Three key principles of rating law

What do the following have in common? a Lady Justice of Appeal choosing what to buy for dinner, an empty office block in Blackpool and a selection of IT infrastructure, partitions and tea points in an office building in Maidenhead. The answer is that, in general terms, they are each connected to a principle of rating law or valuation as explained in recent times by the courts and tribunals. The outcomes of the three cases concern the concepts of general control, general demand and general market appeal. Each is explained here and is set in context for those who want to know more. General control A unit of property may have more than one occupier but it can never have more than one occupier liable for the rates. Where there is more than one occupier, who is the rateable occupier? In Holywell Union v Halkyn District Mines Drainage Co [1895] AC 117 the House of Lords said that where a person already in possession has given to another non-exclusive possession of a part of their premises, they do not cease to be liable to the rate, nor does the other become liable. This occurs in the case of a landlord and their lodger. Both are in occupation but the occupation of the landlord is paramount, that of the lodger subordinate. Forty decades on, in Westminster City Council v Southern Railway Co Ltd [1936] AC 511, Lord Russell of Killowen said: “The general principle applicable to the cases where persons occupy parts of a larger hereditament seems to be that if the owner of the hereditament (being also in occupation) retains to himself general control over the occupied parts, the owner will be treated as being in rateable occupation”. This is the point at which “general control” becomes relevant. Cash machines are operated by banks. ATMs hosted by food stores are often operated by the banking subsidiary of the retail group operating the store. The store will commonly be owned and operated by a retail subsidiary, an associated company of the bank. In 2014, the Valuation Office Agency started to assess ATM sites, generating significant revenues. Some retailers challenged these assessments.  The challenge went to the Court of Appeal. There, Gloster LJ said during submissions that, on her lunch breaks between sittings, she would visit the Tesco branch in the Strand, opposite the Royal Courts of Justice, in order to withdraw cash from the ATM and would think about what to buy for dinner. The Court of Appeal allowed the retailers’ appeals. The Supreme Court (Cardtronics Europe Ltd and others v Sykes (VO) and others [2020] UKSC 21; [2020] EGLR 26) dismissed the valuation officers’ appeals, holding that the retailers were in paramount occupation of the ATM sites by reason of their general control over them. In Cardtronics, control mattered. The stores restricted the use of small parts of the stores to accommodate ATMs because the presence of the ATM furthered the retailers’ own general business purposes. Lord Carnwath noted that the lodging house has always been treated as a single unit occupied by its landlord, even though the lodgers occupy their own rooms. The landlord’s control of the premises supports the enjoyment of the lodgers. The retailer can control the store without interfering with the banking operation of the ATM machine because the store seeks to facilitate the banking operation in the common interest of the bank and the retailer. These three cases provide the authoritative guidance as to whether or not an occupier of property is in exclusive occupation. It is relevant to ask who is in general control of the premises and to examine the relationship between the owner and the occupier – are they working together or independently? Cardtronics is the leading case. Its effect is that “micro-uses” such as coffee, change and foreign currency machines and photo booths are not rateable. Cardtronics has been referenced in the property guardians’ case Southwark London Borough Council v Ludgate House Ltd and another [2021] EWCA Civ 1637; [2021] EGLR 3, where the Court of Appeal found that an office building accommodating property guardians was a single rateable unit in which the guardians facilitated the management of the otherwise empty building. General demand In Hewitt (VO) v Telereal Trillium Ltd [2019] UKSC 23; [2019] EGLR 28, the issue was the correct rateable value of an office building in Blackpool. At the relevant time there was general demand in the area for comparable office buildings, but no actual tenant willing to pay a positive price for the building itself. In a rent review, the only parties are the actual landlord and the actual tenant. They will contest the rental valuation emerging from a hypothetical negotiation between assumed willing parties. If at the rental valuation date, there is no demand for the property in the assumed market, there will be no grounds for a rental increase. That represents a fair outcome between the landlord and the tenant of the specific lease in question. The challenge presented by a valuation for rating is fairness between ratepayers. If the comparable evidence shows that there is demand for the space in three office buildings but not a fourth, it is unfair for the occupiers of the three to pay full rates but for the occupier of the fourth to pay only a nominal amount. In Hewitt, the Supreme Court (by a majority) came up with this solution. It is not critical whether, at the valuation date, the property is occupied or unoccupied, or an actual tenant has been identified.  Even in a “saturated” market we assume a willing tenant who is sufficiently interested to enter into negotiations to agree a rent. There is no reason why, in the absence of other material evidence, the level of rent should not be assessed by reference to “general demand” derived from “occupation of other office properties with similar characteristics”. The majority applied the decision in Lambeth London Borough Council v English Property Corp (1980) 255 EG 161. Valuation officers will seek to make the most of this decision when dealing with rating valuations in weak letting markets, going forward. General market availability For the purpose of rating valuation, one assumes that a property is assumed to be in its condition at the valuation date, vacant and to let, in a reasonable state of repair and with all the ratepayer’s chattels having been removed. The issue in Bunyan (VO) v Acenden [2023] UKUT 17 (LC); [2023] EGLR 19 is how to value for rating the “Cat B” fit out by a tenant when taking a new lease of an office building.  The ratepayer had spent a capital sum on alterations and fit-out to the building itself which would be capable of being utilised by another occupier. There was a dispute about how much of that sum was capable of being utilised by another occupier, having what was referred to as “general market appeal” and whether a different occupier would be prepared to pay rent for them. A well-known example of this type of dispute was Edma (Jewellers) Ltd v Moore (VO) (1975) RA 343 (LT). The VO considered that the majority of the ratepayer’s category B fit-out would have had general appeal to the market. A tenant would pay a premium for fitted-out space. The amount of that premium would reflect how well the space matched the tenant’s needs and what further capital expenditure would be required to complete it to their requirements.  The Upper Tribunal agreed. It found that the tenant’s fit-out in the case was “generic and unexceptional”. In a case where the tenant’s fit-out is bespoke and personal, say, offices in a prime urban setting, the outcome may be very different. The key cases: takeaways Feature First general Second general Third general Control Demand Market appeal Meaning  A test for being in rateable occupation   A test for matching supply and demand The reason why cat B fit out matters Origin  Holywell Union v Halkyn District Mines Drainage Co [1895] AC 117 Lambeth London Borough Council v English Property Corp (1980) 255 EG 161 Edma (Jewellers) Ltd v Moore (VO) (1975) RA 343 (LT) Modern Cardtronics Europe Ltd and others v Sykes (VO) and others [2020] UKSC 21; [2020] EGLR 26 Hewitt (VO) v Telereal Trillium Ltd [2019] UKSC 23; [2019] EGLR 28 Bunyan (VO) v Acenden [2023] UKUT 17 (LC); [2023] EGLR 19 In a phrase  The ATMs litigation  Empty property in Blackpool The Maidenhead fit-out case Level UK Supreme Court UK Supreme Court Upper Tribunal (Lands Chamber) Ripple effect: how the concept is applied Kids’ rides; coffee machines; Forex dispenser; micro uses Empty office building in Blackpool; location inferior; a saturated market Generic and unexceptional? Bespoke and prime? Roger Cohen is senior counsel at Bryan Cave Leighton Paisner Image © Jason Alden/Shutterstock