Should the rental valuation of a property for which there is no demand be discounted?

It was in my first economics lecture that I learnt the lesson, obvious in retrospect, that market value is usually represented by the price at which the forces of supply and demand achieve equilibrium, assuming the availability of perfect information. The property market is, of course, a good example of this. As Lewison LJ noted in his (dissenting) judgment in Harbinger Capital Partners v Caldwell [2013] EWCA Civ 492, there are many areas of the law in which a value is to be ascertained by postulating a hypothetical open-market transaction of one kind or another. In our field, rent review and business tenancy renewals are the most obvious examples, but others include rating, compulsory acquisition and taxation. These various contractual (as in rent review) and statutory (as in rating) hypothetical transactions work well when there are plenty of actual transactions involving similar properties, which amply illustrate the workings of the market. But they lead to difficulty where the evidence is thin or non-existent, as is often the case where the premises are very large and obsolete (as in FR Evans (Leeds) Ltd v English Electric Co Ltd [1978] 1 EGLR 93, which involved more than 1m sq ft of factory space); or the property is landlocked (as in Murphy & Sons Ltd v Railtrack Plc [2002] EWCA Civ 679; [2002] 2 EGLR 48).  In such circumstances, it is often argued that the likely lack of actual demand for the premises were they to be marketed in reality must lead to the conclusion that the hypothetical market cannot be a market at all, and that a valuation is therefore impossible; or that it should produce a nil value; or that terms should be implied to supply an actual market. Judicial thinking The court’s preferred approach to such contentions is to dismiss them, holding that the lack of competition does not have the consequence that there cannot be an open market. The leading authority supporting that proposition is the decision of the Privy Council in Raja v Vizagapatam [1939] AC 302, in which Lord Romer said: “the fact is that the only possible purchaser of a potentiality is usually quite willing to pay for it”. Nevertheless, if there is in practice likely to be only one actual bidder, then that will usually produce the conclusion that, in the absence of substantial competition, the price or value is likely to be low, albeit not negligible. As Peter Gibson LJ observed in Murphy, all the authorities show that even if there is only one special purchaser, nevertheless the property is to be valued on the footing that the special purchaser would be prepared to pay for the acquisition of the property an amount more than merely nominal to reflect its interest in acquiring the property.  Telereal Trillium Last month, however, the Supreme Court decided that this was not the correct approach in a rating case: Hewitt (VO) v Telereal Trillium [2019] UKSC 23; [2019] PLSCS 90 (see EG, 1 June). Should we now modify our approach to valuation in rent review and business tenancy renewal cases, or is rating a special case? The issue in Telereal was the correct approach to determination of the rateable value of a vacant 1970s office building in Blackpool known as Mexford House, in circumstances where the evidence showed at the relevant time a general demand in the area for comparable office buildings, but no actual tenant willing to pay a positive price for the building itself. The rateable value initially entered by the valuation officer with effect from 1 April 2010 was £490,000, reflecting his view that there were in the area other office buildings of similar age and quality, occupied by public sector tenants at rents of the same order. The statutory rating hypothesis requires the rateable value to be an amount equal to the rent at which it is estimated the property in question might reasonably be expected to let from year to year. It was common ground that this value would be the figure at which the hypothetical landlord and tenant would come to terms as a result of bargaining for the property, in the light of competition or its absence in both demand and supply. The difficulty in the case was that there was no evidence of actual demand for the particular property by which to conduct this hypothetical exercise: in the real world, nobody could be identified who would wish to bid for the property.  Hence, although the ratepayer accepted that it was necessary to assume there had to be a tenancy granted on the statutory terms between the hypothetical landlord and the hypothetical tenant after negotiations, it contended that the tenant would bid no more than £1. The Valuation Tribunal for England agreed, determining that the rateable value should be reduced to £1. The Upper Tribunal disagreed: the property was capable of beneficial occupation, and comparable premises were beneficially occupied at substantial rents. It substituted a rateable value of £370,000 – a rate which it was agreed represented the value of the occupation. But the Court of Appeal allowed the appeal and restored the VTE’s assessment. The final word Completing this game of judicial ping pong, the Supreme Court decided, by a 3:2 majority, that in accordance with long-standing House of Lords authority, actual rents agreed between tenant and landlord were not the test of value for rating purposes. Instead, the principle underpinning rating (the so-called “principle of equality”) was to seek a standard by which every property can be measured in relation to every other property. It is not seeking to establish the true value of any particular property, but rather its value in comparison with the respective values of the rest. Accordingly, the test is not at what rent might the property let in the open market, but rather what would be the value of the property to an occupier. Rating, it seems, is indeed a special case. In rent review and lease renewal valuation, we may continue as before. Guy Fetherstonhaugh QC is a barrister at Falcon Chambers