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United Kingdom Upper Tribunal (Lands Chamber)
You are here: BAILII >> Databases >> United Kingdom Upper Tribunal (Lands Chamber) >> S J & J Monk (a firm) v Newbigin (VO) [2014] UKUT 14 (LC) (26 February 2014)
URL: http://www.bailii.org/uk/cases/UKUT/LC/2014/14.html
Cite as: [2014] UKUT 14 (LC), [2014] RA 195
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UPPER TRIBUNAL (LANDS CHAMBER)
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UT Neutral citation number: [2014] UKUT 14 (LC)
UTLC Case Number: RA/62/2012
TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007
RATING – alteration of rating list – material day – whether proposal was to correct inaccuracy in list on day of compilation (1 April 2010) or whether list inaccurate by reason of material change of circumstances occurring on or after 1 April 2010 – whether works to building part of ongoing scheme of refurbishment rendering it incapable of beneficial occupation or whether assumption of a state of reasonable (economic) repair meant no alteration to the list justified – rebus sic stantibus – appeal allowed in part – rateable value determined at £1
IN THE MATTER OF AN APPEAL AGAINST A DECISION
OF THE VALUATION TRIBUNAL FOR ENGLAND
BETWEEN S J & J MONK (a firm) Appellant
and
KEITH NEWBIGIN (Valuation Officer) Respondent
Re: First Floor
Avalon House
St. Catherine’s Court
Sunderland Enterprise Park
Sunderland
SR5 3XJ
Before: A J Trott FRICS
Sitting at: North Shields AIT, Kings Court, Royal Quays,
North Shields, NE29 6AR
on 19 November 2013
Dominic Bayne, instructed by Mr Stuart Monk, for the Appellant
Matthew Donmall, instructed by HMRC Solicitor’s Office, for the Respondent
The following cases are refereed to in this decision:
The Metropolitan Board of Works v West Ham (1870) LR 6 QB 193
Morcom v Campbell-Johnson [1956] 1 QB 106
Hounslow London Borough Council v Rent Audio Visual Ltd [1970] RA 535
Dawkins (VO) v Ash Brothers [1969] 2 AC 366
Paynter (VO) v Buxton [1986] 26 RVR 132
De Silva v Davis (VO) [1983] 1 EGLR 211
Pepper (Inspector of Taxes) v Hart [1993] 1 All ER 42
DECISION
Introduction
1. This is an appeal by S J & J Monk (a firm) against a decision of the Valuation Tribunal for England (“VTE”) dated 19 October 2012. It concerns a hereditament that was entered in the 2010 non-domestic rating list for the Sunderland Billing Authority as “Offices and Premises, 1st Floor, Avalon House, St Catherine’s Court, Sunderland Enterprise Park, Sunderland SR5 3XJ” at a rateable value of £102,000.
2. On 6 December 2010 the appellant made a proposal that “the existing entry [be] deleted with effect from 01 April 2010” on the grounds that “with effect from 1 April 2010 the premises have been subject to a major refurbishment scheme including structural alterations and the premises are incapable of occupation.” The valuation officer (“VO”) did not consider the proposal to be well-founded and the disagreement was referred by him as an appeal to the VTE. The appellant withdrew the appeal on 11 June 2012 prior to the hearing by the VTE.
3. On 6 January 2012 the appellant made a second proposal that the rating list entry should be altered. The details of the proposed list alteration were stated in the proposal form as:
“13A: The rateable value altered to £1 with effect from 01/04/2010”
The reason for believing the list was inaccurate was summarised as:
“15D: Circumstances affecting the rateable value of the property changed on 01/04/2010.”
The detailed reasons for believing the list was inaccurate were given in answer to question 16 of the proposal form:
“We propose that the 2010 entry shown for the above property should be altered to £1 with effect from 01 April 2010 because of a material change in circumstance.
The existing Rateable Value is incorrect and excessive and should be reduced to Rateable Value £1 from 01 April 2010. The Material Change of circumstances is a scheme of works ongoing at the 1/4/10. The building works rendered the hereditament incapable of beneficial occupation on the material day. The scheme of building work occurring on the material day was remodelling and refurbishing of the floor plate to allow subdivision to up to three separate office suites serviced by communal WCs. The description in the rating list should be altered to Building undergoing reconstruction and the rateable value should be reduced to £1.”
4. The VO did not consider the second proposal to be well-founded and he referred the disagreement as an appeal to the VTE. The appeal was heard on 24 September 2012 and was dismissed by the VTE in its decision dated 19 October 2012.
5. Mr Dominic Bayne of counsel appeared for the appellant and called Mr Stuart John Monk, the managing partner of the appellant firm, as a witness of fact and Mr Richard McIntosh Farr BSc FRICS MCIArb, a partner in Sanderson Weatherall LLP, as an expert witness.
6. Mr Matthew Donmall appeared for the respondent and called Mr Keith Adrian Newbigin BSc MRICS, the valuation officer, as an expert witness.
The issues
7. The parties agreed that the issues to be determined by the Tribunal in this appeal are:
(i) Whether the VTE erred in finding that the correct date of the material day, for the purposes of considering the physical state of the appeal hereditament, was 6 January 2012; and
(ii) Whether the VTE erred in upholding the respondent’s position that the appeal hereditament has a rateable value of £102,000, or whether (as contended by the appellant) it ought to have been a rateable value of £1 because at the material day it was undergoing a scheme of refurbishment that altered the hereditament.
In my opinion the second issue is wrongly stated. During the hearing it became clear to me that the necessary preliminary question that needs to be answered is “what physical state should the hereditament be assumed to have been in on the material day?”
Facts
8. From the parties’ statement of agreed facts and from the evidence I find the following facts.
9. The appellant is the freehold owner of the appeal hereditament which is the first floor of the building known as Avalon House, a modern three-storey office block built in the late 1990s overlooking the riverside at Sunderland Enterprise Park, which lies to the west of the city centre in a former enterprise zone area. There is a car park to the front and side of the building.
10. The hereditament has been vacant since 15 March 2006. In December 2009 the appellant accepted the surrender of the lease of the first floor. At the time of the surrender the hereditament comprised office accommodation with raised floors, suspended ceilings, category 2 lighting and comfort cooling. The hereditament included male, female and disabled access WCs. The whole comprised a single office suite of 795.73 m2.
11. On 9 March 2010 the appellant entered a contract with Jomast Developments Limited (“Jomast”) under which Jomast agreed to carry out various renovation and improvement works in consideration of the sum of £322,000. Those works are summarised by the parties as follows:
(i) Removing all internal elements, excluding only the lift and staircase enclosure which give access to the upper floor, but including stripping out the existing cooling system including all internal and external plant, the lighting and power installations, the fire alarm system, the suspended ceiling, all sanitary fittings and drainage connections, the timber joisted and modular raised flooring, and existing masonry walls and metal stud partitions.
(ii) Constructing new common parts to the first floor of the building and new communal sanitary accommodation, including new solid partitioning, raised floor, new sanitary fittings, new drainage and plumbing systems, new electric metering, lighting, alarm and heating.
(iii) Constructing three proposed new letting areas within the property, including the provision of three self-contained electrical distribution circuits and three self contained air conditioning and heating systems.
12. The contract contained only one specific date for the completion of part of the works, namely that lettable area 3 was to be completed by 31 January 2011. All other dates were described as “TBC” (to be confirmed). The base (start) date was stated to be March 2010 and the contract was dated 9 March 2010.
13. During at least the period 1 April 2010 to 6 January 2012 the property was marketed as available to rent as three separate suites of offices, or as a whole. By reason of the changes to the common parts described in paragraph 11(ii) above the three proposed letting areas would have a reduced combined floor area of 763.1m2.
14. An application for building regulations approval was made to Sunderland City Council Building Control Service on 17 January 2012. The application related to the core common sanitary provision and circulation spaces at the property to enable the property to be divided into smaller letting units, each able to access the communal toilets. Conditional approval was granted on 23 March 2012.
15. The parties agreed that the physical condition of the appeal hereditament as at 6 January 2012 was as follows:
(i) The first floor was vacant.
(ii) The majority of the ceiling tiles and suspended ceiling grid and light fittings had been removed.
(iii) Approximately 50% of the raised floor had been removed.
(iv) The comfort cooling system including all internal and external plant had been removed.
(v) The sanitary fittings had been removed and the block walls to the WCs demolished.
(vi) The electrical wiring had been stripped out.
(vii) Plasterboard partitions had been erected and plastered to form the outline for the WCs and a partition had been erected and plastered across the floor at the east side of the building.
(viii) First fix electrical installations to the WC area had been completed and alterations made to the drainage.
16. The parties did not agree the extent of the works that had been completed by the 1 April 2010. Nor did the parties agree that first fix air conditioning installations had been completed by 6 January 2012.
Issue (i): What is the material day?
Statutory provisions
17. The Non-Domestic Rating (Alteration of Lists and Appeals) (England) Regulations 2009 (“the 2009 Regulations”) are primarily concerned with the alteration of non-domestic rating lists which are compiled under Part III of the Local Government Finance Act 1988 (“the 1988 Act”).
18. When determining the rateable value of non-domestic hereditaments with a view to altering a local non-domestic rating list, certain matters (set out in paragraph 2(7) of Schedule 6 to the 1988 Act) are required to be taken as they are assumed to be on the material day. The material day shall be such day as is determined in accordance with the Non-Domestic Rating (Material Day for List Alterations) Regulations 1992 (“the 1992 Regulations”).
19. Regulation 3 of the 1992 Regulations defines the material day for the purpose of list alterations. So far as is relevant to the present appeal regulation 3 states:
“3(1) For the purpose of sub-paragraph (6) of paragraph 2 of Schedule 6 to the 1988 Act, the material day shall be determined in accordance with paragraphs (2) to (7) below.
(2) Where the determination is with a view to making an alteration to correct an inaccuracy in the list on the day on which it was compiled, the material day is the day on which the list was compiled.
…
(7) In any other case –
(a) …
(b) where the determination is with a view to making an alteration to a list compiled on or after 1st April 2005, the material day is –
(i) where the alteration is made in pursuance of a proposal, the day on which the proposal was served on the valuation officer;
…”
20. Regulation 4 of the 2009 Regulations provides for the circumstances in which proposals may be made by a ratepayer to alter a local non-domestic rating list. So far as is relevant to the present appeal regulation 4 states:
“4(1) The grounds for making a proposal are –
(a) the rateable value shown in the list for a hereditament was inaccurate on the day the list was compiled;
(b) the rateable value shown in the list for a hereditament is inaccurate by reason of a material change of circumstances which occurred on or after the day on which the list was compiled;
…”
The case for the appellant
21. Mr Bayne submitted that by its proposal dated 6 January 2012 the appellant sought a determination that there was “a scheme of works ongoing at the 1/4/10” which rendered the list inaccurate on the day it was compiled. By definition that was a determination that fell within regulation 3(2) of the 1992 Regulations and therefore the material day was 1 April 2010.
22. It was clear from the language of the appellant’s proposal that it referred to a state of affairs that was ongoing on the date on which the list was compiled. It was therefore a proposal that fitted more naturally within regulation 4(1)(a) rather than 4(1)(b) of the 2009 Regulations.
23. Alternatively, regulations 4(1)(a) and 4(1)(b) were not mutually exclusive and a proposal that was based on an ongoing state of affairs on 1 April 2010 was capable of falling within either sub paragraph.
24. In any event the 1992 Regulations and the 2009 Regulations made no reference to each other and for the purposes of determining the material day under the 1992 Regulations it was immaterial which of the paragraphs of the 2009 Regulations the proposal fell under. There was no requirement that the 1992 Regulations and the 2009 Regulations should be read together as suggested by the respondent. They did not obviously reflect each other and they used entirely different language.
25. If the material day was held to be the 6 January 2012 as the respondent submitted, Mr Bayne said that the appellant’s position on the second (main) issue would be stronger because more of the works had been completed by then. The effective date (under regulation 14 of the 2009 Regulations) would be the same (1 April 2010) whatever date was determined to be the material day.
The case for the respondent
26. Mr Donmall submitted that regulation 3(2) of the 1992 Regulations corresponded to proposals made under regulation 4(1)(a) of the 2009 Regulations. Both regulations were concerned with proposals which asserted an inaccuracy in the list at the point of its compilation and not with proposals that were asserting a material change of circumstances (“MCC”) which occurred on or after the day on which the list was compiled.
27. Proposals made on the basis of a MCC fell under regulation 4(1)(b) of the 2009 Regulations and the material day for the determination of such a proposal was the day on which it was served on the VO under regulation 3(7) of the 1992 Regulations.
28. The correspondence between the respective provisions of the 1992 Regulations and the 2009 Regulations was a matter of natural construction but it also followed under a purposive construction. A ratepayer who made a proposal on the basis of a MCC would have the matters affecting the physical state or physical enjoyment of the hereditament taken to be as they were assumed to be on the material day, i.e. the date on which the proposal was received by the VO. That incentivised the proposer to make a proposal promptly following an alleged MCC since if the day on which the relevant circumstances arose was not reasonably ascertainable then any alteration to give effect to a proposal would have effect from the day on which the proposal was served on the VO (regulation 14(5) of the 2009 Regulations). It also meant that the task of valuing the hereditament was facilitated because since the material day was the day the proposal was received by the VO it avoided problematic evidential issues of determining the physical state of the hereditament at a much earlier date.
29. The present appeal would aptly demonstrate this potential problem were the appellant’s contentions on the material day to be correct. The appellant served its proposal on 6 January 2012 but sought to argue that the material day, and thus the day on which one had to have regard to the physical state of the hereditament, was 1 April 2010, over 21 months previously, with all the evidential problems such delay created.
30. In its proposal the appellant ticked box D in answer to question 15 which clearly corresponded to regulation 4(1)(b) of the 2009 Regulations. It reaffirmed its reliance upon a MCC in its more detailed answer to question 16. The appellant was legally represented at the time. Consequently the material day under the 1992 Regulations fell to be determined under regulation 3(7)(b)(i) which meant the material day was 6 January 2012.
Conclusion on issue (i)
31. In my opinion the material day in this appeal is 6 January 2012.
32. The proposal dated 5 January 2012 (received by the VO on 6 January 2012) identifies the respects in which it is proposed that the list be altered in the answer to Part B, question 13 of the proposal form. Box A is ticked and the proposed list alteration is stated to be:
“The rateable value altered to £1 with effect from 01/04/2010.”
33. Part C of the proposal form sets out the grounds for the proposed alteration. The appellant completed Box D:
“I have reason to believe the rating list is inaccurate and that the alteration proposed on PART B of the form should be made because:
…
D: Circumstances affecting the rateable value of the property changed on 01/04/2010.”
The more detailed reasons given by the appellant (see paragraph 3 above) refer (twice) to a material change of circumstances.
34. The wording of the grounds of the proposal corresponds with that of regulation 4(1)(b) of the 2009 Regulations. In my opinion it did not constitute a proposal under regulation 4(1)(a) of the 2009 Regulations nor is it a determination under regulation 3(2) of the 1992 Regulations. Consequently it is a determination to which regulation 3(7) of the 1992 Regulations applies.
35. The appellant submits that its intention was to challenge the accuracy of the list as compiled and that the building works were “ongoing” at 1 April 2010. I note that this is not how the appellant expressed the grounds for alteration in its first proposal dated 6 December 2010. In answer to Part C, question 16 of the proposal form it stated:
“With effect from 1st April 2010 the premises have been subject to a major refurbishment scheme including structural alterations and the premises are incapable of occupation.” (emphasis added)
36. If the appellant had wanted to argue that the rateable value for the appeal hereditament was inaccurately shown in the list as compiled on 1 April 2010, it should have ticked Box A to question 15 on the proposal form and not Box D. It did not do so and the answers that it gave are entirely consistent with the grounds of the proposed alteration being for a MCC.
37. I therefore dismiss the appellant’s appeal on the first issue and uphold the VTE’s determination that the material day is 6 January 2012.
Issue (ii): What physical state should the hereditament be assumed to have been in on the material day?
Statutory provisions
38. Schedule 6 to the 1988 Act has effect to determine the rateable value of non-domestic hereditaments. Paragraph 2 of Schedule 6 states:
“2(1) The rateable value of a non-domestic hereditament (none of which consists of domestic property and none of which is exempt from local non-domestic rating) 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 these three assumptions –
(a) the first assumption is that the tenancy begins on the day by reference to which the determination is to be made;
(b) the second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic;
(c) the third assumption is that the tenant undertakes to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command the rent mentioned above.”
…
(6) Where the rateable value is determined with a view to making an alteration to a list which has been compiled (whether or not it is still in force) the matters mentioned in sub-paragraph (7) below shall be taken as they are assumed to be on the material day.
…
(7) The matters are –
(a) matters affecting the physical state or physical enjoyment of the hereditament,
…
…
(8A) For the purposes of this paragraph the state of repair of a hereditament at any time relevant for the purposes of a list shall be assumed to be the state of repair in which, under sub-paragraph (1) above, it is assumed to be immediately before the assumed tenancy begins.”
The appellant’s evidence
39. Mr Stuart Monk gave evidence about the history and nature of the works that had been undertaken at the appeal hereditament. Much of his evidence was accepted by the respondent and is recorded as agreed factual evidence in paragraphs 8 to 15 above. The main points of his remaining evidence were:
(i) Mr Monk is the managing partner of the appellant firm and a director (with a controlling interest) in Jomast.
(ii) By 1 April 2010 most of the stripping out works under section 1 of the contractor’s proposals (appendix 4 of the contract) had been completed. In particular:
(a) The comfort cooling system, including all internal and external plant, had been removed;
(b) The electrical lighting and power installations had been stripped out;
(c) The alarm system had been removed;
(d) The majority of the suspended ceiling had been removed;
(e) The old sanitary accommodation had been demolished, and the fittings and drainage connections removed;
(f) About half of the raised floor had been removed.
(iii) In addition, some of the work set out in sections 2 and 3 of the contractor’s proposals had been carried out:
(a) The new layout had been fixed and was evident on site. In particular, the location of the new sanitary accommodation and a dividing wall to create a separate unit at the east of the property had been marked out.
(b) The drainage had been altered to reflect the new location of the WC block, and
(c) First fix installation to the three new air conditioning systems had been completed.
(iv) Mr Monk acknowledged that there were no photographs or documents to corroborate his sworn testimony about the extent of the works that had been undertaken by 1 April 2010. Most of the completed works comprised stripping out, a labour intensive, but not expensive, exercise. He said that Jomast would not have invoiced the appellant for such works by 1 April 2010.
(v) Mr Monk said that by 1 April 2010 the appellant was irreversibly committed to the new layout for (up to) three offices. Although the cost of stripping out was not expensive the cost of the construction works was very significant. It would make no sense to reinstate what was there before because the new proposals provided for a more commercially viable investment. Sunderland was a difficult business location and property investments needed to be innovative and flexible.
(vi) The marketing campaign had produced a prospective tenant of the east wing of the property and work was suspended while their particular requirements were negotiated. But the deal fell through after about 12 months and in the absence of potential tenants for the remainder of the floor the appellant was “in no particular hurry to complete that part of the project.”
(vii) Due to the lack of tenant interest Mr Monk said that the only additional work that was carried out between 1 April 2010 and 6 January 2012 was to:
(a) construct and plaster the walls of the new WCs;
(b) complete the electrical installation for the new WCs to first fix; and
(c) construct and plaster the dividing stud wall referred to at paragraph (iii)(a) above and to create a doorway leading from the east wing to the common parts area including the new WCs.
(viii) Work had now been suspended pending renewed market interest in some or all of the proposed office accommodation. Mr Monk said that today the property was “in a reasonably marketable condition.”
40. Mr Farr was instructed to describe the work that had been carried out to the appeal hereditament “in relation to each occasion on which you have inspected” by reference to appendix 4 of the contract (the contractor’s proposals). He was asked to give his opinion as to whether, and if so why, any of those works amounted to:
(a) part of a settled programme of works of modernisation and improvements;
(b) a material alteration to the hereditament;
(c) an improvement or improvements to the hereditament.
41. Mr Farr explained that he had inspected the appeal hereditament on 8 December 2011 and taken photographs which he exhibited to his evidence. From his inspection he concluded that there was “a settled programme of works constituting modernisation and improvement of the accommodation.” Works had commenced which would give rise “to an entirely different hereditament” to that presently entered in the list. The works “appeared to coincide” with part of the works described in the contract between the appellant and Jomast.
42. Mr Farr produced a schedule describing the works which had been undertaken at the appeal hereditament cross-referenced to the appropriate section of the contractor’s proposals contained in appendix 4 of the contract. He estimated the degree (expressed by percentage) to which the work was completed by the date of inspection and commented on whether each item of work constituted a material alteration and/or an improvement to the hereditament.
43. The contractor’s proposals were divided into five sections. Mr Farr said that section 1 (“strip out existing”) was 100% complete apart from item 1E (“take down and clear away the existing suspended ceiling system”) which he said was 85% complete. Section 2 (“provide new sanitary accommodation”) comprised 11 items, only the first of which (the provision of solid partitioning to form new WCs and a common corridor) had been partially (85%) completed by the date of inspection. Sections 3, 4 and 5 concerned the provision of the three new lettable areas. Work had only started (85% complete) on items 3C and 4C, both of which involved the provision of new partitioning. No work had commenced on section 5 (lettable area 3).
44. Mr Farr commented on each of the items where work had begun. Taken as a whole he concluded that the works:
“represented part of a major refurbishment of the first floor of Avalon House which will result in accommodation which is wholly different and superior to that which is currently listed in the Valuation List. The works … comprised alteration and modernisation and could not be defined as a repair or indeed repair with an element of replacement.”
45. In cross-examination Mr Farr said that the original hereditament could be replaced exactly but that it would not be commercially sensible to do so. He said that Mr Newbigin’s cost estimate of £300k for replacing the original hereditament was “within the range of acceptable tolerances” considering that the contract with Jomast for the provision of three new office suites was some £322k. He said that Mr Newbigin’s estimate “appears to be a sensible figure.” But Mr Farr emphasised that what he saw on 8 December 2011 was an alteration of the floorplate to create more flexible offices as part of an ongoing scheme of works. When completed that arrangement would not represent the historic hereditament.
The respondent’s evidence
46. Mr Newbigin said that the respondent’s first inspection of the appeal hereditament had been undertaken by his colleague, Mr Ramsey, on 31 January 2011 following the making of the appellant’s first proposal on 6 December 2010. Mr Ramsey had not been able to enter the property but had taken photographs through the door windows. Mr Newbigin said that “At that date the property was vacant and had been largely stripped out.”
47. Mr Newbigin first inspected the property on 19 August 2011 when he was accompanied by Mr Stuart Monk. Mr Newbigin stated that the appeal hereditament “was essentially in a similar state” to its condition when Mr Ramsey had visited.
48. Mr Newbigin inspected the appeal hereditament again on 8 December 2011 together with Mr Farr, ostensibly in connection with the first proposal. His description of the works that had been completed at that time was materially the same as that of Mr Farr.
49. Mr Newbigin made a final inspection of the appeal hereditament on 29 June 2012 together with Mr Monk. He said that “there had been little change” since his previous inspection in December 2011.
50. Mr Newbigin considered that at the material day (6 January 2012) the appeal hereditament was a stripped out floor of a three-storey office block. Its condition had not significantly changed over the two years from the stripped out shell which the appellant said had existed on 1 April 2010. In his opinion the appeal hereditament was in a state of disrepair at the material day and therefore in accordance with paragraph 2(1) of Schedule 6 to the 1988 Act it had to be valued on the assumption that it was in a reasonable state of repair provided it would have been economic for a reasonable landlord to carry out repair works. The cost of the repair works, described by Mr Newbigin as “replacement” and “reinstatement” works, was estimated by Mr Newbigin to be £307,631 as at antecedent valuation date prices and he estimated that they would take three months to complete. None of the works would be structural alterations and they would all be minor works. As such they would “not offend rebus”.
51. The hypothetical landlord would recoup his capital expenditure within three years and Mr Newbigin considered that faced with a choice of doing nothing or putting the property into repair such a landlord would carry out the works.
52. In support of this conclusion Mr Newbigin noted that as at the material day the appellant had not applied for building control permission to sub-divide the first floor. (Such an application was made shortly afterwards and approved conditionally on 23 March 2012.) He also noted that the property was being marketed as suitable for a single letting as well as being divisible into three separate office units.
53. In cross-examination Mr Newbigin explained how he approached a proposal based upon a MCC involving works described as alterations or improvements. He stressed that the reason for the works being undertaken was not relevant. He had to look at the hereditament and value it in the state it was actually in at the material day. The actual landlord’s intentions and future plans did not matter. It was his responsibility as the VO to take an objective view. In this case what he saw at the material day was a stripped out office building that had remained in much the same condition for many months. It was an office that was in disrepair with a number of elements (air conditioning, wiring, flooring, ceiling tiles etc) having been removed. It was necessary to look at any works taking place and to see how they were going to be manifest in the building. It was not relevant to speculate on what further works may or may not take place. In this case the evidence showed the appeal hereditament had been stripped out and some non-structural partitions removed and others erected. There was no evidence of something different taking place, only evidence of these initial works. Nothing much had changed over the course of four inspections over nearly 18 months.
54. The realignment of the WCs and their inclusion within the common parts did not necessarily signify that what was being done was the creation of a wholly different hereditament. The works might produce a new hereditament but it might be that a single letting of the whole first floor would mean the occupier had exclusive use of the realigned WCs in any event. Essentially WCs had been removed to be replaced with WCs but these were minor non-structural alterations within rebus. The hereditament remained an office with its own WCs. Only if there were clear signs of a programme of alterations in a definite scheme that was evidenced and continuing might it be appropriate to describe the works as alterations. But just stripping out an office was not sufficient to show that the hereditament would be different and in this appeal very little work had been done to the hereditament over a considerable period of time. The facts indicated that the appellant had suspended progressing works until a tenant or tenants could be found. The works were market led. At the material day there was a stripped out building awaiting such tenants. The appeal hereditament should be valued rebus and in an assumed state of economic repair.
The appellant’s submissions
55. Mr Bayne said that the hereditament must be valued “rebus sic stantibus”. In The Metropolitan Board of Works v West Ham (1870) LR 6 QB 193 Lush J said (at page 198):
“The rateable quality of land is not to be determined by what it once was, or by what it may hereafter become … The rateable quality of land must be determined by what it was at the time the rate is made.”
56. Prior to the Rating (Valuation) Act 1999 (“the 1999 Act”) there was a common law exception to the rebus rule: that where a hereditament was in disrepair it must be valued on the assumption that it was in reasonable repair having regard to its age, character, locality and class of tenant, provided always that it would be economically reasonable for the hypothetical landlord to put it into reasonable repair. The exception only required it to be assumed that the hereditament was in a state of reasonable repair, not that it would be improved. In Morcom v Campbell-Johnson [1956] 1 QB 106 (a Rent Act case) Denning LJ said, at page 115, that the test as to whether works were a repair or an improvement was this:
“… if the work which is done is the provision of something new for the benefit of the occupier, that is, properly speaking, an improvement; but if it is only the replacement of something already there, which has become dilapidated or worn out, then, albeit that it is a replacement by its modern equivalent, it comes within the category of repairs and not improvements.”
57. Mr Bayne submitted that it followed under the “rebus” rule that while premises were undergoing alterations and improvements, they must be valued in the state in which they were at the material day. This was the conclusion reached by the Lands Tribunal, J. Stuart Daniel QC and J H Emlyn Jones FRICS, in Hounslow London Borough Council v Rank Audio Visual Ltd [1970] RA 535 at page 564.
58. Mr Bayne said that although the intentions of the landlord were to be disregarded (see Dawkins (VO) v Ash Brothers [1969] 2 AC 366), where a property was undergoing works it was necessary to consider whether they comprised repairs or improvements and/or alterations to the hereditament. Mr Bayne relied upon Paynter (VO) v Buxton [1986] 26 RVR 132 to support his submission that where a settled programme of works, which included works of modernisation and improvement, had begun on the material day, then the rateable character of the property had changed and it must be rated on the basis that it could not be beneficially occupied until the programme of works had been completed. He distinguished such a case from where, on the material day, broken fittings had been removed but there was no settled plan to carry out further works. In those circumstances the property was in disrepair and the exception to the “rebus” rule applied: see De Silva v Davis (VO) [1983] 1 EGLR 211.
59. The common law exception to the “rebus” rule was given statutory effect as paragraph 2(1)(b) of Schedule 6 to the 1988 Act which was introduced by the 1999 Act. The Valuation Office Agency (“VOA”) included a Practice Note on the 1999 Act as part of its Rating Manual. In an appendix the VOA included an extract from the speech of Baroness Farrington in the House of Lords on 5 May 1999. Mr Bayne relied upon the following passage of that speech:
“The Valuation Officer will need first to distinguish whether the works being carried out are to correct a lack of repair. Where this is the case, the need for repair may be disregarded in the valuation, subject as always to the question of whether or not the cost of carrying out the repairs would be economic as set out in Saunders v Maltby.
In some cases, the work required to make the property capable of beneficial occupation will involve the replacement and renewal of damaged parts. This work may go beyond repair and constitute an improvement to the property. It is well established in case law that repairs may contain an element of renewal and it is therefore a matter of fact and degree whether the work should be properly classed as repairs, renewal or improvement.
If the works are not considered to be repairs, the repair assumption in the Bill will not be appropriate and the property will be valued in its actual state on the material day.
I turn to buildings undergoing alterations and refurbishment. In a programme of extensive alterations, the works required to make the property capable of beneficial occupation are clearly not repairs. In many cases, properties are stripped back to the shell so that substantial reconstruction or improvement work can be carried out. In such cases, the property will be considered in its actual state on the material day and if it is incapable of beneficial use, removed from the rating list.”
60. Mr Bayne said that it followed, as the VOA’s Practice Note explained, that it was necessary for a valuation officer to distinguish between repairs, minor non-structural alterations and de minimis structural alterations, all of which could be contemplated without offending “rebus”, and other works, which were not within “rebus” and which could not be assumed within the statutory assumption. The VOA’s Practice Note continued:
“5.17 It is essential that VOs distinguish works of repair from works of renewal or improvement because an obligation to repair does not involve a duty to renew or to improve. If the works amount to renewal or improvements, they fall outside the landlord’s or tenant’s repairing liability and cannot be envisaged in the hypothetical rating world.
…
5.21 Following the removal of certain services it is possible that the works required to make the property capable of beneficial occupation will involve the replacement and renewal of damaged parts which may go beyond repair to constitute improvement. It is well established that repair can entail an element of renewal (see Lurcott v Wakely & Wheeler [1911], Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1980], and McDougall v Easington District Council) and it is therefore a question of fact and degree in all cases whether the works are properly classified as repairs, renewals or improvements.”
61. It was necessary to consider whether the works undertaken by the appellant were renewals or repairs, or whether they were part of a programme of alterations and improvements. It was insufficient only to consider the provisions of Schedule 6 paragraph 2(1)(b) to the 1988 Act. It was also necessary, where the rateable value was to be determined with a view to making an alteration to the list, to have regard to the matters mentioned in paragraph 2(7) of Schedule 6 and, in particular, to 2(7)(a): “matters affecting the physical state or physical enjoyment of the hereditament”, being one of the two limbs of the “rebus” rule.
62. To repair a building meant to restore it to the condition that it was once in. The subject works went beyond this and could not be taken into account under the repairing assumption in paragraph 2(1)(b) of Schedule 6. The VOA’s Practice Note on the 1999 Act described what the VOA understood the law to be:
“5.26 Schemes of refurbishment can usually be distinguished from buildings undergoing or requiring repair because the hereditament is physically in the process of being altered and/or improved. In such cases the works required to make the property capable of beneficial occupation are clearly not works of repair and therefore fall outside the repair assumption; indeed in many cases such buildings are stripped back to the shell. As a consequence rebus applies and the hereditament, if one continues to exist, must be valued as it actually is at the date of the proposal…
The works had physically altered and improved the appeal hereditament. The WCs had been moved and made part of the common parts and the building had been made more flexible in layout by the works required to provide three new electrical wiring and air conditioning systems.
63. Elsewhere in the VOA’s Rating Manual there was a section dealing with the valuation of vacant property. Paragraph 8 of this section again emphasised the distinction between alterations and repairs and said that the former were works which “is really creating something different, a different hereditament in effect or fact …” Each case had to be considered on its own facts and the facts in this appeal unequivocally supported the view that the works done by 1 April 2010 (and even more so by 6 January 2012) were alterations and improvements.
64. Appendix 3 of the section of the VOA Rating Manual that covered the valuation of vacant property gave a number of examples as “practical guidance to determine whether works are repairs or alterations.” Mr Bayne submitted that the facts in this appeal were similar to those contained in examples 1 and 3 of the appendix in both of which the VOA’s conclusion was that the rateable value of the hereditament should be reviewed to reflect the altered nature of the hereditament, probably as a “building undergoing works.”
65. Mr Bayne said that the facts of this appeal were analogous to those in Paynter where the Lands Tribunal, W.H. Rees FRICS, held (at page 134):
“I agree with the submission made by the valuation officer that the position must be looked at on 9th August 1983 [the material day] but it must be looked at in my judgment in the context that it was during a period of a programme of works which undoubtedly included structural alterations and modernisation.”
66. Mr Bayne submitted that the appellant’s evidence showed that there was an ongoing programme of modernisation and improvement works involving the relocation of the WCs into the common parts. This work had required the removal of the existing walls. This went beyond soft stripping. The relocation of the WCs had reduced the overall size of the hereditament from some 796m2 to 763m2. Single electrical, heating and air conditioning systems were being replaced by three separate systems. Work on these had begun by 1 April 2010 as Mr Monk had stated in his evidence. The respondent had said that Mr Monk’s evidence was uncorroborated but he had given it under oath and Mr Newbigin had said that he had no reason not to believe it. It would be rare to reject such sworn testimony where the respondent did not actively challenge it. The appellant was contractually committed to the works.
67. Mr Bayne submitted that it was not necessary to consider the assumption to be made under paragraph 2(1)(b) of Schedule 6 to the 1988 Act where the works in question were works of alteration and improvement rather than of repair. Consideration of the matters affecting the physical state or physical enjoyment of the hereditament under paragraph 2(7)(a) of Schedule 6 showed that the works were creating a different hereditament(s) and consequently the repairing assumption no longer applied.
The respondent’s submissions
68. Mr Donmall submitted that the valuation of hereditaments was governed by statute, and in particular paragraph 2(1) of Schedule 6 to the 1988 Act. This paragraph required it to be assumed that the hereditament was in a state of reasonable repair but excluded from that assumption any repairs which a reasonable landlord would consider uneconomic. The valuation was to be undertaken at a specific moment in time, per Lush J in The Metropolitan Board of Works op.cit. The intention of the actual owner as to the future use of the hereditament was irrelevant. In Dawkins Lord Pearce said (at page 382):
“…I think it would be accidental to the hereditament that its owner intended to pull it down in the near future. For the hereditament might have had a different owner who would not pull it down. So the actual owner’s intentions are thus immaterial since it is the hypothetical owner who is being considered.”
In short, as the Lands Tribunal, Mr W H Rees FRICS, observed in De Silva v Davis (VO) [1983] 1 EGLR 211 at 213, “What has to be imagined is a potential tenant viewing the subject premises” as though in economic repair.
69. There was nothing in the statutory framework that distinguished the valuation approach to be taken where (arguably) there were works of improvement or alteration being undertaken. The appellant argued that the nature of the works was significant and that alterations and improvements should be distinguished from repairs. The appellant relied upon Morcom but that was a landlord and tenant case that was concerned with whether there had been expenditure on improvements such as would enable the landlord to increase the rent under the Increase of Rent and Mortgage Interest (Restrictions) Act 1920, as amended. That was an entirely distinct jurisdiction and in the context of rating the distinction between repairs and improvements or alterations was, at best, a gloss upon the statutory wording. That wording required one to assume that the hereditament would be economically repaired and then to assess how much the hereditament as so repaired would be worth to a hypothetical incoming tenant. Mr Donmall said that support for this approach was to be found in Rank Audio Visual Ltd where the Lands Tribunal had not considered whether the hereditament (a factory and premises in very poor structural condition undergoing major structural alterations) was incapable of beneficial occupation per se, but instead had proceeded on a conventional valuation approach by considering what rent an incoming tenant might pay having regard to the then condition of the property. The Tribunal did not decide that there should be a nil valuation as a legal consequence of alterations being undertaken to the hereditament; it reached its decision on the evidence that there was no tenant who would have paid any rent for it.
70. Paynter was not an authority for any proposition of law and was merely a decision reached on the facts of that particular case, as was De Silva which reached a contrasting decision on different facts. Where it was contended that a hereditament had a nil or nominal value that conclusion could only be reached if it was found that no hypothetical tenant would pay any rent for the hereditament as it was on the material day and assuming reasonable repair (if economic). There may be a point at which repairs are no longer economic and where an incoming tenant would not be prepared to pay any rent for a hereditament undergoing works. But the VOA’s Rating Manual was guidance rather than a statement of law and its reference to a programme of works was only shorthand for this type of factual situation. It was always necessary to look at the requirements of the statute and not to be diverted by reference to a “definite scheme” or “programme” of works which had no distinct legal significance.
71. There was little dispute about the condition of the hereditament at the material day. The parties differed about the extent to which the air conditioning had been altered but such alteration as there may have been was in hidden piping and ductwork and did not impact upon the valuation. The factual evidence showed that:
(i) There had been no structural alterations;
(ii) The plans to reconfigure the office accommodation were flexible depending upon the eventual tenants’ requirements;
(iii) The works had been suspended without major costs having been incurred;
(iv) The hereditament could be put back into its former state economically. Mr Monk and Mr Farr said they did not know anyone who would have wanted to do this but the question was not whether it would be done in practice but whether it could be done economically.
(v) The appellant’s argument that there was a different hereditament at the material day could not be supported as a fact. The relocation of the WCs had not fundamentally altered the hereditament. A hypothetical tenant could still let the hereditament as a single office.
72. Based on these facts Mr Newbigin concluded that it was economical to put the hereditament back into a state of repair (the cost being assessed by Mr Newbigin as £307,631, which was accepted by the VTE and not challenged by the respondent). Such repairs being statutorily assumed to have been undertaken at the material day the hereditament would have been a modern, refurbished office floor in a good location that would have commanded more than a nil or nominal rent.
73. Alternatively Mr Donmall submitted that if the appellant just had to show the existence of a definite scheme of improvement or alteration works in order to establish a nil value then it had failed to do so. No such definite programme had been shown by the facts. The contract was vague and the final outcome of the works remained fluid. The works had been suspended indefinitely without significant costs having been incurred.
74. Paragraph 2(1)(b) of Schedule 6 to the 1988 Act required the assumption that the hereditament was in a state of reasonable repair (unless uneconomic). Under paragraph 2(6) where, as here, the rateable value was determined with a view to making an alteration to a list which had been compiled, the matters set out in paragraph 2(7) were to be taken as they were assumed to be on the material day. Mr Donmall submitted that Mr Bayne’s ingenious argument that it was not necessary to consider the paragraph 2(1)(b) assumption where the works were works of alteration and improvement was wrong because the reference in paragraph 2(6) to the matters mentioned in paragraph 2(7) being “taken to be as they are assumed to be” must refer to the three assumptions made under paragraph 2(1). In other words it was first necessary to assume that the hereditament was in a state of reasonable repair before considering the matters contained in paragraph 2(7). It was not possible to by-pass the paragraph 2(1) assumptions by labelling the works being done to the hereditament as alterations or improvements rather than repairs.
Conclusion on issue (ii)
75. The respondent’s argument as presented at the hearing is that, in every case, one must determine whether the hereditament can be repaired economically given its physical condition at the material day. Provided a reasonable landlord would not consider such repairs to be uneconomic then the hereditament must be assumed to be in a state of reasonable repair at that time. The respondent says that it is not relevant if a programme of works is under way at the material day since the intentions of the landlord and the existence of a contract are not relevant. The respondent argues that paragraph 2(1)(b) of Schedule 6 does not require (or allow) a distinction to be made between the causes of the physical state in which the hereditament exists at the material day; all one has to do is determine whether, given that state, it can be repaired economically. If the answer is yes then it must be assumed to be in a state of reasonable repair.
76. This submission is contrary (at least in part) to the case originally pleaded by the respondent. Mr Donmall acknowledged that his present submissions were at variance with some, but not all, paragraphs of the respondent’s statement of case in which the respondent accepted the legal background as set out in the appellant’s statement of case. He said that his skeleton argument had signalled this change, that the case as now pleaded was consistent with paragraphs 16 and 17 of the respondent’s statement of case and that the appellant had not been prejudiced. I allowed the amendment of the respondent’s pleadings at the hearing following submissions by counsel but the fact of the change is relevant.
77. The respondent’s amended pleadings on the law are also contrary to the Valuation Office Agency’s Practice Note on the Rating (Valuation) Act 1999, the Act which introduced paragraph 2(1)(b) of Schedule 6 into the 1988 Act. Appendix 1 to the practice note is an extract from the speech of Baroness Farrington in the House of Lords on 5 May 1999 in which she explains “the background and purpose of the Bill”. This practice note forms Section 4 of Volume 4 of the VOA’s Rating Manual. Other sections of that manual, for instance section 1 of Volume 4, also deal with the points at issue in this appeal. Mr Donmall says that the VOA’s Rating Manual is only for guidance and is not legally binding and that the rule in Pepper (Inspector of Taxes) v Hart [1993] 1 All ER 42 does not allow the statement of Baroness Farrington to be used to interpret the meaning of paragraph 2(1)(b) since that provision contains no ambiguity, obscurity or absurdity. While I accept Mr Donmall’s submission on this point the VOA’s guidance and practice note is nevertheless a considered and informed commentary on the law which merits attention. But it should not be adopted if it is found to be mistaken. The Tribunal is not bound by it and it is not relevant to the construction of the statutory provisions.
78. This appeal concerns a proposal for the alteration of the local non-domestic rating list in circumstances where the appellant argues that the rateable value shown in the list for the appeal hereditament is inaccurate by reason of a material change of circumstances which occurred on or after the day on which the list was compiled. A material change of circumstances, in relation to a hereditament, means a change in any of the matters mentioned in paragraph 2(7) of Schedule 6 to the 1988 Act; see regulation 3 of the 2009 Regulations. In this appeal the appellant relies upon the matters contained in paragraph 2(7)(a): “matters affecting the physical state or physical enjoyment of the hereditament”, the change in which comprises, it submits, a programme of works of alteration and improvement. The matters in paragraph 2(7) are to be taken as they are assumed to be on the material day; see paragraph 2(6) of Schedule 6. It is therefore necessary to consider whether there has been a change in the physical state or physical enjoyment of the hereditament at the material day attributable to the works then being undertaken.
79. Paragraph 2(1)(b) of Schedule 6 requires it to be assumed that immediately before the tenancy begins on the day by reference to which the determination is to be made, the hereditament is in a state of reasonable (economic) repair. Paragraph 8A requires that the state of repair of the hereditament at the material day shall be assumed to be the state of repair which it is assumed to be in under paragraph 2(1).
80. Paragraph 2(7)(a) of Schedule 6 refers to the “physical state” of the hereditament. In my opinion that expression means the physical condition of the hereditament in an assumed state of (economic) repair under paragraph 2(1)(b). Paragraph 2(7)(a) is concerned with matters that affect the physical state of the hereditament and in this connection the appellant seeks to distinguish works of repair and works of alteration. It argues that whereas works of repair are subsumed within the statutory assumption contained in paragraph 2(1)(b) of Schedule 6, works of alteration are not and therefore cannot be assumed to have been undertaken. I do not accept this argument. There is no statutory basis for distinguishing repairs and alterations in this way. It does not matter why the hereditament is in its actual physical state at the material day, nor does it signify that the hereditament may be undergoing a “scheme of refurbishment”. All that the legislation requires is to take the hereditament as it is at the material day and assume that it is in a state of reasonable (economic) repair.
81. The respondent’s case is that these provisions mean that the hereditament must be assumed to be in a state of repair that ignores the effect of the appellant’s works, provided, as the respondent argues, that there are no uneconomic repairs to be excluded. He therefore estimated the cost of the works needed to replace the elements that had been removed and concluded that they would be economic. The respondent looked at the cost of reinstating the hereditament to its former physical state. As Mr Newbigin said in his conclusions at paragraph 12.6 of his expert report:
“At the material day the property was a stripped out floor within a building and looking at the hereditament rebus sic stantibus at that date I conclude that reinstatement works were required which include the replacement of the suspended ceilings and lighting, the power supply, the comfort cooling system, the raised floor and to finish the reinstatement of the WCs.”
In Mr Newbigin’s opinion these were works of repair that, under paragraph 2(1) of Schedule 6, were deemed to have been undertaken.
82. I do not accept the respondent’s argument that paragraph 2(1)(b) of Schedule 6 requires the assumption (provided the cost is not uneconomic) that the hereditament has been reinstated from its actual physical state on the material day to its former physical state prior to the commencement of the works that gave rise to the proposal.
83. I am satisfied that at the material day the hereditament was not capable of beneficial occupation as an office and premises due to its actual physical state, the details of which are substantially agreed. The hereditament had been stripped out to such an extent that to replace major building elements such as an entire electrical circuit and heating and air conditioning systems would go beyond the meaning of repair, regardless of whether such works were economic. This conclusion echoes paragraph 8.5 of Section 1, Volume 4 of the VOA’s Rating Manual:
“In such cases [schemes of reconstruction/refurbishment] the works required to make the property capable of beneficial occupation are clearly not works of repair and therefore fall outside the repair assumption.”
The hereditament is assumed to be in a state of reasonable repair but this assumption does not extend to the replacement of systems that had been completely removed. In my opinion a hypothetical tenant would not pay more than a nominal amount for the hereditament in its assumed physical state under paragraph 2(1)(b) at the material day. The hereditament was affected by a material change of circumstances and the rating list should be altered to show a nominal (£1) value with a description of “building undergoing reconstruction”.
84. An alternative analysis was suggested in Mr Bayne’s closing submissions when he said that it was not necessary to consider paragraph 2(1)(b) of Schedule 6 where the works affecting the physical state of the hereditament were alterations. In my opinion the starting point in this analysis is that Schedule 6 paragraph 2(1)(b) does not apply unless and until there is a hereditament that is capable of beneficial use. The alterations had rendered the appeal hereditament incapable of such use. I do not consider that it would be correct to read paragraph 2(1)(b) as, in effect, changing the law by imposing an assumption that a hereditament that is incapable of beneficial occupation is to be assumed capable of beneficial occupation if it can be made so at reasonable cost. If that is what was meant then the 1999 Act could have said so plainly. In my opinion the use of the words “reasonable repair” suggests a more limited objective. In common English usage the word “repair” has a meaning that is not appropriate in circumstances such as those in this appeal where the subjects of repair have effectively ceased to exist, eg electrical circuitry, heating and air conditioning.
85. The result of both analyses is the same; the rateable value should be reduced to a nominal amount.
The effective date
86. Regulation 14 of the 2009 Regulations sets out the time from which an alteration to the list is to have effect. Regulation 14(2) states that, subject to paragraphs (3) to (7), where an alteration is made to correct any inaccuracy in the list on or after the day it is compiled, the alteration shall have effect from the day on which the circumstances giving rise to the alteration first occurred. Paragraph (5) states, in relation to a proposal, that where the day on which the relevant circumstances arose is not reasonably ascertainable the alteration shall have effect from the day on which the proposal was served on the valuation officer.
87. Mr Bayne submitted that the effective date was 1 April 2010 regardless of the Tribunal’s decision about the material day and that most of the stripping out works and some of the construction work under the contract had begun by that date (see paragraph 39 above). The parties did not agree what work had been done by 1 April 2010 but the respondent did not actively challenge Mr Monk’s evidence on the point and Mr Newbigin saw no reason not to believe it. I accept the appellant’s evidence about the work that had been done by 1 April 2010. Such works were not materially different from those that the parties agreed had been completed by 6 January 2012 and in my opinion the effective date in this appeal is 1 April 2010.
Determination
88. I refuse the appeal on issue (i) and allow the appeal on issue (ii). I therefore determine that the hereditament shall be entered in the local non-domestic rating list at a rateable value of £1 with the description of “building undergoing reconstruction” with effect from 1 April 2010.
89. A letter on costs accompanies this decision which will take effect when, but not until, the issue of costs is determined.
Dated 26 February 2014
A J Trott FRICS
ADDENDUM ON COSTS
90. I have now received a joint submission on costs from the parties in which it is agreed that the respondent shall pay the costs of the appellant on the standard basis, such costs to be assessed if not agreed. I order accordingly and if not agreed such costs shall be the subject of a detailed assessment by the Registrar.
Dated 11 March 2014
A J Trott FRICS