different from that in the earlier case. Having had the benefit of extensive argument on the point - very much fuller argument, it is clear, than any member of the Tribunal has had in any of the rebus sic stantibus cases since Midland Bank - we are satisfied that the Midland Bank formulation is not a correct statement of the law. We have considered the authorities upon which reliance was placed, and we do not think that they provide any basis for it. As stated, the essential proposition - that "all alternative uses to which the hereditament in its existing state could be put in the real world, and which would be in the minds of competing bidders in the market, are to be taken as being within the same mode or category, where the existence of such competition can be established by evidence" - in our view effectively removes the limb of rebus sic stantibus relating to use. Clearly, uses which would not be in the minds of competing bidders in the market would not affect the rent; and if one can take account of any competing bid, regardless of the use that the bidder has in mind, considerations of "mode or category" of use become otiose. Moreover the rent that would be achieved, taking into account all the potential bidders in the market, might well be in excess of the rent that either the actual occupier or anyone else would be prepared to pay to occupy it for its current purpose; so that, if the rent were indeed pitched at that level, neither he nor anyone else would occupy the hereditament for the purpose for which he in fact occupies it. Indeed, it appears that Mr Holgate recognises this by making the submission that rateable value does not have to represent the value of the beneficial occupation to the existing occupier - a submission which we deal with later.
- On the same day as the decision in Midland Bank the Tribunal (Mr V G Wellings QC) gave a decision in another rebus sic stantibus case, Henriques v Garland (VO) (1977) 20 RRC 341. The case concerned shop premises which were in use as a dwellinghouse. The local valuation court had held that they should be valued as a shop, but the member allowed the ratepayer's appeal and held that the premises should be valued as a house. He said (at 346) that support could be found in the authorities "for each of the following propositions (leaving on one side for the moment any question relating to planning):
- He said that proposition (3) was supported by the law in Scotland and that it had been applied by the Tribunal in London Transport Executive v Croydon London Borough Council and Phillips where this had been said:
- The main support for proposition (2) was, he said, to be found in Fir Mill, while it was also supported by Ryde on Rating and Halsbury's Laws of England. Proposition (1) was the contention that was made by counsel, Mr Alan Fletcher, on behalf of the valuation officer. The member said:
- In the event the member found as a fact that that there would not be any demand for the premises as a shop, so that (as in Midland Bank) nothing actually turned on his analysis of the law. Finally, in what was perhaps a somewhat excessive expression of judicial comity (which was reciprocated by the member in Midland Bank), he said that the two decisions did not appear to be in disagreement with each other.
- The approach of the member in Midland Bank has generally been followed in subsequent Lands Tribunal cases. They are listed above in the section which summarises Mr Widdicombe's submissions. We note in particular Tappenden v Stratford (VO), Mugridge v Daniels (VO) and Jermy v Jones (VO), all of which concerned former shop premises that were in use for residential purposes. In each case it was held that they were properly to be valued by reference to shop values. It appears, however, that in only two other cases (S & P Jackson (Manchester) Ltd v Hill (VO), in which a shop in use as a warehouse was valued by reference to shop values, and Re Johnson (VO)'s Appeal, in which car bays in use as builders' storage space were valued as car bays) did the fact that this approach was followed, rather than that in Fir Mill, have any bearing on the outcome. Three of the cases (Florikic v Mummery (VO), Marks v Tucker (VO) and Adams v Freeman (VO)) concerned unused premises, in respect of which no question of the mode or category of the existing occupation arose; in two of the cases the comparables considered would probably have fallen within the same mode or category of occupation on the Fir Mill approach (Vesta Launderettes Ltd v Smith (VO), in which a launderette was valued by reference to shop values, and Makro Self-Service Wholesalers Ltd v Brennan (VO), in which a wholesale warehouse was valued by reference to the values of other warehouses); while it appears that in none of the other cases did the evidence show that the hereditament would let for more for an alternative use than for its existing use. In Couper (VO) v Aylesbury Brewery Co Ltd, although there was no formal analysis of the approach adopted, Mr Emlyn Jones appears to have proceeded on a basis that was in line with Fir Mill.
- One Lands Tribunal case that reached the Court of Appeal should be noted. Byrne v Parker (VO) [1980] RA 45 concerned a launderette which was assessed as "shop and premises" at a shop value. The ratepayer, who appeared in person, contended that the premises were let on terms that required that they should only be used as a launderette, that they were worth less for this purpose than as a shop, and accordingly that they should be assessed at a lower value. Having held that the restrictive terms of the lease were not relevant, Stephenson LJ went on (at 49):
- It is likely, we think, that the statement that there may be some doubt as to the extent of the second assumption was made in recognition of a caveat entered by counsel for the valuation officer. We do not think that it should be read as itself casting doubt about the correctness of Fir Mill, and we do not understand Mr Holgate to suggest that it should.
- Mr Holgate submitted that there is no legal basis for a requirement to arrive at a rateable value representing the value of beneficial occupation to the existing occupier. We disagree: indeed we think that it is fundamental to the law of rating that that is what has to be assessed. There are clear judicial statements to this effect. Thus in R v Grand Junction Railway Company (1844) 4 QB 18, Lord Denman CJ said (at 43):
- In R v Fletton Overseers (1861) 3 E & E 450; 30 LJMC 89, Cockburn CJ said at 94-5:
- In Poplar Assessment Committee v Roberts [1922] AC 93 Lord Buckmaster said at 103-104:
- In Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1936] 1 KB 585 Scott LJ said at 641-2:
- The basis of rating is that the occupier of a hereditament is liable in respect of his occupation; and, given this basis of liability, it is consistent with it that the measure of the liability should be the value to the occupier of his occupation. It is not, however, in respect of the profit that a particular occupier may make or the remuneration he may receive from the use that he makes of it that he is rated, although such considerations may well affect the rent that he is prepared to pay: R v Rhymney Railway Co (1869) LR 4 QB 276 per Mellor J at 283; Mersey Docks and Harbour Board v Birkenhead Union Assessment Committee [1901] AC 175 per Lord Halsbury LC at 180-1.
- Liability to the rate only arises at all because there is occupation; and the liability arises in respect of the occupation of a particular hereditament - consisting of the land occupied and the buildings and structures that form part of it. For there to be occupation it is necessary that some use should be made of the hereditament, and it is to be noted that the nature of the use that will give rise to occupation will depend upon the nature of the hereditament and the mode of occupation in question. In Arbuckle Smith & Co Ltd v Greenock Corporation [1960] AC 813, in which the House of Lords held that occupation consisting in the carrying out of works to convert a warehouse to a bonded store did not constitute rateable occupation, Lord Radcliffe said at 828:
- R v Melladew [1907] 1 KB 192 concerned an empty warehouse, which, despite the fact that it was empty, was held to be rateably occupied by the warehouseman who was keeping it available for the storage of his customers' goods. There was only occupation of this otherwise empty and unused building because of the particular nature of the occupier's business. Given that this was the basis of his liability it would seem to be consistent with it that he should be rated by reference to a warehouse rent rather than the rent that might be achievable for some other use, for example a factory, if such alternative use would produce a higher rent.
- Thus the principle that what has to be assessed is the value to the occupier of his occupation of the hereditament is to be derived from the nature of rating itself, as a tax on occupation; and there is ample authority to support the principle.
- Mr Holgate pointed out that valuation by reference to the mode or category of occupation, as in Fir Mill, necessarily involves that a particular occupier within a mode or category may be assessed at a value that is in excess of the rent that he could afford (and the example of the failing tobacconist is given at (1960) 7 RRC 171, 185). This is undoubtedly the case, but, in view of the principles underlying the concept of the mode or category of occupation (to which we are about to turn) it does not seem to us to undermine the basic principle that what has to be assessed is the value to the occupier of his occupation of the hereditament.
- It is to be noted that the decision in Fir Mill nowhere states the legal principle upon which its enunciation of the rule as to mode or category of occupation is based. The Tribunal agreed with the respondents in rejecting the ratepayer's proposition "that the hypothetical tenant must be conceived as using the premises in the particular mode in which the actual occupier uses them"; it rejected the respondent's first proposition, that the premises are let subject to no limiting condition except as to use in a tenant-like manner; and it accepted the second of the respondent's propositions, that the premises are let subject to a condition that they will continue to be used for the same general purposes that for which they are used at the date of valuation. The decision does not record that any legal principle was advanced in support of the second proposition and does not, in accepting the proposition, set out any justification for it in terms of principle or authority. Nevertheless there are, we believe, two strands of thought that underlie this part of the decision. The first consists of an acceptance of the principle that the assessment must reflect the value of the hereditament for the purpose for which it is occupied (unless this element is present the rule could have no basis at all), together with a concern that the purpose should not be so narrowly defined as to restrict unrealistically the range of competition that may be assumed. The only forebear of the words "mode or category of occupation" that we are aware of is to be found in the Lands Tribunal decision in Tomlinson (VO) v Mills (1959) 6 RRC 146, which was decided some two months before the start of the Fir Mill hearing by Mr J A F Watson FRICS, one of the members in Fir Mill, but which was not, somewhat surprisingly, among the 56 authorities referred to in that decision. It concerned part of a house which had been used at different times for storage and for retail selling. The member, having referred to R v Westbrook, R v Everist (1847) 10 QB 178, asked (at 150):
- Although there is in our view no justification for putting this particular gloss on the words of Lord Denman, the decision does appear to reveal the source of the words "mode or category of occupation" and one of the strands of thought that underlie their use in Fir Mill.
- The second strand of thought lies, we believe, in the practice of categorising hereditaments for the purpose of valuation. One of the principles of rating is uniformity - "that as between different classes of hereditaments, and as between different hereditaments of the same class, the valuation should be fair and equal": per Scrutton LJ in Ladies Hosiery and Underwear Ltd v West Middlesex Assessment Committee [1932] 2 KB 679 at 688. In Double v Southampton Assessment Committee [1922] 2 KB 213, in which a revaluation of some only of the public houses in the parish (the remainder being unaltered) was held to be invalid, Lord Trevethin CJ said (at 224-225):
- There is no longer a prescriptive approach to the method of valuation to be used in valuing particular forms of property (see Garton v Hunter (VO) [1969] 2 QB 37]), but the principle of uniformity remains. It has recently been recognised in the decision of the House of Lords (given after the conclusion of argument in the present case) in Coventry and Solihull Waste Disposal Co Ltd v Russell (VO) [2000] 1 All ER 97, in which it was held that a waste incineration and electricity generation plant, the primary function of which was waste incineration, was properly to be assessed on the contractor's basis rather than under the formula prescribed in the Electricity Generators (Rateable Value) Order 1989: see per Lord Hope of Craighead at 106f-g and Lord Clyde at 112b-c. We have no doubt that the valuer members of the Lands Tribunal in Fir Mill would throughout their professional lives have been accustomed to approach the valuation of hereditaments of a particular class in a way that achieved uniformity between them.
- In the light of this, we believe that Fir Mill identifies with adequate clarity the basis on which hereditaments are to be categorised for the purposes of the rebus sic stantibus rule. The assumption is that the premises will continue to be used for the same general purpose as that for which they are used at the material date, so that a dwelling house is assessed as a dwelling house, a shop as a shop, but not as any particular kind of shop, a factory as a factory, but not as any particular kind of factory. For the purposes of the rebus sic stantibus rule it is thus the principal characteristics of the actual use that are relevant - those features of the occupation that reflect the general purpose of the use - rather than the particular operations of the individual occupier. In Tomlinson (VO) v Mills (1959) 6 RRC 146 Mr Watson had suggested a categorisation that distinguished between a dwelling-house on the one hand and a commercial occupation on the other. Such a broad system of categorisation was not adopted in Fir Mill, and it is inconsistent with that decision.
- Not every use, of course, falls into a familiar broad category - shop, office, factory, for example. Many uses are, to borrow a term that is frequently used in planning law, sui generis, belonging to no class or category. In the light of what we believe to be the underlying reasons for the Fir Mill formulation of mode or category of occupation - the need to take account of the actual use but to avoid any unrealistic narrowing of the competition that may be assumed, and the need for uniformity in valuing hereditaments of the same class - we can see no reason why such sui generis uses should not be valued as such. There is no requirement to construct, artificially, some wider category of use to which a sui generis use must be consigned.
- The words "the mode or category of occupation", as we have noted earlier, appear in statute. They appeared first in the Local Government Act 1966 section 17, which made provision for valuation according to the tone of the list. The provision re-appeared in the consolidating General Rate Act 1967 as section 20. It provided:
- In Clement (VO) v Addis Ltd [1988] 1 WLR 301 the House of Lords had to determine the meaning of the provision for the purpose of deciding whether the existence of an enterprise zone, which was adjacent to the subject hereditament and had the effect of reducing its value, should be taken into account in considering the "state" of the locality. Lord Keith of Kinkel, with whom the other law lords agreed, noted (304D):
- He then said (at 505 E-H):
- The reference in section 20(2)(a) to "the mode or category of occupation of the hereditament" is therefore, in our view, to be taken as a statutory expression of the rebus sic stantibus rule relating to use. That the words are the same as those used by the Lands Tribunal in Fir Mill is deliberate. Mr Holgate drew attention to the statement by Mr MacColl, Parliamentary Secretary at the Ministry of Housing and Local Government, at the Report stage of the Local Government Bill (HC Parliamentary Debates 1966-67 Vol 734 Cols 517-518) in the context of an amendment to leave out the words "manner of occupation" in the provision and insert "mode or category of occupation". The minister said this:
- In the light of this we conclude that the Fir Mill concept of mode or category of occupation has been embodied in statute and when applying the provisions of Schedule 6 para 2(7) of the 1988 Act it is right to give to the words "mode or category of occupation" the meaning that the Lands Tribunal gave to them in that case. It is to be noted that the provision in section 17(2) of the 1967 Act relating to public houses was not carried over into the 1988 Act, but this a point that does not seem to us to be of significance.
- Mr Holgate argued that, whatever the position was under the earlier legislation, "mode or category of occupation" was incorporated in the 1988 Act after the decision in Midland Bank. It was a long established principle that where a word or phrase of doubtful meaning in a statute has received a clear judicial interpretation, a subsequent statute which incorporates the same expression must be construed so as to have the same meaning: Barras v Aberdeen Steam Trawling and Fishing Co Ltd [1933] AC 402. In choosing to use the phrase "mode or category of occupation" in the Local Government Finance Act 1988 Schedule 6 para 2(7)(b), he said, Parliament must be assumed to have had in mind the meaning given to that phrase by the member in Midland Bank. We cannot accept this. As we say elsewhere, the Midland Bank formulation was at odds with that in Fir Mill and it has as authority no claims to precedence over it. We have no doubt that the meaning of "mode or category of occupation" in the 1988 Act must be the same as the identical words in the corresponding provision in the 1967 Act which the 1988 Act replaced; and that, as we have said already, embodied the Fir Mill interpretation.
- We do not believe that there is in practice any great difficulty in applying the rebus sic stantibus rule as to mode or category of occupation. It is the principal characteristics of the use and the methods of valuation commonly applied by rating surveyors to which regard must be had; and shops, offices and factories serve as examples of categories. Many uses may be sui generis. Frequently also it will not be necessary for the valuer to formulate a description of the mode or category of occupation into which the use of the subject hereditament falls. What he will have to do is to decide whether a potential comparable falls into the same mode or category of occupation as the subject hereditament, since the question for him will be whether the rent or assessment of the comparable provides useful evidence of the value of the subject hereditament. We return later to the issue of evidence.
- Mr Holgate relied on the view of the member in Midland Bank ([1978] RA 1 at 21) that the potential for carrying out structural alterations to the hereditament could properly be taken into account if it would affect the rent that a tenant would be prepared to pay. He also relied on the authorities cited in support of this view. The principal authority cited by the member was Consett Iron Co Ltd v North West Durham Assessment Committee [1931] AC 396. That case concerned certain coal mines, which had been worked at a loss for the last three years. Quarter sessions had found that under the trade conditions prevailing at the time none of the mines could be worked other than at a loss, and that the only basis on which anyone could have been found who might have entered into a tenancy of the hereditaments at that time would have been on the assumption that his tenancy would have continued for a term of years and in the hope that conditions of trade would improve during that period. The House of Lords held that the reference in the finding to a term of years meant a tenancy from year to year, and that the expectation of better trade in future could be taken into account in assessing the value of a colliery that was actually being worked.
- That case seems to us to have no bearing at all on the doctrine of rebus sic stantibus in relation to the physical state of the hereditament. It was not concerned with the physical state of the hereditament. At 410, Lord Sankey LC put as a "correct statement of law" the following:
- Thus the point at issue was the relevance of possible changes in economic circumstances during the currency of a tenancy from year to year. Clearly, future trading conditions are one of the factors that the prospective tenant of business premises would have in mind in deciding what rent he might bid, and there is no suggestion that the rebus sic stantibus rule relates in any way to such considerations.
- The member said that dicta in other cases supported his approach. He quoted Lord Denman CJ in R v Grand Junction Railway Co (1844) 4 QB 18, at 36-7:
- The member italicised the words "though very fit to be taken into account when making the calculation as to quantum." We have considered this passage in the earlier section dealing with the older cases. It relates, as we have said, not to prospective changes in the use or the structure of the hereditament, but to changes in trading conditions; and the case itself provides clear authority for the proposition that prospective changes in the nature of the occupation are to be left out of account. It was not concerned at all with possible changes to the hereditament itself.
- The next dictum relied on was that of Cockburn CJ in R v Fletton Overseers (1861) 3 E & E 450 at 465, 30 LJMC 89 at 94-5:
- The member italicised the final conditional sub-clause. That case was another railway case. It concerned the assessment of Peterborough station, which was owned by the Eastern Counties Railway Company and used jointly by them and the London and North Western Railway Company who paid rent for the right to do so. A new line had removed a substantial part of the London and North Western Railway Company's traffic and Eastern Counties Railway Company were successful at Quarter Sessions in achieving substantial reduction in the assessment on that account. The court held that Quarter Sessions were wrong because the rent payable to Eastern Counties Railway Company by London and North Western Railway Company remained the same despite the reduction in traffic. Following the passage we have quoted, Cockburn CJ went on:
- Taken in context, therefore, the words of Cockburn CJ that are relied on do not appear to us to provide authority for the proposition that changes in use that might be made by a possible tenant are to be taken into account; and the case was not concerned at all with prospective physical changes to the hereditament.
- Then the member quoted Lord Maugham in Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1937] AC 419 at 436:
- In his decision the member italicised the words "prima facie" (see West Dorset DC v Auton (VO) (1979) 21 RRC 390 at 398), evidently to found the same argument as that advanced in the present case by Mr Holgate. We have said above why we do not think that this passage from Lord Maugham should be taken to imply that that prospective changes in the use or physical state of the hereditament are to be taken into account if there is evidence to show that they might be made.
- Finally, reliance was placed on what Lord Wilberforce said in Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366 at 385. We have concluded elsewhere that that case supports the rebus sic stantibus rule as to the physical state of the hereditament as we have stated it to be. It does not in our judgment suggest that possible structural alterations to the hereditament are properly to be taken into account. Indeed, we believe that there is no authority that can properly be relied on as supporting such a proposition.
- The basis of the rule that the hereditament is to be valued in its actual physical state is, we believe, clear. Liability to the rate falls on the occupier in respect of his occupation of the hereditament. It is the value of an actual occupation of an actual hereditament that falls to be assessed, and to take account of the value that the hereditament would have if it were to be altered, even after making allowance for the cost of altering it, is plainly to assess something different. Decisions of the Tribunal have tempered the application of the rule in its absolute strictness. In Fir Mill, this was said (at 185):
- This approach has been applied in other decisions of the Tribunal, although the precise words in which it has been expressed have varied slightly. Thus in Sheffield United Tours Ltd v Elliott (VO) [1983] RA 81 the Tribunal (Mr C R Mallett FRICS) accepted the agreement of all three parties that the test, in relation to structural alterations, was whether or not they were de minimis considered together (see pp 89 and 96). In Westminster City Council v British Telecommunications Plc [1985] RA 87 the Tribunal (Mr J H Emlyn Jones FRICS) said at 101 that it was possible "to take into account minor non structural changes and certain structural alterations if they are of a trivial character." In Re Appeal of Sheppard (VO) (1967) 13 RRC 139 Mr R C Walmsley FRICS referred to "minor alterations of a non-structural character." We believe that, with the exception of Midland Bank, all the decisions of the Tribunal to which we have been referred in relation to physical state of the hereditament were decided on the approach expressed in these words. They show a consistency throughout.
- Mr Holgate argued that the physical adaptability or capacity for change of a hereditament is one of its inherent characteristics, and the potential for change in the physical state of the hereditament must be taken into account if it affects the rent that the tenant would be prepared to pay. The only limitation he placed on this is that the works should not be so extensive as to make the property into a materially different hereditament. We can see no basis in principle or in authority for the approach which Mr Holgate urges. As we have said, it runs counter to the concept that what is being valued is the actual occupation of an actual hereditament. It is contrary to Lord Wilberforce's statement in Dawkins v Ash that a building cannot "be rated by reference to changes which might be made to it either as to the its structure or to its use." That the House of Lords in that case accepted as material the prospect of demolition, following compulsory purchase, of part of the factory does not in our judgment imply, as Mr Holgate suggests, that physical changes which a tenant might have in mind are also material.
- In our judgment the approach adopted by the Tribunal in the cases we have cited, with the exception of Midland Bank, correctly interprets the effect of the first limb of the rebus sic stantibus rule: that minor alterations of a non-structural character and structural alterations which are de minimis may be taken into account, but that any other alterations to the hereditament which a person bidding for it would plan to carry out must be disregarded. Expressed in this way the rule appears to require that consideration must be given in each case as to whether the works in question are or are not structural - often, as in the present case, a time-consuming and unsatisfactory inquiry. Moreover it is the totality of the works that has to be considered, and, since some of the works may be structural and some non-structural, to seek to differentiate between them on this basis is likely to confuse rather than to assist the overall analysis. We believe that the test may most usefully expressed in this way: are the works in question, taken as a whole, minor? So expressed it encompasses both elements of the approach adopted by the Tribunal in the cases we have referred to, since works which involve alterations to the structure that are more than minimal would not be minor, but it avoids the need for an unhelpful classification of the works under consideration.
- We note that the Valuation Office Agency Practice Note on the Rating (Valuation) Act 1999 (which amends the law on the assumptions as to the state of repair of the hereditament) says this:
- Finally we would add that we can see no basis in principle or in the light of authority for applying the two limbs of the rebus sic stantibus rule as a combined test. In our judgment they are separate and fall to be separately applied.
- In his submissions Mr Holgate placed emphasis on the wording in para 2(6) of Schedule 6 to the 1988 Act (and the similar wording in para 2(5)) that the matters mentioned in subparagraph (7) "shall be taken to be as they are assumed to be" on the material day. This, he said, did not in itself alter the law on rebus sic stantibus, but the looseness of the wording provided the opportunity for judicial interpretation of the doctrine.
- The wording on which Mr Holgate's submission relies is obscure. It requires an assumption on the subparagraph (7) matters to be made ("shall be taken to be"), but the assumption is that they are "as they are assumed to be" on the material day. Where does one look to find out how they are assumed to be on the material day? Where is that second assumption to be found? The Act contains no answer to this question; and for our part we can find no basis anywhere for making any assumption other than that the subparagraph (7) matters were as they actually were on the material day.
- In any event, however, we do not see how the particular wording of para 2(6) assists Mr Holgate's argument. His contention is that it is all matters, all the advantages and disadvantages of the hereditament, as they actually were on the material day, that fall to be taken into account. He expressly says that the potential for a change in the use or the potential for change in the physical state of the hereditament must be taken into account as potentialities and that it should not be assumed that any change has in fact been implemented on the material day. The essence of his argument is that it is all the matters which in the real world would influence the rent that the premises would fetch that should be taken into account, and that any other assumptions should not be made. In our judgment no support for this argument is to be derived from the wording of subparagraph (6), nor can we see that what he terms the "looseness" of the wording provides scope for judicial interpretation of the rebus sic stantibus rule along the lines for which he contends.
- It is, we believe, important to distinguish between the operation of the rebus sic stantibus rule and the identification of the evidence to which regard may be had in valuation. The most usual method of assessment in rating is by reference to the rents or assessments of comparable hereditaments. Mr Widdicombe argued that the rebus sic stantibus rule requires that only the rents and assessments of hereditaments occupied for the same mode or category of purpose as the subject hereditament can be taken into account. We cannot accept this contention, and we believe that a mistaken adoption of it may underlie some of the problems that have arisen with the application of the rule. What the valuer is seeking to assess is the value of the hereditament on the assumption that the matters set out in para 2(7) of Schedule 6 were as they were on the material day. For this purpose he will have regard to the rent (if any) of the subject hereditament and to the rents and assessments of other hereditaments to the extent that the evidence of these assists him in making his valuation. All relevant evidence is admissible, and the goodness or badness of it goes only to weight: see Garton v Hunter (VO) [1969] 2 QB 37. Comparables will inevitably differ in some degree from the subject hereditament in terms of their location and surroundings and their physical properties. How useful their rents and assessments will be to the valuer will depend on the extent to which the differences can be allowed for. The making of such allowances and adjustments is the essence of the valuer's skill. We do not think it is right to exclude as a matter of principle as comparables all hereditaments that differ from the subject hereditament in terms of their mode or category of use, any more than it is right to exclude those that differ in terms of the other matters set out in para 2(7) of Schedule 6. Whether the rents of assessments of hereditaments in a different mode or category of use are relevant, and the weight to be attached to them, is a matter for judgment in the individual case. Often they will be of no assistance, but there are undoubtedly cases where they may constitute helpful evidence. Take, for example, a shopping street which contains, in addition to shops and A3 uses, a few offices in premises built as shops. The subject hereditament, in office use, is in a part of the street that contains only shops and restaurants apart from the subject hereditament itself. If the evidence from the other parts of the street is that the rents and assessments of offices are no different from those of shops and A3 uses, the valuer may well conclude that the best evidence of the value of the subject premises as offices is to be found in the rents and assessments of the adjacent shops and restaurants and he will make his valuation on the basis of the zone A prices that are established for this part of the street frontage. It is a matter of evidence and argument and valuation judgment in the particular case whether the rents and assessments of hereditaments in a different mode or category of use are of assistance.
- In the example given, the valuer is not, of course, valuing the subject hereditament as a shop or restaurant. He is valuing it as an office but by reference to rents and assessments of shops and restaurants, because he finds that from those rents and assessments can be derived the rent that a tenant would pay to occupy the subject hereditament as an office. It is not necessary for him to pretend that the offices are in the same mode or category of use as shops or restaurants, any more than it is necessary for him to treat shops and restaurants as being in the same category of use for the purpose of comparing their rents and assessments where evidence and judgment show this to be appropriate.
- In Midland Bank itself, if there had been evidence that company training schools paid office rents or were subject to assessments that reflected office rents when they occupied premises suitable for office use elsewhere in the City of London or in other nearby areas, that might well have suggested that the best evidence of the value of the subject premises as a training school lay in office values. In fact, however, the evidence of the valuation officer was to the contrary - that there was evidence of a comparable training school let in a commercial building at a rent lower than that which would have applied to offices; and on the basis of this the member concluded that there would be no competing bids for the subject premises as offices. He might equally well have concluded simply that the evidence did not show that training schools paid office rents, so that the assessments of offices were of no assistance in valuing the subject premises.
- In the case of a sui generis use where there is no comparable evidence from other premises put to a similar use, the valuer is likely to need to look at rents and assessments of premises which differ in terms of their use from the subject hereditament. He will use the evidence that is available to him and will apply his valuer's judgment to it, making such adjustments as appear to him to be necessary to take account of the difference in use, just as he would make adjustments to reflect differences in physical nature or location.
- In our view the identification of the mode or category of use does not depend on whether or not planning permission would be required for particular changes of use. It is a point that was made by the Tribunal in London Transport Executive v Croydon LBC and Phillips (VO) (1974) 19 RRC 299 at 300-1. It is also right that planning restrictions which limit the uses to which the hereditament can be put are material if they restrict the changes that the occupier can make within the mode or category of his occupation. The conclusion which we have come to on the scope of the rebus sic stantibus rule means that the valuer will only occasionally have to concern himself with planning matters and, when he does, it will only be to a limited extent. If Mr Holgate were right, however, so that every potentiality for a more valuable use or physical improvement were relevant, the consequence would be that not only would the valuation officer have to consider all the potential changes which might be made and would increase the value of the hereditament but he would also have to form a view on the prospects of achieving planning permission where the changes involved development. He would have to consider the development plan and other planning material and he would have to keep up to date with any changes in these that were made. The scope for disagreement between valuation officer and ratepayer would be considerable.
- The requirement to have regard to all potential changes that might be made in the use or structure of the hereditament so as to increase its rental value would undoubtedly add a new dimension of complexity to the rating process. It would not just be a matter of looking at shop premises that were in some other use and deciding whether retail use would be more valuable than the current use: that would not be likely to present any difficulty. What the valuation officer would have to do, however, would be to consider every hereditament in terms of its potential for profitable change within the time horizon of the hypothetical tenancy. Might this warehouse, currently in storage use, be more profitably let for retail purposes? or for leisure purposes? Would planning permission be obtained? Are there alterations to these office premises that could be made so as to increase their rental value? Taking account of the costs of conversion or alteration, would this increase the rent that would be paid on the rating hypothesis? The range of considerations and the breadth of the investigations that would be necessary would be huge. We do not believe that this is the sort of process that valuation officers or other rating valuers currently go through or that they have ever done so.
- The corollary of the rule that a hereditament is to be valued according to the existing state of things is that, when there is a change, "the rate must be altered to meet it": per Lord Denman CJ in the London & South Western Railway case (1842) 1 QB 558 at 588 (see above). For a long time rating legislation has provided for this to be done, and the current provision for it is contained in the general duty of the valuation officer to maintain the rating list (1988 Act section 41(1)) and the power of an interested person to make a proposal to alter the list if there has been a material change of circumstances (Non-Domestic Rating (Alteration of Lists and Appeals) Regulations 1993 regulation 4A: see above). Thus the established regime caters for the potential for changing the hereditament by enabling the list to be altered when change in fact occurs.
- The conclusions we have come to on the nature and scope of the two limbs of the rebus sic stantibus rule in England and Wales accord, in essentials if not in detail, with the law as we understand it to be in Scotland. The law is set out in Chapter 18 of Armour under the title "Existing Value". The equivalent provision to section 1 of the English Parochial Assessments Act 1836 was section 6 of the Lands Valuation (Scotland) Act 1854, which provided:
- The words "in their actual state" were omitted from the successor provision, section 6 of the Valuation and Rating (Scotland) Act 1956. As explained in Armour paras 18.01 et seq the omission was due to the repairing assumptions introduced by the successor Act and did not alter the requirement that heritage must be valued in its actual physical state and according to the use to which it is devoted at the time of valuation. The inclusion of the words in the 1854 Act did not, in our view, serve to differentiate the law in Scotland from that in England, as Mr Holgate contended, but did on the contrary accurately reflect the law as it then was in England. The subsequent application of the actual state rule, with its two limbs of physical state and use, essentially reflects the two limbs of the rebus sic stantibus rule in England, although there was for a time dispute as to whether the actual state rule applied to use: see Armour para 18-10.
- The approach in Scotland to rebus sic stantibus in terms of use is somewhat different from that in England and Wales, although the underlying purpose is clearly the same. Under Scottish law the rule is that heritage is to be valued according to the use to which it is then devoted (Assessor for Stirlingshire v Myles and Binnie 1962 SC 530) and the rule so stated makes no reference to the mode or category of occupation. However, in determining the value of heritage under the comparative principle of valuation (valuation by reference to comparables) it is established that the subjects with which comparison is made should be of the same category or genus for valuation purposes as the subject whose valuation is to be determined: see Armour para 19.21 -
- The text of para 19.21 notes, by reference to authorities, that it is incorrect to value shop premises by reference to the particular nature of the business carried on in them and to make an allowance for inconvenience resulting to the occupier solely because of the nature of his trade; and also that categorisation is merely a means to an end, the aim being a fair estimate of annual value. Recent authority warns against an over-rigid approach to classification. There is one qualification to the actual state rule on use that has no equivalent in English law. This is that, if the property has been rendered valueless by arbitrary restrictions which the proprietor has imposed on its use, it will be valued on the hypothetical basis that full beneficial use is being made of it: see Armour para 18-10. Subject to this qualification it appears to us that the actual state rule in relation to use is effectively the same as the use limb of the rebus sic stantibus rule as stated in Fir Mill.
- The member in Midland Bank discounted the Scottish cases because, he said, before 1956 the law of rating in Scotland differed in material ways from the law in England and Wales. Previously the Tribunal in London Transport Executive v Croydon LBC and Phillips (VO) (Mr Douglas Frank QC, President, and Mr W H Rees FRICS) had expressed the view that the law of rebus sic stantibus was the same in England as in Scotland. Subject to the qualification that we have mentioned, we agree with this view. We do not think that the reasons given by the member in Midland Bank for discounting the Scots law are sound; but in any event the relevant cases and the statement of the law in Armour date from after 1956.
- We do not find the Hong Kong case to be of assistance. In Commissioner of Rating and Valuation v Lai Kit Lau Mutual Aid Committee [1986] HKLR 93, Kempster JA held at 96 that "all realistic alternative uses to which premises could be put, in the condition found at the material date, are to be taken into account." He based himself on the judgment of Oliver LJ in Edmondson (VO) v Teesside Textiles Ltd (1983) 83 LGR 317 at 328. However, the passage from the judgment upon which he placed reliance was recording submissions made on behalf of the valuation officer and not the lord justice's own view.
- The conclusions that we have come to can be stated shortly. The rebus sic stantibus rule identifies for the purpose of valuation the hereditament, the physical changes which may be made to it, and the mode or category of occupation. The rule rests on the concept that what has to be determined in rating is the value to the occupier of his occupation of the hereditament, measured by the rent on an assumed yearly tenancy. In carrying out a valuation under the rating hypothesis the following assumptions are to be made about the hereditament:
- We now turn to the facts of the two cases under appeal and we consider the evidence and the contentions of the parties on them.
- The parties had prepared a statement of agreed facts and valuations. Evidence for the appellants was given by Michael Edward Watt FRICS, an associate director in the specialist licensed leisure and hotels division of Chesterton International Plc of London W1 and elsewhere, and Timothy Smith BSc ARICS, a partner in the specialist pub, brewing, hotel and leisure department of Gerald Eve and Co, chartered surveyors, of London W1 and elsewhere. Evidence for the respondent was given by Donald Henry Head ARICS, formerly deputy to the General Manager of Milton Keynes Development Corporation from 1972 to 1983 and now a senior lecturer in the Faculty of Business and Law De Montfort University, Milton Keynes; and by the respondent himself, Raymond Frederick Williams FRICS, district valuer and valuation officer Aylesbury and valuation officer for the Borough of Milton Keynes from 1984 to 1997 and now district valuer and valuation officer for south-west England. On the basis of the agreements and the evidence we find the following facts.
- We record the following agreements on valuation and related matters:
- The appellants' case is that the appeal properties should be valued in their actual physical condition on the material days. The only alterations permitted are minor alterations of a non-structural character. These would be insufficient to allow the properties to be used as shops or restaurants.
- In relation to the City Fayre / City Duck Mr Watt said that the minor alterations permitted under the rebus sic stantibus rule are to be considered in the context of physical change and not by reference to costs or other financial criteria, as contended by the valuation officer. Even if cost alone is considered, the agreed works of stripping back the appeal properties to shell condition cannot be considered as minor. These works would increase the value but would change the mode or category of occupation. The financial approach fails to have regard to the nature of the alterations, which would change the character of the properties. The agreed stripping out works are substantial. A reasonable person would not consider them to be minor. The properties would be significantly different in character after the alterations. The term "minor" should be considered having regard to such matters as inconvenience, the time required to carry out the works, visual changes, cost and whether in the opinion of a reasonable man the property had remained sufficiently similar to its original condition. In addition to the agreed works to convert the properties to shell condition, a hypothetical tenant wishing to occupy for another purpose would carry out further works of adaptation and shop fitting. The valuation officer, said Mr Watt, had changed his ground when he considered works which would be "absolutely necessary" for a change of use. He moved from stripping back to shell finish to the less extensive works which would be "absolutely necessary" for a change of use. All the properties in Milton Keynes centre have been adapted for their current use. Changes to a property are carried out to accommodate changes in the mode or category of occupation. The rebus sic stantibus rule, said Mr Watt, refers to minor alterations of a non-structural character. "Structural" means works constructed on site in component parts, requiring demolition for removal. The works necessary to strip the City Fayre / City Duck to shell finish go significantly beyond works of a minor nature. Many are structural works. Structural does not mean "load bearing", as suggested by the valuation officer. The correct interpretation of "structural" works is that which would be applied by a reasonable person. Mr Watt put in evidence a schedule for each of the appeal properties showing the works necessary to effect a change of use to wine bar, food sales and shop respectively, distinguishing between structural and non-structural works.
- In relation to the Rose and Castle Mr Smith said that it was accepted in Fir Mill that only minor non-structural alterations could be considered. In Jones v Toby Restaurants the Lands Tribunal concluded that the property was used as a public house and could not be used for any other purpose without significant changes to its physical state. Removal of non-load bearing items was a significant structural alteration. It is accepted, he said, that, in order to change the use of the Rose and Castle, alterations would be necessary. These are agreed: they involve returning the property to shell condition. It would be unrealistic to carry out lesser works. These alterations taken as a whole are not de minimis; they change the property from a public house to a shell. They are major structural alterations and offend the rebus sic stantibus rule. It is wrong to consider these works solely by reference to cost. A tenant wishing to use the Rose and Castle as a wine bar, cafe, licensed restaurant or shop could not do so without making substantial alterations. The necessary works would be outside the rebus sic stantibus rule.
- Mr Widdicombe submitted that the changes required to allow the appeal properties to be used as shops or restaurants would involve the carrying out of structural and non-minor works. In the light of the authorities he had referred to (see above paras 13 and 14) Mr Widdicombe submitted that the following items at the City Fayre / City Duck were structural: the brick shop frontages, the internal walls, the screed, the dumb waiter and that the following works would be structural works: the removal of the kitchen and the toilets, the removal of walls and joinery, and the capping off drains. At the Rose and Castle the following items were structural: the brick shop frontages, the internal walls, the screed the raised concrete floor and ramp, the staircase and lift shaft; and the following works would be structural in their nature: a new opening in the floor slabs for a staircase, the removal of the toilets and kitchen. It was thus, he said, clear that the use of the appeal hereditaments as shops and restaurants would require structural alterations and in any event alterations that were more than minor; and such use would therefore infringe the first limb of the rebus sic stantibus rule.
- The valuation officer's case is that the alterations needed to allow the appeal properties to be used as a shop, restaurant or wine bar, when considered in an economic or financial context, and whether those works comprise stripping back to shell or less extensive necessary works, would be minor and non-structural and allowable under the rebus sic stantibus rule.
- The valuation officer said that the agreed works and costs refer to the stripping back of the appeal properties to shell finish. This agreement does not carry the assumption that it is necessary to carry out all these works to effect a change of use. In the application of the first limb of the rebus sic stantibus rule it is a question of fact and degree in each case as to the extent of the work which can be taken into account when considering whether a hereditament can be valued for an alternative use (Irving Brown at page 61). In central Milton Keynes, said Mr Williams, it can be seen that:
- Parties to rental agreements and agreed assessments, said Mr Williams, must have considered that different internal layouts fall within the rebus sic stantibus rule. The presumption must be that the alterations required are those which the market would envisage. They would not be so material as to change the mode or category of occupation. This is a common sense approach. On a letting in the real world of a property in Milton Keynes, the tenant would strip out all the internal fittings and refit to his own requirements. The cost is reflected in comparable rents and assessments. The words "minor" and "structural" in the rebus sic stantibus rule are indicative and not definitive. In each case the interpretation will depend on the facts and the location of the property. In Milton Keynes the works necessary to strip back to shell are minor and do not offend the rule. They do not affect the safety or stability of the structure and the cost is minor compared to rental value as a shop or restaurant. This cost would be absorbed without reduction in rent.
- Mr Williams said that his valuations of the appeal properties reflect the prospect of carrying out alterations to accommodate shop and restaurant uses. In the real world most tenants would prefer to strip back to shell finish and refit. He has transferred this approach to the hypothetical world of rating, having regard to the agreed costs of stripping out. The landlord would not reduce the rent for these works. The stripping out works fall within the rebus sic stantibus rule for both of the appeal properties. But not all the works required to return the properties to shell finish are necessary for a change of use to a shop or restaurant. Mr Williams prepared a schedule for each of the appeal properties showing the works necessary to enable use as a wine bar, cafe, restaurant or shop. These works are less than the agreed works to strip back to shell finish. Mr Williams said that, seen through the eyes of a hypothetical tenant, the prospect of alterations for use within class A1 or A3 of the Use Classes Order would be within the scope of the rebus sic stantibus rule, whether the alterations involve stripping back to shell finish or comprise the less extensive works necessary for a change of use.
- Mr Holgate submitted that the valuation officer's evidence regarding the construction of the appeal properties was unchallenged and should be adopted. Both properties provide flexible accommodation which can be stripped out at minimum cost and refitted. No problems arise in stripping back to shell finish. Traders accepted the need to undertake extensive works and pay high premiums as a condition of entry. The hypothetical tenant would strip the properties back to shell finish at his own cost. The construction of the appeal properties and their suitability and adaptability for alternative uses are, said Mr Holgate, relevant factors in determining the mode or category of occupation. They are relevant to a consideration of the alterations which can be envisaged and the demand for alternative use. The following propositions are not in dispute: works necessary for shop or restaurant use can be carried out without affecting the structural integrity of the properties; this would be done in most circumstances; stripping out and refitting would not affect value; there is no economic constraint on conversion to these uses. Thus, subject to the effect of the rebus sic stantibus rule, the properties could be converted to any use within classes A1 or A3 of the Use Classes Order. It was not the appellant's case that the works necessary for shop or restaurant use would make the rents unviable for those uses. The cost of works would be a relatively small percentage of the total rents over a five year period.
- In Milton Keynes centre, Mr Holgate said, any particular shop or restaurant use can have a different appearance and layout from other uses in the same mode or category. There is a general requirement that these uses require clear and uninterrupted space in zones A and B. If these premises can be zoned for rental and rating valuation, there is no reason in principle why a similar approach should not apply to public houses. Mr Holgate said that the definition of "structural" works (assembly on site) adopted by Mr Watt and Mr Smith leads to anomalous situations. It has been applied inconsistently. If this definition is adopted, it would mean that, when valuing a unit like Macdonald's, most of the changes required to strip out the premises and install another shop or restaurant use would infringe the rebus sic stantibus rule and could not be taken into account when valuing for rating. The scope of potential bidders would be limited to those who would take the premises in their existing state. The correct approach is to look at the necessary alterations as a whole and then to judge whether they are substantial by reference to the following factors:-
- It is necessary, Mr Holgate said, to look at each property and all the circumstances in order to assess whether the changes infringe the rebus sic stantibus rule. The hypothetical landlord would be influenced in his negotiations only by the works needed for A1 or A3 use. Additional works specific to the incoming tenant would not bear upon the rent. On the evidence the City Fayre / City Duck could be used for A3 use (wine bar, cafe or restaurant) without alteration. It could be used as a shop with internal alterations which would not offend the rebus sic stantibus rule. Alternatively, the internal works necessary for A1/A3 use would not be structural, and, in the further alternative, a complete stripping out would not offend the rule. The property could be used as it stands for A1 use, although, if it is assumed that the central service core on the ground floor cannot be removed, this would reduce the rental value below the valuation officer's figure. With regard to the Rose and Castle, on the evidence the use could be changed to A3 without alteration or, alternatively, if alterations are required, they would not infringe the rebus sic stantibus rule. The property could be used as it stands for shop use, although if it is assumed that certain items cannot be removed, this would reduce the rental value below the valuation officer's figure.
- The question originally posed by the parties under this head was whether, if other uses for the appeal properties may be considered in addition to the existing uses, the physical alterations to enable such alternative uses to be accommodated can be contemplated under the rebus sic stantibus rule? During the hearing this became sub-divided into two questions. What works would be necessary to enable the appeal properties to be occupied for an alternative and higher value use? Would those works fall within the rule? Our formulation of the first limb of the rule is that a hereditament is to be valued in the same physical state as on the material day. Alterations which the hypothetical tenant might make to the hereditament may be taken into account if, taken overall, they are minor. All other prospective alterations are to be ignored. We emphasise that what has to be valued is the actual hereditament as it existed on the material day. It would, however, be contrary to common sense to exclude the possibility of any alteration, however minor, and therefore the first limb of the rule permits minor alterations to the hereditament to be taken into account. What is in dispute in these appeals is the scope of those alterations.
- The starting point for the application of the rule is the hereditament as it existed on the material day. In these appeals we must consider the physical state of the Rose and Castle as at 14 August 1990 and that of the City Fayre / City Duck as at 21 August 1990. We have described these at para 154 above.
- During the hearing the works required to the appeal properties to allow a change of use were considered under two heads: works required to strip the properties back to shell finish and the lesser works necessary to allow a change of use to shop, restaurant or wine bar. It is common ground, and we find as a fact, that the hypothetical tenant of each of the appeal properties, wishing to occupy for a use commanding the higher agreed rents, would strip out the specialist fittings, furnishings and works and restore the properties to shell finish. It is also not in dispute, and we find as a fact, that the hypothetical tenant, would carry out their own shopfitting and other works to enable the property to be occupied for the higher value use. The extent of the stripping out works to shell finish and their cost have been agreed.
- The valuation officer, however, introduced a second category of works which may be described as a "necessary works". These are less extensive than the agreed stripping out works. It is the valuation officer's view, that, although the hypothetical tenant would prefer to strip back to shell and refit, the lesser works necessary to allow a higher value occupation and use can be taken into account under the first limb of the rebus sic stantibus rule. We reject this contention. The first question is not what works are necessary to allow the appeal properties to be occupied for a higher value use but what works would the hypothetical tenant wish to carry out for the purposes of that use? What works would he have in mind when making his rental bid at the higher agreed figures? The agreement between the parties that the hypothetical tenant would strip out and refit for the purposes of a higher value use, in our judgment, excludes consideration of the valuation officer's necessary works. There was no evidence before us that the hypothetical tenant would pay rents at the agreed higher figures on the basis of the necessary works.
- To answer our second question we consider whether the agreed works of stripping back to shell finish fall within the rebus sic stantibus rule, that is to say are they alterations which, taken overall, are minor? This part of the rule rests on the principle that the hereditament is to be valued in its actual condition on the material day - as it was rebus sic stantibus. We emphasise that the alterations must be minor: this is the important word in our formulation of the first limb of the rule. As we have said above, we regard an investigation into whether works are structural or non-structural to be a sterile and unnecessary exercise. The correct approach is to look at the totality of the works in the context of the hereditament and then ask the question: are those works minor works? Cost is a factor to be taken into account, but as an absolute figure and not in relation to the increased rental value which can be realised by the works. A low cost clearly indicates that the works are minor and a high cost that they are works which fall outside the rule. The enquiry, however, is not an economic inquiry, as suggested by the valuation officer. It is essentially a matter of impression and common sense: would a reasonable man, looking at the hereditament as it stands at the material date and the proposed alterations, describe those alterations as minor?
- We apply this test to the agreed works required to strip the appeal properties back to shell finish. At the Rose and Castle these works include the removal of suspended ceilings, brick and other frontages, internal walls, floor coverings, floor screeds and the raised concrete floor on the ground floor, the staircase and lift shaft and all services. The agreed cost is £23,595, or £20,407 if the raised floor is retained. At the City Fayre / City Duck the agreed alterations to return the property to shell finish include the removal of suspended ceilings, frontages, internal walls, floor coverings and screeds and all services and sanitary fittings. The agreed cost is £26,050.
- In our judgment, applying the test referred to above, these are substantial works of alteration and do not fall within the first limb of the rebus sic stantibus rule. It is to be noted also that they do not include the substantial works that the tenant would have to do, having stripped the property to its shell, to make it fit for occupation. Under the rating hypothesis the stripping out works cannot be taken into account. The hypothetical tenant would not be able to carry out these works. They would not be in his contemplation when making his rental bid. The range of potential hypothetical tenants would therefore be restricted to those willing to occupy the properties in their existing condition. In short, the hypothetical tenant of the Rose and Castle would wish to occupy the property as a public house and the hypothetical tenant of the City Fayre / City Duck would wish to occupy the property as a public house and licensed cafe bar. Tenants wishing to use the properties as a shop, restaurant or wine bar use would not be in the market and the rental values are accordingly restricted to the agreed values for existing use of £29,500 for the Rose and Castle and £50,000 for the City Fayre / City Duck. We find that no tenant occupying the appeal properties in their existing state as a public house and public house and licensed cafe bar respectively would pay the higher agreed rents.
- It is the appellants' case that the use of the appeal properties as public house and public house and licensed cafe bar respectively are sui generis uses. They form a separate mode or category of occupation. They are not in the same mode or category as shops, restaurants or wine bars.
- Mr Watt said that mode of use as a public house is sui generis. This term can be used in rating. Occupation as a public house is sui generis for three reasons: the need for a justices' on-licence, the construction and layout, and the method of valuation. The review rents of the appeal properties show that the market pays substantially less for a public house. It is incorrect for the valuation officer to say that a range of similar uses under the Use Classes Order will always have the same value. The RICS Appraisal and Valuation Manual ("the Red Book") includes different valuation approaches for public houses and restaurants, although both are within the same use class. It is not disputed that the appeal properties should be regarded as retail outlets but the term "retail" includes a wide range of properties. The absence of basement cellars and living accommodation is irrelevant when considering occupation as a public house. Many of these properties have beer storage facilities (cellars) on ground or first floors, as at the appeal properties where deliveries and storage are at first floor level. Living accommodation is not rated but subject to council tax. The concept of mode or category of occupation cannot be applied selectively according to location but must be applied consistently and universally. The approach adopted by the valuation officer constitutes a change to the basic principle of rating, namely that a property should be assessed according to its current use. Assessments should follow changes in use and occupation rather than lead them. In cross-examination, Mr Watt accepted that the following factors may be relevant when determining mode or category of occupation: use, construction and physical characteristics, works customarily carried out by an incoming tenant and statutory restrictions on use. Mr Watt did not agree that the use of other premises in the locality, their values and the likely demand for the property for alternative uses are relevant factors.
- Mr Watt said that he has been valuing public houses since 1977 and has not before experienced valuation in existing use on a floor area basis or as a retail unit. For rating under the 1990 list the accepted method of valuation is the overbid method. He knew of only one case where a valuation officer has maintained that the value should be on a floor area basis as a retail unit. In Milton Keynes there is a considerable difference between shop rents and the rents of the appeal properties. The valuation officer has been inconsistent in his use of the areas of the appeal properties. In some locations a public house will pay a higher rent than a shop and in other locations the converse will apply. This is shown by the rental evidence in Milton Keynes. This demonstrates that the locational criteria applicable to a public house differ from those applicable to a shop. The valuation officer is wrong to draw the conclusion that A1 and A3 uses have the same values in Milton Keynes. The rents of the appeal properties are lower than other rents in the centre. All leases contain restrictive user clauses limiting the use to that of the tenant. In this respect the leases of the public houses and shops are the same: the valuation officer is wrong to conclude that the rents of the appeal properties are low due to restrictions on use. The zoning method of rental valuation puts the highest value on zone A. A shop user is therefore unlikely to obstruct this space with ancillary structures, as found in the Rose and Castle. This illustrates different operational criteria for public houses and confirms their separate mode or category. It is not disputed that in Milton Keynes restaurants, fast food, general retail and certain financial services pay the same level of rent. It follows that the value before or after physical change between these uses would be unchanged. But there is no evidence to support the opinion that a fast food unit would command the same rent on conversion to general shop use. If the City Fayre / City Duck is valued on the assumption that it commanded a retail rent then the current operation of the property would be unviable. The agreed trade is 810 barrels; to support a value of £210,000 the trade would have to increase to 7,000 barrels a year.
- Mr Watt said that the Couper decision is relevant because it relates to the City Fayre / City Duck. The repeal of section 20(2) (c) of the General Rate Act 1967 is irrelevant and the valuation officer has not proved that changes in planning legislation have any application to rating law. The Toby decision is also relevant because, in addition to the point regarding section 20(2) (c) of the 1967 Act, the absence of basement cellars and living accommodation in these appeal properties is immaterial. In Toby the Lands Tribunal clearly differentiated between public house and restaurant use. In cross-examination, Mr Watt was asked about the effect of competing bids in the market for the appeal properties. He said that if bids for public house use exceeded shop bids then these latter can be taken into account. If the converse applied, however, the higher shop bids should be excluded.
- Mr Smith agreed with Mr Watt that a public house is sui generis, on the grounds of a need for a justices' on-licence and physical characteristics. It is not essential that a public house should have basement cellars. In cross-examination, Mr Smith accepted that the following factors may be relevant when determining mode or category of occupation: use, construction and physical characteristics, works customarily carried out by an incoming tenant and statutory restrictions on use. As to the use of other premises in the locality and their rents, Mr Smith said that it is relevant to look at adjoining uses and the rents relating to those uses. He did not accept, however, that demand for alternative uses and their values are relevant when deciding mode or category of occupation. The application of the rebus sic stantibus rule involves looking at the property having regard to its existing condition and layout, and then considering whether any alternative use can be accommodated within the existing hereditament.
- Mr Smith said that the direct method of valuation was used for valuing public houses in the 1973 list and the overbid method for the 1990 list. Both are based on trading potential and not floor areas. The overbid method was introduced by the Valuation Office Agency for the 1990 list. Section 20(2) (c) of the 1967 Act did not require public houses to the valued solely by reference to trading potential. The repeal of this provision is immaterial to the method of valuation. It has not reduced the importance of the Toby decision. The public house in that case was not different from the Rose and Castle, as stated by the valuation officer, and the lack of basement cellars and living accommodation in the Rose and Castle does not affect the relevance of that decision. The Rose and Castle would not have been used as a wine bar due to lack of demand. There is no evidence of the rental value for such a use. The Rose and Castle is too small to accommodate a fast food operation and has an inappropriate layout for cafe or restaurant use. Mr Smith said that a valuation of the Rose and Castle based on retail rents would make the property unviable as a public house. The agreed trade of 650 barrels would need to increase to 5,000 barrels a year to justify an assessment of £132,000.
- Mr Widdicombe submitted that the mode or category of occupation of the appeal properties is as fully licensed public houses. This use is sui generis for the purposes of rating, and shops and restaurants are not in the same mode or category of occupation. The separate status of public houses is indicated by the following factors:-
- With regard to the criteria suggested by Mr Holgate for deciding mode or category, Mr Widdicombe commented as follows:-
- It is the valuation officer's case that, within the Milton Keynes centre, mode or category of occupation is a wide concept and includes all uses within classes A1 and A3 of the Use Classes Order. Mr Williams said that mode or category of occupation is a matter of fact and opinion, to be established by the evidence (Irving Brown (at 62); S & P Jackson (Manchester Limited) and Lanham (at 26)). The rental evidence in Milton Keynes shows that, in the absence of restrictions on rent, the market pays the same level of rent for shop and food sales use. Rent is calculated on the zoning basis: no account is taken of the physical arrangement of the property. Restaurants may be treated as in the same category as shops for the purposes of rental valuation (Zubaida v Hargreaves). There is no reason why the existence of an on- licence should change the position. All units within the centre are retail units: they were originally built to shell finish and are all concerned with sales. Mode or category of occupation can include any use within classes A1 and A3 of the Use Classes Order. Fine distinctions in the manner of occupation do not change the overall mode or category of occupation (Tomlinson (V0) v Mills) at 122).
- Mr Williams said that there are no universal or general tests for the rebus sic stantibus rule: the application of the rule must be determined on market evidence. All evidence should be considered (Garton v Hunter (V0)). Every public house in a shopping street is not necessarily to be valued as a shop. Factors to be taken into account when determining mode or category of occupation include: user, value, physical characteristics, demand, works to be carried out, and statutory restrictions. A public house is not sui generis, a term used in planning law. A public house is within class A3 of the Use Classes Order. Many other properties require a statutory licence or approval. This does not make them sui generis. No licence is required to change from a public house to a shop (A1): the on- licence could be surrendered or not used. Similarly, no licence is required to change from a public house to a restaurant, which could trade under the existing on- licence. It is illogical that an occupier of a retail unit, wishing to use it for the sale of intoxicating liquor and with an on-licence, would pay a lower rental than other retail users of similar properties.
- Mr Williams referred to the Macdonald's unit, opposite the City Fayre / City Duck. This has counters, serveries and internal partitioning similar to the appeal properties. It cannot be right that an on-licence dramatically reduces value. The City Fayre operates as a cafe: the predominant sales are of tea, coffee, snacks and meals. No draught beers, lagers or ciders are available. All bottles are housed in a small chill cabinet. There is unrestricted access for children. There is no evidence of use as a wine bar (as under the lease) nor of any licence for alcohol. The use is as a cafe, similar to Rivoli and any other A3 user. Most people would be surprised to find that it had an on-licence. It is now accurately described in the rating list as a "cafe". As to rental value, Mr Williams said that, if the City Fayre is valued by zoning, disregarding the central common toilets and kitchen and the City Duck public house area, the value would be £145,000, showing how unrealistic a rateable value of £50,000 is for the whole property. In the real world in 1990, the appeal properties would have let as shops or for the sale of food and drink (classes A1 or A3). Full rents would have been paid. In the hypothetical world of rating the rebus sic stantibus rule does not require any alteration to this position.
- Mr Williams assessed the rateable value of the City Fayre / City Duck and Rose and Castle using the zoning method valuation. The valuations envisage a hypothetical tenant taking the properties for a purpose within class A1 or A3 having regard to the alterations to accommodate those uses. In most cases it is correct to value public houses by reference to trading potential. Most public houses are, however, traditionally built specifically for that use; there is little evidence of alternative use. Where there is evidence of a higher rental bid, as in these cases, then the effect of bids from tenants wishing to occupy for uses within classes A1 or A3 should be taken into account. In rating the hypothetical tenant would occupy the appeal properties for those purposes
- In the real world in Milton Keynes rent reviews provide for rents for general retail purposes. Restaurant and A3 uses pay the same level of rent as A1 uses. Rents form a pattern. No landlord would let at a rent below the level of retail rents for three reasons. First, it is the position of the centre which dictates value. Secondly, in planning terms an A3 use can be changed to an A1 use. Thirdly, the market for A3 use is as strong as A1. Mr Williams said that his valuations of the appeal properties were based on shop rents. The properties should be considered as retail units, a category which includes all units in the centre. Mr Williams considered whether his valuation of the appeal properties in the real world required adjustment to reflect their physical characteristics. He concluded that no adjustment should be made for the following reasons. Tenants principally pay rent for position in the centre. This is modular in construction: walls are not load-bearing. Tenants would strip back to the bare shell before re-fitting and would not pay for specific physical characteristics required by a previous occupier which they would wish to replace.
- Mr Williams said that in the real world in 1990 the appeal properties would have been let at full rents for A1 or A3 use. Their continued use as licensed premises is due mainly to the terms of the original leases, with their restricted user clauses, resulting in lower rents (to be disregarded for rating) than to any motivation of the hypothetical landlord. The objects of the Development Corporation when letting and managing the centre were different from those of the institutional investor who acquired the property in 1989. The policy of tenant mix and market strategy has changed over the years. In 1979 the appeal properties and a discotheque were the only licensed premises in the centre, but by 1990 there were five more. Between 1979 and 1990 retailing trends changed and A1 and A3 rents rose considerably. Account would have been taken of this and the landlord would not have been prepared to let these units for less than their full value. Since 1979 estates close to the centre have been built with their own public houses. For all these reasons the appeal properties would have been let in the real world in 1990 for A1 or A3 use and the occupiers would have paid full rents. The guidance in the RICS Red Book under GN9 (restaurants) is more appropriate than GN7 (public houses), which does not deal with the issue in these appeals, namely the uses which can be taken into account when applying the rating hypothesis.
- Mr Holgate said that the appellants' argument that a public house is sui generis is wrong. It is based on the requirement of an on-licence. This licence does not prevent the property being used for another purpose. Many uses are subject to statutory control but this does not make them sui generis. As a matter of law the appeal properties could be occupied for A1 or A3 uses without the need for planning permission and notwithstanding the existing licences. It is wrong to assert that all public houses are in a separate class. The range of these properties is wide. Regard must be had to the particular circumstances of each case. The following factors are relevant when considering mode or category of occupation:-
- Our formulation of the second limb of the rebus sic stantibus rule is that it is to be assumed that the hereditament could only be occupied for a purpose within the same mode or category of purpose as that for which it was being occupied on the material day. Any prospective change of use outside that mode or category is to be ignored. In determining to what mode or category a particular use belongs regard is to be had to the principal characteristics of the use and the method of valuation commonly applied by rating surveyors. The question we must answer is whether, having regard to these matters, the use and occupation of the Rose and Castle as a public house and of the City Fayre / City Duck as a public house and a licensed cafe bar are in a mode or category that excludes the higher value uses within classes A1 and A3 of the Use Classes Order, particularly shops and restaurants.
- We look first at the principal characteristics of the use of the appeal properties. The Rose and Castle is a typical public house. On the ground floor is a saloon bar with a food servery, kitchen and customer toilets. The bar has a traditional bar counter where alcoholic and non-alcoholic drinks are served and an adjoining food servery selling typical pub food. There are several entrances to the bar and servery. There are the usual bar stools and tables and two gaming machines. On the first floor the floor space has been divided to provide chilled cellarage, wine and spirits store, office, plant room, staff toilets and storage. We find that the principal characteristic of the use is the sale of alcoholic and non-alcoholic drinks and food for consumption on the premises. The City Fayre / City Duck has slightly different characteristics. It has a composite use. On the ground floor part is a typical public house with bar and tables and three gaming machines and part is a licensed self-service cafe/bar. The kitchen and customer toilets are common to both uses. The first floor, like the Rose and Castle, has been divided into similar ancillary accommodation. As with the Rose and Castle the principal characteristic of this use is the sale of alcoholic and non-alcoholic drinks and food for consumption on the premises.
- In our judgment these uses are distinct from those of a shop or restaurant (fast food or other), notwithstanding that these uses are all within classes A1 and A3 of the Use Classes Order. The characteristic of a shop is the retail sale of goods and services for use off the premises. The shop does not need a justices' on-licence. A restaurant is primarily used for the consumption of food on the premises, the consumption of alcoholic and non-alcoholic drinks being ancillary to the provision of food. The City Fayre / City Duck has a cafe use but this is part only of the overall use, which cannot be described solely as cafe or restaurant. The nearest use to the appeal properties is a wine bar. We note the evidence of the appellants' experts, that, leaving on one side the works that would be needed to convert the appeal properties to wine bar use, a wine bar has different characteristics to a public house and a public house combined with a cafe bar. Nevertheless the similarities are such that had there been rental or assessment evidence of a wine bar in the Milton Keynes shopping centre we should have been disinclined to discount it on the basis of mode or category of occupation. There was, however, no such evidence, and indeed it is to be noted that the rent review rent for City Fayre / City Duck, the lease for which includes among the uses permitted that of wine bar, is at £48,000 effectively equivalent, when account is taken of size, to the £32,000 for the Rose and Castle, the use of which is limited to a public house.
- It is common ground that public houses are valued by reference to trading receipts and shops and restaurants are valued by reference to floor area, either zoned in the case of shops and restaurants in shopping streets or overall. The agreed alternative values in these appeals reflect these different methods of valuation. It is of some significance in relation to valuation practice, we believe, that the valuation officer, though familiar with the valuation of shops and restaurants, has very little experience of the valuation of public houses, and the valuation office employs specialist licensed valuers; while Mr Watt and Mr Smith for their part specialise in the valuation of public houses and certain other leisure uses and have little experience of valuing shops and restaurants.
- Mr Smith's valuation of the Rose and Castle is based on the rent of £32,000 per annum and also on trading receipts, that is to say the overbid method of valuation introduced by the Valuation Office Agency for the 1990 rating list. It is derived from the previously used direct method of valuation. It involves assessing the tied rent based on the sales of beers, wines and spirits, adding the gaming machine receipts and catering/letting (the dry bid), and finally adding for brewers' overbid, a percentage of the wholesale profits on the sale of beers, wines and spirits. Mr Watt's valuation of the City Fayre / City Duck uses the same methods, rent and overbid and a third method, a percentage of total receipts. Mr Williams uses the zoning method of valuation for both properties, valuing the ground floor as four zones with decreasing values per square metre, adding a percentage for return frontage and using an overall rate per square metre for the first floor. Mr Watt and Mr Smith have valued the appeal properties in their existing use as public house and public house and cafe bar respectively; Mr Williams has valued both properties as if they were shops.
- We were referred to the RICS Red Book. Guidance Note GN7 gives guidance on trading - related values and goodwill. GN7.2.14 states:-
- Guidance Note GN9 is concerned with the valuation of restaurants. GN 9.3 states:-
- We find that public houses are valued by reference to trading receipts and shops and restaurants by reference to floor areas. These are the methods of valuation commonly used by rating surveyors. Rental valuations of operational public houses would not be undertaken on a floor area basis and, conversely, rental valuations of shops or restaurants would not be undertaken on a receipts or profits basis. This distinction in the method of valuation indicates that public houses are in a separate mode or category of occupation which does not include shops or restaurants.
- Our overall conclusion is therefore that, applying the tests of the principal characteristics of the use and the method of valuation, the Rose and Castle and the City Fayre / City Duck are in a mode or category of occupation which excludes the higher value uses of shop or restaurant.
- The rebus sic stantibus rule identifies for the purpose of valuation the hereditament, the physical changes which may be made to it, and the mode or category of occupation. The rule rests on the concept that what has to be determined in rating is the value to the occupier of his occupation of the hereditament, measured by the rent on an assumed yearly tenancy. In carrying out a valuation under the rating hypothesis the following assumptions are to be made about the hereditament:
- On the first limb of the rebus sic stantibus rule we find that works to strip them back to shell finish would be required by a hypothetical tenant wishing to occupy the properties for a use commanding the agreed higher rents but that those works go beyond the minor works that may be contemplated under the first limb of the rebus sic stantibus rule. In short, the stripping out works are assumed not to be in the contemplation of the hypothetical tenant when formulating his rental bid.
- On the second limb of the rebus sic stantibus rule we find that the Rose and Castle and the City Fayre / City Duck are not in the same mode or category of occupation as the shops and restaurants on which the valuation officer places reliance, and that their potential for shop or restaurant use is to be ignored. They are properly to be valued on the appellants' basis.
- We have found for the contentions of the appellants and therefore, in accordance with the agreement reached between the parties, the agreed rateable values are £29,500 for the Rose and Castle and £50,000 for the City Fayre/City Duck. Both appeals are allowed. We order that the decisions of the Buckinghamshire Valuation Tribunal dated 18 November 1993 be set aside and that the appeal properties be entered in the 1990 rating list as:
- What we have said so far concludes our determination of the substantive issues in this case. It will take effect as a decision when the question of costs is decided and at that point, but not before, the provisions relating to the right of appeal in section 3(4) of the Lands Tribunal Act 1949 and Order 61 rule 1(1) of the Civil Procedure Rules will come into operation. The parties are invited to make submissions as to the costs of this reference and a letter accompanying this decision sets out the procedure for submissions in writing.
- The appellants ask for their costs and the respondent accepts that he should pay them. We therefore order that the appellants do recover their costs of these appeals against the respondent, such costs to be agreed and if not so agreed to be the subject of a detailed assessment on the standard basis by the Registrar of the Lands Tribunal in accordance with Rule 44.4 and Rule 44.7 of the Civil Procedure Rules. Any such detailed assessment will, however, be conducted in accordance with Rule 52 of the Lands Tribunal Rules 1996 and not in accordance with Rule 47 of the Civil Procedure Rules.
[2000] EWLands RA_480_1993 (22 February 2000)
RA/480/1993
RA/484/1993
LANDS TRIBUNAL ACT 1949
RATING - valuation - rebus sic stantibus - public house and public house /licensed cafe/bar - standard units in covered shopping centre - potential for use as shops or restaurants - whether requisite physical alterations within rebus sic stantibus rule - the test for this - mode or category of use - the test for this - held both physical alterations and change of use would offend rebus sic stantibus rule - not to be valued by reference to rental values of shops and restaurants
IN THE MATTER OF TWO APPEALS AGAINST DECISIONS
OF THE BUCKINGHAMSHIRE VALUATION TRIBUNAL
BETWEEN SCOTTISH AND NEWCASTLE RETAIL LIMITED Appellant
and
R F WILLIAMS Respondent
(Valuation Officer)
Re: Public House & Premises known as The Rose and Castle,
122 Midsummer Arcade, Milton Keynes
and
ALLIED DOMECQ RETAILING LIMITED Appellant
and
R F WILLIAMS Respondent
(Valuation Officer)
Re: Public House Wine Bar and Premises known as City Fayre / City Duck
44 Midsummer Arcade, Milton Keynes
Before: The President and Mr P H Clarke FRICS
Sitting at 48/49 Chancery Lane
on 25-28 May, 20-24, 29-30 September and 1 October 1999
The following cases are referred to in this decision:
Couper (VO) v Aylesbury Brewery Co Ltd (1985) 275 EG 255
Fir Mill Ltd v Royton UDC and Jones (VO) (1960) 7 RRC 171
Midland Bank v Lanham (VO) [1978] RA 1
R v St Luke's Hospital (1760) 2 Burr 1053; 97 ER 703
R v Gardner (1774) 1 Cowp 79; 98 ER 977
Kempe v Spence (1779) 2 Black W 1244; 96 ER 733
R v Mast (1795) 6 TR 154; 101 ER 485
R v Liverpool Exchange (1834) 1 Ad & E 465; 110 ER 1285
R v Everist (1847) 10 QB 178; 116 ER 69
R v Grand Junction Railway Co (1844) 4 QB 18; 114 ER 804
North and South Western Junction Railway Co v Brentford Union Assessment Committee (1888) 13 App Cas 592
Great Western Railway Co v Kensington and Hammersmith Assessment Committees [1916] AC 23
Robinson Brothers (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445; [1938] AC 321
Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366
British Bakeries v Gudgion (VO) (1969) 16 RRC 56
Lewis Vintners v Speight (VO) (1984) 272 EG 1177
Manchester Tennis and Racquet Club v Castle (VO) (1960) 6 RRC 269
Liverpool Corn Trade Association Ltd v Pritchard (VO) (1962) 9 RRC 358
Peter Dixon & Sons Ltd v Elliott (VO) (1967) 13 RRC 325
White v Grice (VO)[1975] RA 38
Marks v Tucker (VO) [1983] RA 221
Sheffield United Tours Ltd v Elliott (VO) [1983] RA 81
Westminster City Council v British Telecommunications Plc [1985] RA 87
Jones (VO) v Toby Restaurants (South) Ltd [1992] RA 87
Hope (VO) v Wellcome Foundation Ltd (1960) 6 RRC 287
Fletcher v Dyson (VO) [1965] 5 RVR 416
Croydon Corporation v Hardiman (VO) (1967) 9 RRC 382
Venis v Bullock (VO) (1966) 12 RRC 114
Re Appeal of Sheppard (1967) 13 RRC 139
Irving Brown and Daughter v Smith (VO) [1996] RA 53
Duckworth (VO) v Manchester Corporation (1970) 16 RRC 235
London Transport Executive v Croydon LBC and Phillips (VO) (1974) 19 RRC 299
James v Clee (VO) (1976) 20 RRC 304
Henriques v Garland (VO) (1977) 20 RRC 341
Florikic v Mummery (VO) (1977) 21 RRC 73
West Dorset DC v Auton (VO) (1979) 21 RRC 390
Vesta Launderettes Ltd v Smith (VO) [1979] RA 317
S & P Jackson (Manchester) Ltd v Hill (VO) [1980] RA 195
Tappenden v Stratford (VO) [1981] RVR 11
Mugridge v Daniels (VO) [1981] RVR 68
Jermy v Jones (VO) [1982] RVR 225
Re Johnson (VO)'s Appeal [1983] RA 157
Adams v Freeman (VO) (1984) 270 EG 855
Hearne v Bromley (VO) [1984] RVR 81
Re Chilton-Merryweather (VO)'s Appeal [1994] RA 417
Makro Self-Service Wholesalers Ltd v Brennan (VO) [1996] RA 341
Shah v Kubbinga (VO) (LT ref RA/59/98, 1 December 1998)
Assessor for Stirlingshire v Myles and Binnie 1962 SC 530
Assessor for Lanarkshire v Smith 1962 SC 517
R v London School Board (1886) 17 QBD 738
LCC v Erith Parish [1893] AC 562
Byrne v Parker (VO) [1980] RA 45
Metropolitan Water Board v Chertsey Union Assessment Committee [1916] AC 337
Port of London Authority v Orsett Union [1920] AC 273
Poplar Assessment Committee v Roberts [1922] 2 AC 93
Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1936] 1 KB 585; [1937] AC 419
Consett Iron Co Ltd v Assessment Committee for No.5 Area Durham [1931] AC 396
R v Fletton Overseers (1861) 3 E & E 450; 30 LJMC 89
Rozel Motor Co Ltd v Clark [1983] RA 70
Edmondson (VO) v Teesside Textiles Ltd (1985) 83 LGR 317
Clement (VO) v Addis Ltd [1988] 1 WLR 301
Hoare (VO) v National Trust [1998] RA 391
Black v Oliver [1978] 1 QB 870
Jones v Mersey Docks and Harbour Board (1865) 11 HL Cas 443
Kingston Union Assessment Committee v Metropolitan Water Board [1926] AC 331
Staley v Castleton Overseers (1865) 5 B & S 505
Great Eastern Railway Co v Haughley Overseers (1866) LR 1 QB 666
Commissioner of Rating and Valuation v Lai Kit Lau Mutual Aid Committee [1986] HKLR 93
K Shoe Shops v Hardy (VO) [1983] 1 WLR 1273
Stirk & Sons Ltd v Halifax Assessment Committee [1922] 1 KB 264
Double v Southampton Assessment Committee [1922] 2 KB 213
Ladies Hosiery and Underwear Ltd v West Middlesex Assessment Committee [1932] 2 KB 679
Garton v Hunter (VO) [1969] 2 QB 37
Robinson v Le Grys (VO) [1969] RA 63
Burling v Escott (VO) (1968) 14 RRC 319
Cyril Fogelman Ltd v York (VO) [1966] RA 306
R v London & South Western Railway Co (1842) 1 QB 558
Liverpool Corporation v Chorley Union Assessment Committee [1913] AC 197
Talargoch Mining Co v St Asaph Union (1868) LR 3 QB 478
Sculcoates Union v Kingston-upon-Hull Dock Co [1895] AC 136
Harter v Salford Overseers (1865) 6 B & S 591
Arbuckle Smith & Co Ltd v Greenock Corporation [1960] AC 813
R v Melladew [1907] 1 KB 192
Tomlinson (VO) v Mills (1959) 6 RRC 146
Coventry and Solihull Waste Disposal Co Ltd v Russell (VO) [2000] 1 All ER 97
Barras v Aberdeen Steam Trawling and Fishing Co Ltd [1933] AC 402
David Widdicombe QC and Michael Druce instructed by J P Scrafton for the Appellants
David Holgate QC and David Forsdick instructed by Solicitor of Inland Revenue for the Respondent
DECISION
Introduction
"In our opinion only two assumptions are permitted. The first assumption is that the hereditament is vacant and to let - vacant in the physical sense and in the sense that the existing business has ended and any process machinery has been removed. The second assumption - and here we accept the second proposition of counsel for the respondents - is that the mode or category of occupation by the hypothetical tenant must be conceived as the same mode or category as that of the actual occupier. A dwelling house must be assessed as a dwelling house; a shop as a shop, but not as any particular kind of shop; a factory as a factory but not as any particular kind of factory. Some alteration to a hereditament may be, and often is, effected on a change of tenancy. Provided it is not so substantial as to change the mode or category of use, the possibility of making a minor alteration of a non-structural character, which the hypothetical tenant may be assumed to have in mind when making his rental bid, is a factor which may properly be taken into account without doing violence to the statute or to the inference we draw from the authorities."
"... all alternative uses to which the hereditament in its existing state could be put in the real world, and which would be in the minds of competing bidders in the market, are to be taken as being within the same mode or category, where the existence of such competition can be established by evidence."
"...[W]hat is the position where a tenant, in the knowledge and in anticipation of the increased value after the structural alterations have been carried out, is prepared to pay by way of rent under a tenancy from year to year some part of that enhanced value not covered by the cost of the structural alterations required to bring it about? This seems to me to be again entirely a question of evidence."
Mr Widdicombe's submissions
(a) the occupier is to be rated for the value of his occupation;
(b) the statutory definition of net annual value is the means of establishing that value;
(c) the hereditament must be valued rebus sic stantibus, i.e. in its existing state, both physical and as to use.
R v St Luke's Hospital (1760) 2 Burr 1053; 97 ER 703;
R v Gardner (1774) 1 Cowp 79; 98 ER 977;
Kempe v Spence (1779) 2 Black W 1244; 96 ER 733;
R v Mast (1795) 6 TR 154; 101 ER 485;
R v Liverpool Exchange (1834) 1 Ad & E 465; 110 ER 1285;
R v Everist (1847) 10 QB 178; 116 ER 69;
R v Grand Junction Railway Co (1844) 4 QB 18; 114 ER 804;
North and South Western Junction Railway Co v Brentford Union Assessment Committee (1888) 13 App Cas 592;
Great Western Railway Co v Kensington and Hammersmith Assessment Committees [1916] AC 23;
Robinson Brothers (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445 (CA); [1938] AC 321;
Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366.
Manchester Tennis and Racquet Club v Castle (VO) (1960) 6 RRC 269 (widening of door entrance);
Liverpool Corn Trade Association Ltd v Pritchard (VO) (1962) 9 RRC 358 (telephone boxes);
Peter Dixon & Sons Ltd v Elliott (VO) (1967) 13 RRC 325 (pits in factory floor);
White v Grice (VO)[1975] RA 38 (erection of fence);
Marks v Tucker (VO) [1983] RA 221 (installation of kitchen and bathroom);
Sheffield United Tours Ltd v Elliott (VO) [1983] RA 81 (inspection and workshop pits in floor of factory);
Westminster City Council v British Telecommunications Plc [1985] RA 87 (new entrance and demolition of internal walls);
Jones (VO) v Toby Restaurants (South) Ltd [1992] RA 87 (removal of toilets and kitchen in public house).
Hope (VO) v Wellcome Foundation Ltd (1960) 6 RRC 287 (temporary partitions and boarding of windows);
Fletcher v Dyson (VO) [1965] 5 RVR 416 (wooden batten on garage door);
Croydon Corporation v Hardiman (VO) (1967) 9 RRC 382 (small notice-board at show house);
Venis v Bullock (VO) (1966) 12 RRC 114 (batten and nails on garage door, cut back of tree);
Re Appeal of Sheppard (1967) 13 RRC 139 (wooden batten on garage door);
Irving Brown and Daughter v Smith (VO) [1996] RA 53 (temporary partition).
"... I think the matter is finally determined by the evidence of the valuation officer who told me that, although the rents for training schools were formerly the same as those for offices .... there must have been changes because there was evidence of a comparable training school let in a commercial building at a rent lower than that which would have applied to offices ... The evidence of the valuation officer can only be taken to mean that on the facts of this case there would be no competing bid from prospective office tenants who would at the relevant date influence the rent which a tenant of the hereditament, taken as a whole, would be expected to pay in respect of the upper floors, used as part of the training school."
"From a study of these authorities I can see nothing to cause me to reject, and much to support, the proposition that in determining the annual value of a hereditament, although one is required to arrive at the annual value to the occupier, one is also required to take into account such competition as is likely to arise in the real world from other possible tenants who must, nevertheless, be assumed to take the premises in their existing physical sate."
"... [A]ll alternative uses to which the hereditament in its existing state could be put in the real world, and which would be in the minds of competing bidders in the market, are to be taken as being within the same mode or category, where the existence of such competition can be established by evidence."
"The mode or category of occupation is that of the actual occupier but, in deciding what rent an occupier would pay it is proper to have regard to the rents which would be paid for the hereditament in its existing state by competing bidders existing in the real world."
This test also, said Mr Widdicombe, was wrong in law because it made the mode or category of occupation of no practical significance since it could be reversed or overridden at the valuation stage.
Florikic v Mummery (VO) (1977) 21 RRC 73;
West Dorset DC v Auton (VO) (1979) 21 RRC 390;
Vesta Launderettes Ltd v Smith (VO) [1979] RA 317;
S & P Jackson (Manchester) Ltd v Hill (VO) [1980] RA 195;
Tappenden v Stratford (VO) [1981] RVR 11;
Mugridge v Daniels (VO) [1981] RVR 68;
Jermy v Jones (VO) [1982] RVR 225;
Sheffield United Tours Ltd v Elliott (VO) (above);
Marks v Tucker (VO) (above);
Re Johnson (VO)'s Appeal [1983] RA 157;
Adams v Freeman (VO) (1984) 270 EG 855;
Hearne v Bromley (VO) [1984] RVR 81;
Westminster City Council v British Telecommunications Plc (above);
Re Chilton-Merryweather (VO)'s Appeal [1994] RA 417;
Couper (VO) v Aylesbury Brewery Co Ltd (above);
Irving Brown and Daughter v Smith (VO) (above);
Makro Self-Service Wholesalers Ltd v Brennan (VO) [1996] RA 341;
Shah v Kubbinga (VO) (LT ref RA/59/98, 1 December 1998).
"Two views of this matter have been entertained by our judges. The one is that you must value heritage in its actual physical state at the time of the valuation, and according to the use to which it is then devoted. The second view is that you must value heritage in its actual physical state at the date of the valuation, but, if it is not then devoted to the most profitable use which that state permits without structural alterations, you may value it on the hypothetical basis that it is being devoted to that most profitable use. We have had a full citation of the judicial opinions which deal with the matter, and the great weight of judicial opinion is in favour of the first view."
In Assessor for Lanarkshire v Smith 1962 SC 517 it was held that a house with space for a garage should not be assessed at a higher value than an otherwise identical house with no space for a garage. On the rating hypothesis any additional value deriving from the potential to construct a garage was irrelevant.
"I am not persuaded in this case that the zoning method as applied by Mr Couper produces the right answer. The appeal hereditament is an unusual one and the hypothetical tenant must also be taken to be unusual. The hypothetical tenant is certainly not a shopkeeper nor is he a normal restaurateur. He is a person like the ratepayer company who carries on a recognised public house trade in The City Duck and an almost completely separate business in Jemimah's. The assessment of gross value in such a case clearly presents unusual difficulties.
In the light of the evidence I think that an application of the direct method if properly applied is more likely to produce the right answer. That does not mean that the valuer is to set aside his judgment and slavishly adopt a formula as a substitute for valuation. He must have regard to all the factors which affect the value of the hereditament."
Mr Holgate's submissions
"(1) The hereditament to be valued under s.22 of the Act is always the actual house or other property for the occupation of which the occupier is to be rated, and that hereditament is to be valued as it in fact is - rebus sic stantibus." (At 468)
"(5) In weighing up the evidence bearing upon value, it is the duty of the valuer to take into consideration every intrinsic quality and every intrinsic circumstance which tends to push the rental value either up or down, just because it is relevant to the valuation and ought therefore to be cast into the scales of the balance before he looks to see the resultant figure on the dial at which the pointer finally rests." (At 469)
"(8) 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 the 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'". (At 471)
"(10) ... The objective being the real value of the actual hereditament, the inquiry is primarily economic and not legal; it is only legal in so far as logical relevance is the measure of legal admissibility." (At 470-471)
"(11) On such an inquiry every factor, intrinsic or extrinsic, which tends to increase or decrease either demand or supply is economically relevant and is, therefore, admissible evidence for the assessment committee or its valuer or the quarter sessions on appeal to consider." (At 471)
"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 of 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. That is why in valuing a public house you must take into account its licence, with the statutory implications of the licence, as for instance, on the one hand, its monopoly value, and, on the other, the degree to which in that area the competition of other licensed houses may reduce the profit-making quality of that particular house and so prejudiced the demand for it. The second consequence is that 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." (At 474)
"Three principles are implicit in the judgment: (1) that the real value of the hereditament must be ascertained so far as an estimate can ascertain it; (2) that that value will, like all other values, depend on and be fixed by economic forces of demand and supply in every case where the hereditament is of a kind to admit to those forces operating; and (3) that every imaginable motive affecting human nature which makes people want a thing, whether a commodity or a hereditament, creates demand, and thus affects value." (At 478-479)
Consett Iron Co Ltd v Assessment Committee for No.5 Area Durham [1931] AC 396,
R v Fletton (1861) 3 E & E 450; 30 LJMC 89,
West Dorset DC v Auton (VO) (1979) 21 RRC 390,
Vesta Launderettes Ltd v Smith (VO) (above),
Rozel Motor Co Ltd v Clark [1983] RA 70,
Edmondson (VO) v Teesside Textiles Ltd (1985) 83 LGR 317,
Westminster City Council v British Telecommunications Plc (above),
Clement (VO) v Addis Ltd [1988] 1 WLR 301,
Hoare (VO) v National Trust [1998] RA 391,
Black v Oliver [1978] 1 QB 870,
Jones v Mersey Docks and Harbour Board (1865) 11 HL Cas 443,
Kingston Union Assessment Committee v Metropolitan Water Board [1926] AC 331,
Henriques v Garland (VO) (above),
Staley v Castleton Overseers (1865) 5 B & S 505,
Great Eastern Railway Co v Haughley Overseers (1866) LR 1 QB 666,
Commissioner of Rating and Valuation v Lai Kit Lau Mutual Aid Committee [1986] HKLR 93,
K Shoe Shops v Hardy (VO) [1983] 1 WLR 1273,
Stirk & Sons Ltd v Halifax Assessment Committee [1922] 1 KB 264,
Double v Southampton Assessment Committee [1922] 2 KB 213,
Ladies Hosiery and Underwear Ltd v West Middlesex Assessment Committee [1932] 2 KB 679,
Garton v Hunter (VO) [1969] 2 QB 37,
Robinson v Le Grys (VO) [1969] RA 63,
Burling v Escott (VO) (1968) 14 RRC 319,
Mugridge v Daniels (VO) (above),
Jermy v Jones (VO) (above),
Liverpool Corn Trade Association v Pritchard (VO) (above),
Shah v Kubbinga (VO) (above),
Croydon Corp v Hardiman (VO) (above),
Cyril Fogelman Ltd v York (VO) [1966] RA 306, and
Re Johnson (VO)'s Appeal (above).
The statutory provisions
"A person (the ratepayer) shall as regards a hereditament be subject to a non-domestic rate in respect of a chargeable financial year if the following conditions are fulfilled in respect of any day in the year -
(a) on the day the ratepayer is in occupation of all or part of the hereditament, and
(b) the hereditament is shown for the day in a local non-domestic rating list in force for the year."
"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"
- on certain assumptions as to the state of repair, the duty to repair and insure, and the duty to pay rates and taxes. This definition of rateable value as the rent reasonably to be expected on a tenancy from year to year derives from section 1 of the Parochial Assessments Act 1836 and its successor provisions in the Rating and Valuation Act 1925 and the General Rate Act 1967. The provision in the 1836 Act contained the following proviso:
"...Provided always, that nothing herein contained shall be construed to alter or affect the principles or different relative liabilities (if any) according to which different kinds of hereditament are now by law rateable."
"(a) Matters affecting the physical state or physical enjoyment of the hereditament,
(b) the mode or category of occupation of the hereditament,
(c) the quantity of minerals or other substances in or extracted from the hereditament,
(cc) the quantity of refuse or waste material which is brought on to and permanently deposited on the hereditament,
(d) matters affecting the physical state of the locality in which the hereditament is situated or which, though not affecting the physical state of the locality are nonetheless physically manifest there, and
(e) the use or occupation of other premises situated in the locality of the hereditament."
The older cases
"As to the argument that has been urged in support of the order, 'that a proprietor of lands and houses can not, by his own private voluntary act, discharge such his property from payments due to other persons upon and out of it' - it does not hold true in fact. For this rate payable to the parish, as well as other payments arising from property and chargeable upon it, do and must depend upon the will of the proprietor. The owner of a house may, if he pleases, pull it quite down, and convert it into a toft. The owner of land may, if he pleases, suffer them to lie barren and unoccupied."
"The next objection made to this order is, that these areas yield no profit, and therefore ought not to be rated. The answer to that is, that the value is in the judgment of the assessors. If land undergoes any alteration, the assessors must take all the circumstances into their consideration when they are about to fix the value: it would be an absurd rule to say, that lands not covered with houses, should pay the same as they did when houses were standing upon them. The rates must be according to the value of the thing to be rated; and the duties increase according to the increase of agriculture or improvement."
"All property is liable to variations in point of value, in maritime counties especially. So, in others, the value may be enhanced or lessened, annihilated or new created, by culture or neglect, by pulling down ancient buildings or erecting new ones."
"Every inhabitant ought to be rated according to the present value of his estate, whether it continue of the same value as when he purchased it, or whether the estate is rendered more valuable by the improvements which he has made upon it."
"These cases establish the principle, that the advantages attendant upon a building, either in respect of its situation or the mode of its occupation, are to be taken into account in estimating its rateable annual value, wherever those advantages would enable the owner of the building to let it at a higher rent that it would otherwise fetch; but not the profits of a trade carried on in the building and not enhancing its rent. The news room in question has certain advantages, and an attendant revenue in consequence of the Act of Parliament referred to; under which Act it must always have those advantages and attendant revenue, though the amount of it may be more or less from varying circumstances: but it must be a public room at all times, by the express provisions of the Act. The circumstances of its being a public room permanently under the Act, gives it the advantages which it has, and as it cannot be let as a private news room, or for a room for any purpose which excludes the public, it seems absurd to consider it in that light for the sole purpose of rating it. As long as it continues one of the rooms mentioned in the sixth section of the Act, so long the advantages alluded to must be attached to it, and must be taken into account in estimating annual value."
"Now neither of the appellant's modes are correct, nor were contended so to be: they were in effect to rate land occupied in one mode as though it were occupied in another; the modes producing different rates of profit and commanding different amounts of rent; than which nothing can be more unreasonable."
"...[T]hough the supposition of a tenancy is to be made, yet what the incidents of the tenancy must be as to actual terms and allowances must be determined, for the purposes of fixing the amount of the rate by the actual state of things; for this supposition of a tenancy is only a mode of ascertaining the existing value to the existing occupier."
"What under the Act was possible by law, what in point of fact might be in future, however near, we thought immaterial as to the principle, though very fit to be taken into account when making the calculation as to quantum; but in principle the parish officers were to look at the actual state and value of the occupation."
What that was saying in terms, said Mr Holgate, was that prospective changes could be taken into account in assessing the value of the hereditament.
"Let now the principle which these cases establish be applied to the facts before us. If we wish to know whether the fares would have been properly included in the rate before the Assessment Act was passed, we apprehend that, according to that principle, the only question to be asked would be, do they increase actually the value of the buildings and lands on which the rate is to be made? If they do, and to whatever extent they do, to that extent, due allowances always being supposed, they must, directly or indirectly, be included. It would be no answer to say that by law the railway is a highway; that all the world may carry goods and passengers on it; that it is an accident that the company alone monopolize all the trade, and that their monopoly may cease tomorrow. These circumstances, so far as they lessened the value of the building and lands, would be proper to be taken into the account as to the quantum of the rate; but they would not affect the principle."
"If it be said that, not only by law but in fact, the company may lease their line, and become mere carriers on it, or that they may demise their buildings and carriages, cease to be traders, and become mere occupiers of the railway, the answer is, that the present rate, with which alone we have to deal, is not made on either of these states of facts; that when either shall arise, the rate must be altered to meet it; but that even then, in all probability, the result to the parishes would be much the same; the rate would only become apportionable between two classes of occupiers instead of being charged on one."
"It is unnecessary after this statement to point out the difference in fact between the two cases...Still in both the enquiry must be the same:- what is the value of the occupation, from whatever source derived? In neither can the profits of trade, as such, be brought into the rate; but, if the ability to carry on a gainful trade upon the land adds to the value of the land, that value cannot be excluded merely because it is referable to the trade. Suppose a house occupied by a private family today, which, having great advantages of situation for the purposes of trade, is turned into a shop tomorrow, and in consequence lets for double or treble the former rent; would not the rate be properly increased in proportion? Could it be objected that to do so was to rate the profits of trade? Again, supposing that the occupier was to let out different rooms to other persons carrying on the same trade as himself, and this mode of occupying was still to increase the value of the house to let; would this at all vary the principle on which he was rated, though it might increase the quantum?"
"The thing is to be valued as it is, for the purpose for which it is used, and its value is to be ascertained upon the principle which is enacted by the statute."
"It is a principle of rating assessment that the hereditament should be valued as it stands and as used and occupied when the assessment is made."
The cases leading to Fir Mill and Midland Bank
"When cost is taken as a basis it must surely be on the footing that what has in fact been paid presumably indicates capital value, and that interest on it presumably indicates annual value. When a man pays a price for the fee simple of land, whatever fitness or capability for profitable use then existed in the land, or may run with it, is surely covered by the price he pays, unless some special arrangement is made, of which there is no trace here."
Lord Atkinson said (at 354):
"When a person purchases land he purchases it with all its capacities. If the vendor is aware that the purchaser desires to obtain it in order to devote it to a special purpose, and that it is specially fitted for that purpose, and that it is especially fitted for that purpose, he presumably demands the more for it for the same reason. Its special fitness thus enhances the price for which it is sold and is paid for by the purchase money ... As far as the buildings are concerned, they were built for the very purposes of the waterworks and nothing else."
"This capacity [the capacity of land and buildings to be applied to the objects of a water company] is some inherent quality of the physical thing itself, its fitness to be devoted to a certain purpose, irrespective altogether of the value of its actual user for that purpose."
And at 353, with reference to Talargoch Mining Co v St Asaph Union (1868) LR 3 QB 478:
"This is the case upon which the Master of the Rolls based his judgment. It is clear and emphatic authority that it is the adaptability, or special fitness, of a hereditament for the purpose to which it is to be put, and not its actual user for that purpose, that is to be taken into account as enhancing its value."
In the speech of Lord Shaw of Dunfermline at 357:
"My Lords, land and buildings should be taken account of just as they are, to the eye of a hypothetical tenant - that is to say, with all their advantages, fitnesses, facilities and capacities."
In the speech of Lord Parker of Waddington at 361:
"No doubt in ascertaining the annual value of a hereditament, as indeed for ascertaining its capital value, it is necessary and proper to take into account its fitness or adaptability for every purpose for which it can legitimately be used, including the purpose for which it is actually used ..."
"... but if such annual value be ascertained according to the rule we are considering, all elements of value arising from fitness or adaptability are already taken into account, and I cannot follow the argument that there remains anything to be added to the annual value so ascertained."
"The actual hereditament of which the hypothetical tenant is to be determined must be the particular hereditament as it stands, with all its privileges, opportunities and disabilities created or imposed either by its natural position or by the artificial conditions of an Act of Parliament."
"But although the tenant is imaginary, the conditions in which his rent is determined cannot be imaginary. They are the actual conditions affecting the hereditament at the time when the valuation is made. This was stated by this House in Port of London Authority v Orsett Union Assessment Committee, and I do not think that the language which I there used needs to be modified or explained; but those words related entirely to determining the value of the occupation to the occupier, excluding, of course, any element due to his skill, industry, or other strictly personal qualifications ... It is in respect of his occupation that the rate is levied, and the standard in the Act is nothing but a means of finding out what the value of that occupation is for the purposes of the assessment."
"... including the capacity of the hereditament and its adaptabilities ..."
"It is notoriously difficult, in some instances, to ascertain the figure at which the assumed annual rental should be fixed, but it is the duty of the Assessment Committee, in all cases, to ascertain for this purpose as accurately as may be, the value of the beneficial or profitable occupation of the particular property, and then to make the statutory deductions. In ascertaining this annual value, all that can reasonably influence the judgment of an intending occupier ought to be taken into consideration, including not only the natural conditions, but any statutory provisions which may tend to enhance or diminish the value of the beneficial occupation of the property or its profit-earning capacity."
"Thus there was a hypothetical tenant and a hypothetical rent, but I think a real and concrete hereditament. It was necessary to take into consideration all possible tenants, including the actual occupier and even the owner. The hypothetical tenant was assumed to be a tenant from year to year with a reasonable prospect of continuing in occupation; but the hypothetical rent which the tenant could give was estimated with reference to the hereditament in its actual state, and a continuance of the existing state of things was prima facie to be presumed."
"It is not evident that fixed machinery and plant of the nature of landlord's fixtures could properly be regarded as being stored by the hypothetical tenant; nor is it easy to see what distinction could be drawn between landlord's fixtures and tenant's fixtures from the point of view of the rateability of the occupier in respect of the hereditament, if we hold to the doctrine that the valuation must proceed on the actual physical state of premises at the time, so that we ought not to suppose an imaginary severance of fixtures from the hereditament. We were accordingly invited to be strictly logical, and to reverse these long established decisions, so far as they related to fixtures, if we were unable to explain, and a fortiori if we were unable to understand them. For the reason already indicated I should hesitate a long time before acceding to this invitation."
"(1) The hereditament to be valued under section 22 of the Act is always the actual house or other property for the occupation of which the occupier is to be rated, and that hereditament is to be valued as it is - rebus sic stantibus."
"The function of rating valuation is to ascertain the value to the existing occupier, because that is the basis of comparative liability between himself and other occupiers; the hypothesis of the imaginary tenant is intended to help and not to hinder the just enforcement of the primary obligation: if it hinders, it must pro tanto be treated as inapplicable."
"Can this reasonable probability of demolition and the impact it would have on an intelligent occupier be taken into account in assessing the hereditament's annual value for rating purposes? Common sense would seem to suggest that it should; the accepted structure of the law of rating that it should not; which is it to be?"
"It was also said on behalf of the appellant that equality of rating requires that each hereditament should be valued as it is now - rebus sic stantibus - and the prospect of a future partial destruction of it must be disregarded. But it seems to me that this point can be turned against the appellant. In the expression rebus sic stantibus which are the res? In other words, which are the factors to be taken into account in order to produce equality of rating? There is, in this case, a present possibility of a future happening, and the present probability affects the present value of the hereditament. There is inequality of actual values if of two otherwise identical hereditaments one is likely to have part of it demolished within about a year and the other is likely to remain intact."
Fir Mill and Midland Bank
"...the premises are let subject to a condition that they will continue to be used for the same general purpose as that for which they are used at the date of valuation, and subject to the same obligation as before to use them in a tenant-like manner. On that alternative, a dwelling-house must be valued on the assumption it will continue to be used as a dwelling-house. Premises used as a shop must be valued on the assumption that they will continue to be used as a shop, but not on the assumption that the hypothetical tenant will be obliged to carry on exactly the same trade as the actual occupier. Premises occupied as a factory must be valued on the assumption that they will continue to be occupied as a factory, but not on the assumption that the hypothetical tenant will be obliged to manufacture exactly the same kind of goods as the actual occupier."
"In our opinion only two assumptions are permitted. The first assumption is that the hereditament is vacant and to let - vacant in the physical sense and in the sense that the existing business has ended and any process machinery has been removed. The second assumption - and here we accept the second proposition of counsel for the respondents - is that the mode or category of occupation by the hypothetical tenant must be conceived as the same mode or category as that of the actual occupier. A dwelling house must be assessed as a dwelling house; a shop as a shop, but not as any particular kind of shop; a factory as a factory but not as any particular kind of factory. Some alteration to a hereditament may be, and often is, effected on a change of tenancy. Provided it is not so substantial as to change the mode or category of use, the possibility of making a minor alteration of a non-structural character, which the hypothetical tenant may be assumed to have in mind when making his rental bid, is a factor which may properly be taken into account without doing violence to the statute or to the inference we draw from the authorities."
"For all the foregoing reasons, subject to the qualifications we have indicated, we are of opinion that the doctrine of rebus sic stantibus relates only to the physical characteristics of the hereditament. Accordingly, we find against the appellants on the point of law."
Other Lands Tribunal cases
(1) that valuation for rating of a hereditament may take into account any use for which the hereditament is physically suitable;
(2) that such valuation may take into account only those uses for which the hereditament is physically suitable which are also in the same mode as that of the actual use;
(3) that such valuation may have regard only to the particular use actually being made of the hereditament."
"For our part, we are satisfied that one looks only at the actual use; where one has a shop one values as a shop for any purpose as a shop, but not as a shop which may be used as an office, for example..."
"I reject proposition (1) as going much too far. In doing so I am happy to follow the decisions of the Tribunal in Fir Mill v Royton UDC supra and London Transport Executive v Croydon London Borough Council and Phillips supra. In the circumstances, because Mr Fletcher concedes, as I have stated, that shop use is not in the same mode as residential use, there is no need for me to distinguish between proposition (2) and proposition (3).
If there were need for me to make that distinction, I would apply the observations of the Tribunal cited above from London Transport Executive v Croydon London Borough Council and Phillips supra."
"There is a decision of the Lands Tribunal referred to at p 452 of Ryde on Rating, Fir Mill Ltd v Royton Urban District Council and Jones (VO) in which the Lands Tribunal said that two assumptions were permitted [1960] 31 DRA 375, 388.
'The first assumption is that the hereditament is vacant and to let...The second assumption...is that the mode or category of occupation by the hypothetical tenant must be conceived as the same mode or category as that of the actual occupier. A dwellinghouse must be assessed as a dwellinghouse; a shop as a shop, but not as any particular kind of shop; a factory as a factory, but not as any particular kind of factory.'
There may be some doubt as to the extent of the second of those assumptions, but here there can be no doubt that the letting of these premises as a shop, not necessarily as a launderette but a shop of some quite different kind, is something which can and must be considered in assessing the rent which the hypothetical tenant would pay for the vacant hereditament."
Value of occupation to the occupier
"... though the supposition of a tenancy is to be made, yet what the incidents of the tenancy must be as to actual terms and allowances must be determined, for the purpose of fixing the amount of the rate by the existing state of things; for the supposition of a tenancy is only a mode of ascertaining the existing value of the occupation to the existing occupier."
"The true principle, according to which the value of the occupation to the hypothetical tenant contemplated by Parochial Assessment Act is to be estimated, is, to assume the continuance of those circumstances which constitute the value to the existing occupier, unless it be made to appear that those circumstances are about to undergo a change."
"But although the tenant is imaginary, the conditions in which his rent is determined cannot be imaginary. They are the actual conditions affecting the hereditament at the time when the valuation is made. This was stated by this House in Port of London Authority v Orsett Union Assessment Committee, and I do not think that the language which I there used needs to be modified or explained; but those words related entirely to determining the value of the occupation to the occupier, excluding, of course, any element due to his skill, industry, or other strictly personal qualifications ... It is in respect of his occupation that the rate is levied, and the standard in the Act is nothing but a means of finding out what the value of that occupation is for the purposes of the assessment."
"If persons 'are occupiers of property from which they derive a benefit, they are rateable,' per Bayley J in R v Green, quoted by Lord Atkinson in Poplar Assessment Committee v Roberts The hypothetical tenant test is in truth mere machinery for ascertaining the value to the occupier, as was contended by the present Talbot J as counsel in the Poplar case."
And then at 643:
"The function of rating valuation is to ascertain the value to the existing occupier, because that is the basis of comparative liability between himself and other occupiers; the hypothesis of the imaginary tenant is intended to help and not to hinder the just enforcement of the primary obligation: if it hinders, it must pro tanto be treated as inapplicable."
"It is evident, therefore, that there will not be occupation in the context of rating unless some use is made of the hereditament in the course of the relevant year. 'Use' is not a word of precise meaning, but in general it conveys the idea of enjoyment derived by the user from the corpus of the object enjoyed. When rating law turns its attention from dwelling-houses to industrial or commercial premises the same conceptions are, in my opinion, applicable to determine whether or not occupancy ceases or begins, though they must be adapted to the particular circumstances of such premises, factory or warehouse, and the business for the purpose of which they are created. Nevertheless, I think that the words of Farwell LJ in Rex v Melladew provide a satisfactory indication of the correct test: 'Rateable property has many varieties; of some the normal use is by personal occupation, e.g., a dwelling-house, of others by occupation by live or dead stock, e.g., a linhay used as a shelter for cattle, or a barn; and the nature of the property and its mode of use must be considered in each case. The test, in a case like the present, of business premises, appears to me to be, Has the person to be rated such use of the tenement as the nature of the tenement and of the business connected with it renders it reasonable to infer was fairly within his contemplation in taking or retaining it?'"
Mode or category of occupation
"What might result in this case were we to apply the principle which might appear to derive from a too narrow interpretation of the dictum of Lord Denman? What did he mean precisely by 'mode' of occupation?"
and he answered the second question by saying (at 151):
"I think Lord Denman implied certain broad categories of occupation only."
"It is a principle of the law of rating that all properties of the same class must be valued by the same method of assessment, but not that properties of different classes must be treated by the same method. The special methods of assessment which are applicable to each form of property may be applied to that form of property, but not necessarily to other forms of property. In the present case the places of amusement and riverside properties bear no relation or comparison to the licensed houses and cannot be valued in the same way. The licensed houses, however, are comparable things forming a class by themselves and the respondent is aggrieved by reason of the fact that 127 of these houses were treated upon a different footing from the other 327 houses."
"(1) For the purposes of any alteration of a valuation list to be made under Part V of this Act in respect of a hereditament in pursuance of a proposal, the value or altered value to ascribed to the hereditament under section 19 of this Act shall not exceed the value which would have been ascribed thereto in that list if the hereditament had been subsisting throughout the year before that in which the valuation list came into force, on the assumptions that at the time by reference to which that value would have been ascertained -
(a) the hereditament was in the same state as at the time of valuation and any relevant factors (as defined by subsection (2) of this section) were those subsisting at the last mentioned time; and
(b) the locality in which the hereditament is situated was in the same state, so far as concerns the other premises situated in that locality and the occupation and use of those premises, the transport services and other facilities available in the locality, and other matters affecting the amenities of the locality, as at the time of valuation.
(2) In this section the expression "relevant factors" means any of the following, so far as material to the valuation of a hereditament, namely -
(a) the mode or category of occupation of the hereditament;
(b) the quantity of minerals or other substances in or extracted from the hereditament; or
(c) in the case of a public house, the volume of trade or business carried on at the hereditament;
and in paragraph (c) of this subsection the expression "public house" means a hereditament which consists of or comprises premises licensed for the sale of intoxicating liquor for consumption on the premises where the sale of such liquor is, or is apart from any other trade or business ancillary or incidental to it, the only trade or business carried on at the hereditament."
"One of the features of a valuation under section 19 is that the hereditament is to be valued in its actual state - 'rebus sic stantibus' - at the date of valuation, with all the advantages and disadvantages which it then possesses."
"The broad purpose of section 20 was to secure that a hereditament which, for one reason or another, fell to be valued at a time after the coming into force of a valuation list should be valued on the basis of the general level of values prevailing when the list was made up. It is not apparent that there was any good reason for requiring the disregard of any of the circumstances which would ordinarily be taken into account under the rebus sic stantibus rule. If any of such circumstances were to be disregarded, the result would necessarily be to some extent artificial. The expression rebus sic stantibus raises the concept of a certain ascertainable state of affairs. It would involve no undue straining of language to conclude that when paragraph (a) of section 20(1) refers to the hereditament being 'in the same state as at the time of the valuation' the meaning is that the whole state of affairs affecting the hereditament is to be assumed to be the same, at the time of coming into force of the last valuation list, as it is at the time when the valuation is being made. The result would be that the rebus sic stantibus rule would fall to be applied to its full extent. But the reference to a defined category of specified relevant factors makes this difficult, and moreover it would make paragraph (b) unnecessary. Since, however, there is no readily perceptible reason for limiting the application of the rebus sic stantibus rule, the word 'state' should in my opinion be given a wide construction, so as to include intangible as well as physical advantages and disadvantages."
"...[T]he proposal to use the phrase 'mode or category of occupation' rather than 'manner of occupation' really arises out of a decision of the Lands Tribunal in 1960, in which the mode or category of occupation was defined. It does not seem wise to use a slightly different phrase because that might look as though we were trying to have a different meaning from that laid down by the Lands Tribunal."
Physical state
"There may be circumstances which prevent the occupier of a coal mine from using it for the purpose of producing coal, and if there are such circumstances he may be entitled to have excluded from consideration, in fixing the amount of the assessment, the expectation that at some future time circumstances will change so as to allow him to use it for that purpose. But where, as in this appeal, a colliery is actually being worked by the occupier for the production of coal, the expectation of better trade subsequent to the year of assessment is a consideration which may be taken into account in arriving at true assessment."
"What under the Act was possible by law, what in point of fact might be in future, however near, we thought immaterial as to the principle, though very fit to be taken into account when making the calculation as to quantum; but in principle the parish officers were to look at the actual state and value of the occupation."
"The true principle, according to which the value of the occupation to the hypothetical tenant contemplated by the Parochial Assessment Act is to be estimated, is, to assume the continuance of those circumstances which constitute the value to the existing occupier, unless it be made to appear that those circumstances are about to undergo a change."
"But there is nothing in the present case to lead to the supposition that the Eastern Counties Company will either forego their right under a very advantageous agreement, which is to bind the London and North-Western Company to a very remote future, or that the Eastern Counties company will either let the station to any other occupier, or if they do, will place such occupier, relatively to the other company, in a different position from that in which they themselves stand. It will be time enough to deal with such altered circumstances when they arise."
"There was thus a hypothetical tenant and a hypothetical rent, but I think a real and concrete hereditament...the hypothetical rent which the tenant could give was estimated with reference to the hereditament in its actual physical condition (rebus sic stantibus), and a continuance of the existing state of things was prima facie to be presumed. In my opinion it is possible to make very wide assumptions as to the hypothetical tenant if these propositions are borne in mind."
"Some alteration to a hereditament may be, and often is, effected on a change of tenancy. Provided it is not so substantial as to change the mode or category of use, the possibility of making a minor alteration of a non-structural character, which the hypothetical tenant may be assumed to have in mind when making his rental bid, is a factor which may properly be taken into account without doing violence to the statute or to the inference we draw from the authorities."
"5.23 If the works are found not to be 'repairs', then the property must be considered rebus. The principle of rebus restricts the extent to which it can be assumed that a hypothetical landlord or tenant can alter the property.
5.24 The Lands Tribunal decision in Westminster City Council v British Telecom and Woolway (VO) [1985] RA 97 provides authority for minor non structural changes and certain trivial structural changes to be taken into account without offending the principle of rebus (see also Fir Mill Ltd v Royton UDC and Jones (VO) (1960) 31 DRA 375, West Dorset DC v Auton (VO) and the Post Office [1979] RA 191, and Sheffield United Tours Ltd v Elliott (VO) [1983] RA 81).
5.25 Rebus therefore imposes a tight restriction on the changes that can be envisaged to the hereditament. Significant changes to the structure would offend the rebus principle."
That in our view contains a correct statement of the law, although we believe that the rule may be more usefully expressed in the way that we have stated it above.
Interpreting the statutory provisions
Rebus sic stantibus and evidence
Planning and practical considerations
The law in Scotland
"In estimating the yearly value of lands and heritages under this Act, the same shall be taken to be the rent at which, one year with another, such lands and heritages in their actual state might be reasonably expected to let from year to year...."
"Shops are valued as shops, not as grocers' shops or butchers' shop. Factories are valued as factories, not as factories for producing tweed or as factories for producing wireless components. Exceptions are only carved out of general categories if it shown that heritage of the alleged exceptional kind commands rents of a different order from heritage belonging to the general category."
Hong Kong
Conclusions on the rebus sic stantibus rule
(a) That the hereditament was in the same physical state as on the material day. Alterations which the hypothetical tenant might make to the hereditament may be taken into account if, taken overall, they are minor. All other prospective alterations to the hereditament are to be ignored.
(b) That the hereditament could only be occupied for a purpose within the same mode or category of purpose as that for which it was being occupied on the material day. Any prospective change of use outside that mode or category is to be ignored. In determining to what mode or category a particular use belongs it is the principal characteristics of the use and the methods of valuation commonly applied by rating surveyors to which regard must be had; and shops, offices and factories serve as examples. Some uses may not fall within any such broad category, however, and are to be regarded as sui generis.
Any evidence relating to the rents or assessments of other hereditaments may be taken into account provided it is relevant to the valuation. There is no rule that evidence relating to another hereditament is irrelevant if that other hereditament is in a different mode or category of occupation.
The facts
(a) The appeal properties are situated in the central covered shopping centre of Milton Keynes, which was built on a greenfield site and opened in 1979. The centre contains about 100,000 square metres of enclosed retail space spread between 160 traders, including department stores, major retailers, banks, financial institutions, building societies, restaurants, cafes and two public houses. At the relevant dates in these appeals the centre was opened for trading at the following times:
Mon - Wed 8.30 am - 6.30 pm
Thu & Fri 8.30 am - 8.30 pm
Saturday 8.30 am - 6.30 pm
Sunday Closed
(b) The centre is of steel frame construction with reinforced concrete floors, mainly non-load bearing division walls and a felt covered profiled metal roof deck. The centre is clad with non-structural curtain walling and the tenants' fitted shop fronts. All shop units are entered at ground floor level and have first floor retail or storage space. A circulation and delivery area is on the flat roof at 1st floor level.
(c) The Rose & Castle is a public house with frontages to Midsummer Arcade, a pedestrian only arcade within the covered centre, and to Midsummer Boulevard which runs along the exterior of one side of the centre. The Rose & Castle is adjacent to the Market Square. The external walls at ground floor level are mainly brick. Accommodation is on ground and first floors. The ground floor is the trading area and is fitted out as a saloon bar with food servery, kitchen and customer toilets. The first floor comprises: chilled cellarage, wine and spirits store, office, plant room, staff toilets and storage areas. There is a hoist between the ground and first floors. The property has a net internal floor area of 222.73 square metres (including customer toilets) and the ground floor and 79.33 square metres on the first floor.
(d) The City Fayre / City Duck has frontages to Midsummer Arcade and Borough Walk (both pedestrian only) and Midsummer Boulevard. The occupiers trade on the ground floor in part as a public house (City Duck, now Laffertys) and as a licensed cafe bar (City Fayre, formerly Jemimah's) with common customer toilets and kitchen. The first floor comprises: chilled cellarage, wine and spirit store, office, kitchen, plant room and staff toilets. There is a hoist between the ground and first floors. The property has a net internal floor area of 311.55 square metres (including customer toilets) on the ground floor and 176.37 square metres on the first floor.
(e) By an underlease dated 3 November 1988 the Rose and Castle (described in the underlease as unit no.151) is held by Scottish and Newcastle Breweries Plc for 35 years from 1 October 1979 on full repairing and insuring terms. Rent reviews are every five years to the greater of the rent payable and "the current market rental value" (subsequently defined as "the current rack rental value"), namely "the rent ... for use as a public house" disregarding inter alia the tenants' initial fitting out works and improvements. The rent on review from 1 October 1989 was £32,000 per annum. The permitted user under the underlease is "as a public house with facilities for the service preparation and consumption of food."
(f) By an underlease dated 4 February 1983 the City Fayre / City Duck (described in the underlease as unit no.123) is held by Allied Domecq Retailing Ltd for 25 years from 1st July 1979 on full repairing and insuring firms. Rent Reviews are every five years to the greater of the rent payable and "the current market rental" (subsequently defined as "the current rack rental value"), namely "... the rent ... for licensed purposes" disregarding inter alia tenants' improvements. The rent on review from 1 July 1989 was £48,000 per annum. The permitted user under the underlease is "as a fully licensed public house and wine bar/coffee shop with or without provision for the sale of food."
(g) Both appeal properties have a justice's full on-licence for the sale of intoxicating liquor on the premises.
(h) The Rose and Castle was described in 1973 valuation list as "public house and premises." This property was originally entered in the 1990 rating list as "public house and premises rateable value £155,000." The ratepayers made a proposal dated 14 August 1990 to reduce the assessment and the resultant appeal was heard by the Buckinghamshire Valuation Tribunal on 29 July 1993. By a decision dated 18 November 1993 the tribunal confirmed the description and reduced the assessment to rateable value £132,000. The ratepayers appealed to this Tribunal against that decision on 8 December 1993.
(i) The City Fayre / City Duck was described in the 1973 valuation list as "public house, wine bar and premises" following a decision of this Tribunal (Couper (VO) v Aylesbury Brewery Co Ltd). This property was originally entered in the 1990 rating list as "public house, wine bar and premises" with a rateable value of £210,000. The ratepayers made a proposal dated 21 August 1990 to reduce the assessment. The resultant appeal was heard by the Buckinghamshire Valuation Tribunal on 29 July 1993 and, by a decision dated 18 November 1993, the description was changed to "cafe, public house and premises" and the rateable value was confirmed at £210,000. The ratepayers appealed to this Tribunal against that decision on 14 December 1993.
(j) On 6 June 1997 these appeals were ordered to be heard together.
(a) The rateable value for each of the appeal properties is to be determined as at the specified valuation date of 1 April 1988 having regard to the physical circumstances and other matters set out in paragraph 2(7) of Schedule 6 to the Local Government Finance Act 1988 ("The 1988 Act") as they were at the dates of the originating proposals, namely 14 August 1990 for the Rose and Castle and 21 August 1990 for the City Fayre / City Duck.
(b) Alternative values have been agreed. For the Rose and Castle, if the appellants' contentions are fully upheld the rateable value is £29,500; if the respondent's contentions are fully upheld the rateable value is £132,000. For the City Fayre / City Duck, if the appellants' contentions are fully upheld the rateable value is £50,000; if the respondent's contentions are fully upheld the rateable value is £210,000. In both cases, if either of the contentions is not fully upheld by this Tribunal then the values are not agreed.
(c) The extent of the works necessary to remove all the specialist fittings and furnishings and restore the appeal properties to basic shell condition are agreed. The agreed costs are £23,595 (£20,407 if the solid raised floor on the ground floor is retained) for the Rose and Castle, and £26,050 for the City Fayre / City Duck. For the purposes of comparison of costing the respondent valuation officer has selected Macdonald's Restaurant at 52-56 Midsummer Arcade and the parties have agreed the works necessary to restore this unit to basic shell condition at an agreed cost of £32,060. All costs are exclusive of fees.
(d) The appeal properties are both within Class A3 in Part A of the Schedule to the Town and Country Planning (Use Classes) Order 1987 ("use for the sale of food or drink for consumption on the premises or of hot food for consumption off the premises"). This Order came into force on 1 June 1987. A change of use to a use within Class 1 (shops) or Class 2 (financial and professional services) in Part A of the Schedule to the Use Classes Order from use within Class 3 of Order is permitted development under the Town and Country Planning General Development Order 1977 (as modified).
(f) Any restriction on user in the underleases of the appeal properties are to be disregarded for the purposes of rating.
Physical changes to the appeal hereditaments: the appellants' case
Physical changes to the appeal hereditaments: the valuation officer's case
(i) rents and agreed assessments in the 1990 rating list form a uniform and consistent pattern notwithstanding the different internal layouts of the various units;
(ii) the appeal properties have been fitted out in the same way as other retail units, by works within the structural frame which could be removed without affecting the structural integrity of the property;
(iii) many of the comparables are physically similar to the appeal properties.
(i) whether there is a change in the overall floor area;
(ii) whether the alterations affect the load bearing parts of the property;
(iii) the extent of the works customarily carried out by an incoming tenant commensurate with the type, location and value of the property;
(iv) the degree of similarity with other units in the centre;
(v) the cost of the works compared to rental value.
Conclusions on physical changes to the appeal hereditaments
Mode or category of occupation of the appeal hereditaments: the appellants' case
(i) section 20 (2) (c) of the 1967 Act:
(ii) the requirement for a justices on- licence, indicating a use requiring special legislation and regulation;
(iii) the long established and separate method of valuation;
(iv) the statement of Lord Trevethin in Double v Southampton Assessment Committee (at 225) that licensed houses form "a class by themselves";
(v) the use by the Valuation Office Agency of a separate primary description in the rating list for public houses.
(i) he agreed that the actual use of the appeal properties and nearby properties and their rental levels, construction and statutory restrictions are relevant:
(ii) he did not agree that suitability and demand for alternative uses are relevant:
(iii) a substantial difference in rental levels for different properties is a strong indication that those properties are not in the same mode or category.
Mode or category of occupation of the appeal hereditaments: the valuation officer's case
(i) actual user of the property;
(ii) actual user of premises in the locality and their value;
(iii) the construction and physical characteristics of the property and suitability and adaptability for alternative uses;
(iv) demand for the actual or alternative uses of the property and values in the locality for such uses;
(v) the works customarily carried out by an incoming tenant commensurate with the type, location and value of the property;
(vi) statutory restrictions on alternative uses.
Conclusion on mode or category of occupation of the appeal hereditaments
"Proposals have been put forward for that rental value of public houses, particularly those let free of tie, should be assessed on a floor area basis rather than by reference to trading potential. It will be appreciated that both methods rely upon the analysis of comparable transactions. At present the assessment of pub rents on a floor area basis is not a proven or generally accepted method of valuation, although further research on the subject continues."
"The method used in preparing a rental valuation is usually analysis of comparable transactions but, depending on the type of restaurant, some valuers prefer to adopt a zoning method, others apply overall rental per square metre. Rental per square metre will vary depending upon whether the restaurant is at basement, ground or first floor, or on a combination of floors, as well as on the use and other terms under the lease.
The valuer should be careful in applying a profit or turnover based rental valuation, unless it is appropriate to do so, i.e. where there is no direct physical comparable, such as in rural locations."
Decision
(a) That the hereditament was in the same physical state as on the material day. Alterations which the hypothetical tenant might make to the hereditament may be taken into account if, taken overall, they are minor. All other prospective alterations to the hereditament are to be ignored.
(b) That the hereditament could only be occupied for a purpose within the same mode or category of purpose as that for which it was being occupied on the material day. Any prospective change of use outside that mode or category is to be ignored. In determining to what mode or category a particular use belongs it is the principal characteristics of the use and the methods of valuation commonly applied by rating surveyors to which regard must be had; and shops, offices and factories serve as examples. Some uses may not fall within any such broad category, however, and are to be regarded as sui generis.
Any evidence relating to the rents or assessments of other hereditaments may be taken into account provided it is relevant to the valuation. There is no rule that evidence relating to another hereditament is irrelevant if that other hereditament is in a different mode or category of occupation.
Rose and Castle, public house and premises - rateable value £29,500
City Fayre / City Duck, public house and licensed cafe bar - rateable value £50,000
DATED 22 February 2000
George Bartlett QC, President
P H Clarke FRICS
ADDENDUM ON COSTS
DATED
George Bartlett QC, President
P H Clarke FRICS