Telereal Trillium v Hewitt (Valuation Officer) [2018] EWCA Civ 26 (19 January 2018)

Neutral Citation Number: [2018] EWCA Civ 26
Case No: C3/2016/3392

[2016] UKUT 258 (LC)

Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 19/01/2018

Before :
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– and –

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Mr Richard Glover QC (instructed by DLA Piper UK LLP) for the Appellant
Ms Hui Ling McCarthy (instructed by HM Revenue and Customs Solicitor’s Office) for the Respondent
Hearing date: 1st November 2017
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Judgment Approved

Lord Justice Henderson:

Introduction and background

1. This is a rating appeal, brought by the appellant, Telereal Trillium, from the Lands Chamber of the Upper Tribunal (Judge Huskinson and Mr P D McCrea FRICS) (“the Upper Tribunal”) which by its decision released on 4th August 2016 (“The UT Decision”) allowed the appeal of the valuation officer, Kevin Hewitt, concerning the rateable value of the subject premises, Mexford House, Mexford Avenue, Blackpool, FY2 0XN (“Mexford House”) which had been determined at a nominal figure of £1 with effect from 1st April 2010 (“the material date”) by the Valuation Tribunal for England (“the VTE”) on 10th November 2014.

2. Mexford House is a substantial three-storey block of offices in the North Shore area of Blackpool. It was purpose-built in 1971, and was occupied continuously as Government offices from 1972, in part by the Department of Work and Pensions (“the DWP”) and in part by the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”). By the material date, however, the property was vacant. Both HMRC (on 29th February 2008) and the DWP (on 13th March 2008) had given notice of their intention to vacate the property, and it was formally handed back to the lessor on 31st March 2009. It is uncertain when the process of vacating the premises was finally complete, but there is no dispute that the property was empty by 1st April 2010, that being the date on which the 2010 non-domestic rating list for the area of Blackpool Borough Council first came into force by virtue of section 41(2) of the Local Government Finance Act 1988 (“the 1988 Act”).

3. Although the new rating list came into force on the material date, the rateable value of Mexford House (which comprised the relevant hereditament for rating purposes) had to be determined as at a valuation date two years earlier, on 1st April 2008: see Article 2 of the Rating Lists (Valuation Date) (England) Order 2008 (SI 2008 No 216). This date is usually referred to as the “antecedent valuation date” or “AVD” for short. It will be noted that both HMRC and the DWP had already given notice of their intention to vacate Mexford House shortly before the AVD.

4. Ascertainment of the rateable value of a business (ie non-domestic) hereditament requires the application of a time-honoured hypothesis which in its essentials dates back at least to a statute of King William IV, the Rating Valuation Act of 1836. In its current version, which is contained in paragraph 2 of Schedule 6 to the 1988 Act, the hypothesis reads as follows:

“(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 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.”

The day referred to in sub-paragraph 2(1)(a) is the AVD, and so in the present case is 1st April 2008: see paragraph 2(3).

5. The essential content of the rating hypothesis lies in the words “the rent at which it is estimated the hereditament might reasonably be expected to let from year to year”. These words assume a notional letting of the hereditament on a yearly tenancy, in relation to which Wills J said in one of the early leading cases (Smith v The Churchwardens and Overseers of the Poor of the Parish of Birmingham (1888) 22 QBD 211, at 219):

“The Act of Parliament requires the assumption of a tenancy from year to year to be made, and you can no more impugn the hypothesis of such a tenancy in rating matters than in logic you are permitted to deny your opponent’s hypothetical premiss. You must assume a landlord willing to let, and a tenant willing to take by the year; and having done so, you must get in the best way you can at the rent which, under an agreement brought about by the compromise of the conflicting interests of the man who wants to receive as much as he can and the man who wants to pay as little as he can, would be arrived at under such circumstances.”

6. I will need to return later to some of the more recent learning on the principles which the valuation officer (or, on appeal, a tribunal or court) must follow when the rating hypothesis has to be applied. At this stage, I will merely note that, by virtue of paragraph 2(5) of Schedule 6 to the 1988 Act, certain matters “shall be taken to be as they are assumed to be on the day on which the list must be compiled”, i.e. in the present context on the material date, two years after the AVD. These matters are listed in paragraph 2(7), and relevantly include:

“(a) matters affecting the physical state or physical enjoyment of the hereditament,

(b) the mode or category of occupation of 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 none the less physically manifest there, and

(e) the use or occupation of other premises situated in the locality of the hereditament.”

7. Against this statutory background, the rateable value entered in the 2010 list for Mexford House with effect from 1st April 2010 was £490,000. This figure was substantially in excess of the yearly rent of £417,000 for the premises which had been payable since September 2000, including after a septennial rent review in 2007. On appeal, the VTE (Mr M Unees (chairman) and Dr M Fraenkel) by its decision dated on 24th October 2014 reduced the rateable value to £1, after hearing valuation evidence and submissions from a valuer instructed by Telereal Trillium (Mr Stevens), and from Mr R May on behalf of the valuation officer, at a hearing on 12th September 2014.

8. Mr Stevens was able to place before the panel what it found to be “good examples of valuation officers placing nominal or nil values on large dated offices which could no longer be let” (paragraph 37 of the VTE’s decision). For his part, Mr May “attempted to show that there was a demand because other large offices in the area were occupied” (paragraph 32). Mr May stated that the occupier of Hesketh House in Fleetwood had agreed a large increase in rent on review in 2008, and he referred to a tribunal case where Mexford House itself had been successfully relied on by the valuation officer as a comparable occupied property. The panel, however, found these submissions unconvincing. As they explained, at paragraph 33:

“However, the panel noted that the occupiers of those other offices were mainly public sector organisations. Was there a demand for large offices to be situated [in] Blackpool from public sector organisations or businesses at the AVD of 1 April 2008? Would they be interested in occupying the appeal property? On the evidence available, the panel was not convinced. The panel found Mr Stevens’ evidence persuasive. He had shown that between 2005 and 2009, there were no new lettings for offices anywhere near the size of the appeal property in Blackpool or the wider geographical area. In addition, there had been no demand for the appeal property in over 5 years of marketing it. Mr May acknowledged that there had been no new lettings in the area for offices of that size and admitted, during questioning, that the appeal property was currently unlettable as offices.”

9. The VTE then stated its conclusions, in paragraph 38:

“In conclusion, the panel was satisfied that by the AVD of 1 April 2008, the actual occupier of the appeal property had decided to vacate it. The evidence from lettings in the area between 2005 and 2009 clearly showed that there was no market demand for the appeal property in its current layout as three storey offices over 6000 sq.mts. The appeal property had been on the market for more than five years which further showed that there was no demand, even on a floor by floor or wing by wing basis. As valuation officers had placed nominal values on other large offices where there was no demand, the panel decided to reduce the appeal property’s assessment to a nominal value, say rateable value £1.”

10. From this decision, the valuation officer appealed to the Upper Tribunal. Since the VTE does not form part of the First-tier Tribunal established by the Tribunals, Courts and Enforcement Act 2007, we enquired about the source and nature of the right of appeal thus exercised. In a helpful joint note supplied to us on the day after the hearing in this court, counsel referred us to regulation 42 of the Non-Domestic Rating (Alteration of Lists and Appeals) (England) Regulations 2009 (“the NDR Regulations”), which provides that:

“(1) An appeal shall lie to the Upper Tribunal in respect of a decision or order given or made by the VTE on an appeal under the NDR Regulations…

(5) The Upper Tribunal may confirm, vary, set aside, revoke or remit the decision or order, and may make any order the VTE could have made.

… ”

11. In the light of the very wide powers conferred on the Upper Tribunal by regulation 42(5), it was accepted by the Lands Chamber of the Upper Tribunal in Johnson (Valuation Officer) v H & B Foods Ltd [2013] UKUT 539 (LC), presided over by the then President of the Chamber, Sir Keith Lindblom (now Lindblom LJ), that the Upper Tribunal “has jurisdiction to deal with appeals such as the appellant’s in [that] case by way of a fresh hearing, rather than simply by way of a review of the decision of the VTE”: see paragraph 60 of the decision, and the supporting reasoning in paragraphs 61 to 66. With the benefit of this material, we have no doubt that the position was correctly analysed in Johnson v H & B Foods, with the consequence that (unlike an appeal from the First-tier Tribunal to the Upper Tribunal) an appeal from the VTE to the Upper Tribunal proceeds by way of a fresh hearing, and is not confined to an appeal on a point of law. In this respect, rating appeals continue to be treated in the same way as they were when appeals previously lay to the Lands Tribunal before 1st June 2009.

12. The hearing before the Upper Tribunal took place over two days on 28th and 29th April 2016, in London. Both sides were then represented by the same counsel as have appeared before us, Ms Hui Ling McCarthy for the appellant valuation officer, Kevin Hewitt, and Mr Richard Glover QC for Telereal Trillium. The hearing before the Upper Tribunal took a rather unusual course, which I will need to explain in some detail. Before doing so, however, I will first say a little more about the facts, as found by the Upper Tribunal in paragraphs 4 to 15 of the UT Decision. There is no dispute about any of this factual background, most of which was contained in a statement of agreed facts and issues prepared by the parties.

The facts in more detail

13. Mexford House is located about two miles from the centre of Blackpool, and 4.5 miles from junction 4 of the M55. There are local amenities near by, and Layton railway station is a ten-minute walk away, with regular services to Blackpool North station and to the West Coast mainline at Preston. The immediate location is primarily residential.

14. Mexford House itself has a concrete frame and flat roof, with brick elevations. It has an area of 5,878 square metres, arranged in an “F” formation. The internal configuration is a combination of open plan and cellular office space, with kitchen, toilet and shower facilities on each floor. The main access at the front of the building has a reception area, from which a ten-person passenger lift and staircase give access to the upper floors, with additional staircases in each wing of the building. There are 149 car parking spaces including seven garages, to the front and side of the building, within a site bounded by security fencing.

15. As at the AVD, the property was the subject of a lease to the Secretary of State for the Environment which had been granted for 42 years from September 1972. In 1998, the lease was the subject of a so-called “virtual assignment” to Trillium PRIME Ltd, now the respondent Telereal Trillium, under which Trillium took over commercial ownership of the lease, and responsibility for the rent, running the property and acting as the tenant in any rent review negotiations. It was explained to us that the “virtual assignment” had no effect on the legal title to the lease, which remained vested in the Secretary of State, but the arrangement was intended to replicate the commercial effects of an assignment under which Trillium for all practical purposes stepped into the shoes of the Secretary of State. The landlord was throughout a nominee company for a pension fund.

16. As I have already said, the lease provided for septennial rent reviews, and at the review in September 2000 the rent was set at £417,000 per annum. In 2002, a reversionary lease was granted in the name of Telereal Trillium, which would run from the expiry of the original lease on 29th September 2014 until 31st March 2018 when the PRIME contract was due to expire. At the 2007 rent review, the landlord’s surveyor argued for an increased annual rent of £488,250, while the appellant’s surveyor contended for a reduced rent of £341,000. The question was referred to an independent expert, who determined that there should be no change in the current rent of £417,000 per annum.

17. As I have already explained, the property was occupied throughout by the DWP and HMRC, who gave notice of their intention to vacate in February and March 2008 and yielded up possession to the landlord on 31st March 2009. The property remained unoccupied at the material date.

The hearing before the Upper Tribunal

18. On the first day of the hearing, Ms McCarthy called Mr Hewitt to give evidence. He is a chartered surveyor, and a rating team leader in the Lancaster Valuation Office with many years’ experience in the North West of England. In paragraphs 19 to 23 of the UT Decision, the Upper Tribunal summarised some of his written evidence designed to show that there was a continuing demand for Mexford House at the AVD. Mr Hewitt considered that Mexford House was “not obsolete either in a functional or in a locational sense”. Under cross-examination, however, the picture painted by Mr Hewitt took on a rather different complexion. As the Upper Tribunal recorded, at paragraph 24:

“During the course of his cross-examination Mr Hewitt accepted that as at the AVD he could not identify in the real world any person who would put in a bid for a tenancy of Mexford House on the statutory terms; that there was no demand for such accommodation from the private sector; and that all public sector demands as at the AVD were being met by the occupation of other premises which the public sector already enjoyed. He accepted the opinion expressed by Mr Baldwin [the surveyor instructed for Telereal Trillium] in paragraph 11.1 of Mr Baldwin’s first report, namely that “vacant and to let” at the AVD there would be no demand for Mexford House.”

19. This evidence was similar to that which Mr Stevens had given to the VTE. It is fair to say that it posed obvious difficulties for the valuation officer’s appeal. The best that Mr Hewitt could do, in the circumstances, was to point to the existence of other occupied properties which he considered to be comparable to Mexford House, eight of which he said were of a similar age and specification. His main comparable property was Hesketh House in Fleetwood, which was a building of 8,403 square metres built in 1966. It had been assessed for rating purposes at £59 per square metre. Mr Hewitt considered that the existence of demand for this, and other, comparable properties, which he referred to as a “general demand”, demonstrated that there was a sufficient demand for Mexford House to require the conclusion that it should not be rated at nil, but should instead be rated at a value obtained by reference to the level of rents paid for the comparable properties.

20. As the Upper Tribunal recorded, in paragraph 29 of the UT Decision:

“Leaving aside any detailed comparisons (some favourable some unfavourable) between Mexford House on the one hand and Hesketh House and the other comparables on the other hand, [Mr Hewitt] expressed the view that there was a quantity of broadly comparable office accommodation which was in beneficial occupation and for which substantial rents were paid at the AVD. He said that the fact that as at the AVD there was in the real world no demand for Mexford House (because all the demand had been absorbed in the other comparable properties) was not because of any intrinsic lack of merit (or obsolescence) in Mexford House as compared with these other properties but because Mexford House could be considered as “unlucky” not to have occupants in beneficial occupation when comparable office premises did have occupants in beneficial occupation.”

21. On this basis, Mr Hewitt’s final assessment of the rateable value of Mexford House was £370,000: see the UT Decision at paragraph 30. By the end of the first day, Mr Hewitt had completed his evidence, subject only to any questions which the Tribunal might put to him and to his re-examination (if any).

22. On the morning of the second day, however, matters took an unexpected turn. The parties informed the Upper Tribunal that, in the light of Mr Hewitt’s evidence the previous day, the parties were now “of the view that the issue between them could be decided as a matter of law upon an agreed basis of fact” (paragraph 31 of the UT Decision). The Tribunal then indicated that they would wish this agreed basis to be put in writing, and the parties were given time to do this, but were unable to finalise the wording during the rest of the morning. The Tribunal therefore heard legal argument “based upon what was considered likely to be the eventually agreed basis” (ibid), but directed that unless a formally agreed basis were lodged by noon on 3rd May 2016, the matter would have to be restored for further argument and evidence the following day.

23. In the event, the parties were able to reach agreement and on the morning of 3rd May 2016 they lodged a Joint Position Paper signed by both counsel which read as follows:

“1. The parties are content that the issue can be decided as a point of law.

2. The Respondent [i.e. Telereal Trillium] contends that the correct approach requires the valuer to consider whether, had the subject hereditament been on the market at the AVD (1 April 2008), anybody would have been prepared to occupy the property and pay a positive price.

3. The parties agree that had the subject hereditament been on the market at the AVD (1 April 2008), nobody in the real world would have been prepared to occupy the property and pay a positive price. Thus, if the correct approach under the rating hypothesis is as formulated in paragraph 2 above, the appeal should be dismissed and the decision of the [VTE] confirmed.

4. The [Valuation Officer] accepts that there was nobody in the real world who would be prepared to pay or bid a positive price for Mexford House at 1 April 2008.

5. If, however, the correct approach is, as the [Valuation Officer] contends, that (notwithstanding the absence of anybody who would be prepared to pay or bid a positive price for Mexford House at 1 April 2008), the rating hypothesis:

(a) requires the existence of a hypothetical tenant to be assumed and;

(b) requires the rateable value to be assessed by reference to the “general demand” as evidenced by the occupation of other office properties with similar characteristics,

then the parties agree that the appeal should be allowed and the [rateable value] determined at £370,000.

6. The Respondent accepts the proposition at 5(a) but does not accept the proposition at 5(b).

7. If the [Valuation Officer] is right, [his rateable value] of £370k is confirmed.

8. If the Respondent is right, the Respondent’s [rateable value] of £1 is confirmed.”

Footnotes to paragraphs 2 and 3 of the Joint Position Paper also recorded the parties’ agreement that the factors in paragraph 2(7) of Schedule 6 to the 1988 Act were to be taken as they were at the material date, i.e. 1st April 2010.

24. In the light of the Joint Position Paper the Tribunal decided to proceed in accordance with the parties’ invitation. The Tribunal pointed out that they would then be unable to resolve any dispute of fact, but the parties were content with this, and considered that the question of law which they had identified could properly be resolved on the basis of the facts which were now agreed.

25. Although the Tribunal were content to proceed in this way, they evidently had some misgivings about doing so. As they recorded in paragraph 34 of the UT Decision, there were certain points which they had raised and upon which (in the absence of agreement) they would have expected to be addressed:

“(a) We expressed interest in hearing more detailed evidence (i.e. more details than as revealed in Mr Baldwin’s reports) as to what steps were taken when and by whom to let Mexford House upon what terms. We thought it of potential interest to investigate the extent to which the property had been exposed to the market.

(b) In particular, we expressed an interest in hearing evidence as to whether Mexford House could have been let at a rent which was very much lower than the £59 per square metre contended for by Mr Hewitt but which was more that nil. We asked whether we would be addressed upon the question of whether the DWP or HMRC might have reversed their decision to remove from Mexford House (so as to consolidate their operations at other office buildings in the public sector) and might instead have chosen to consolidate at Mexford House itself if Mexford House had been made available on the hypothetical statutory terms at such a very much lower rent.”

26. The answer to both these points, as recorded in paragraph 35 of the UT Decision, was that the Valuation Officer “did not seek to argue that in the real world Mexford House could at the AVD have been let at a positive price”, with the consequence that points (a) and (b) above did not need to be investigated. This answer reinforces the agreement contained in paragraph 3 of the Joint Position Paper, and makes it clear beyond argument that the assumed position now was that as at the AVD nobody in the real world would have been prepared to pay even a discounted price to occupy Mexford House, including the current occupiers.

27. In the remainder of the UT Decision:

(a) the Tribunal set out matters of relevance which they derived from the authorities cited to them, at paragraphs 38 to 65;

(b) recorded the submissions of counsel on each side, at paragraphs 66 to 94; and

(c) in a section headed “Discussion”, running from paragraphs 95 to 108, gave their reasons for allowing the Valuation Officer’s appeal.

28. The Tribunal’s reasoning is too long to quote in full, but I agree with Mr Glover (in paragraph 34 of his skeleton argument) that the following propositions may be derived from it;

(a) the hypothetical parties will agree terms for the lease of the hereditament;

(b) the question is whether occupation of the hereditament would be of value;

(c) if somebody wanted to occupy the hereditament it is capable of use as offices;

(d) a nominal rateable value is only permissible where either (i) the hereditament is incapable of use, or (ii) “where the responsibilities of a tenancy are so great as to result in the occupation being burdensome rather than beneficial in the commercial sense” (paragraph 99 of the UT Decision);

(e) if demand were not already met elsewhere, it would be met at Mexford House;

(f) Telereal Trillium “attributes to the hypothetical tenant” the characteristic of “not wanting the tenancy at all” (paragraph 104);

(g) it is only permissible to attribute such a characteristic to the hypothetical tenant “where the hereditament is intrinsically valueless (struck with sterility) or where the responsibilities are such that no beneficial occupation is possible in a commercial sense” (ibid);

(h) occupation of Mexford House on the hypothetical tenancy would be of value to the occupier;

(i) once it is decided that the occupation would be of value, it is impermissible as a matter of law to determine a nominal rateable value; and

(j) it is therefore necessary to determine a rateable value which represents the value of the occupation, even though no demand for such occupation exists in the real world.

29. In granting permission to appeal to this court on 3rd August 2016, the Upper Tribunal helpfully identified the central issue of principle raised by the UT Decision in the following terms:

“The appeal raises an issue of principle which is likely to recur in connection with substantial vacant buildings with significant rateable values. Where the evidence shows that there is no demand to occupy a hereditament which is capable of occupation, does the rating hypothesis require the valuer to assume demand that does not in reality exist?”

The grounds of appeal

30. The appellant’s grounds of appeal to this court are commendably clear and succinct. They are as follows:

(1) It being accepted that there was no demand to occupy the hereditament on the statutory terms and conditions at a positive rent, the Tribunal was wrong to conclude that the rating hypothesis requires the valuer to assume demand that did not in reality exist.

(2) In the circumstances as found, the rating hypothesis requires that the valuer does not assume demand that in reality did not exist. The Upper Tribunal erred in concluding otherwise.

(3) In the circumstances as found, the Tribunal should have concluded that the rateable value of the appeal hereditament was £1.

The rating hypothesis: relevant principles

31. I can now return to examine in more detail the general principles which must be followed when applying the rating hypothesis contained in paragraph 2 of Schedule 6 to the 1988 Act.

32. The rent which “might reasonably be expected” under the assumed yearly tenancy depends, as one would expect, on the interplay of supply and demand in the market. As Scott LJ put it, in an oft-cited passage, in Robinson Brothers (Brewers) Ltd v Houghton & Chester-le-Street Assessment Committee [1937] KB 445 at 470:

“The rent to be ascertained is the figure at which the hypothetical landlord and tenant would, in the opinion of the valuer or the tribunal, come to terms as a result of bargaining for that hereditament, in the light of competition or its absence in both demand and supply, as a result of “the higgling of the market.” I call this the true rent because it corresponds to real value.”

Scott LJ added (ibid):

“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 … 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.”

33. Although the yearly letting is hypothetical, the open market in which it is assumed to take place is real. This appears most clearly from the decision of this court in Inland Revenue Commissioners v Gray [1994] STC 360, where the issue concerned the valuation of a deceased person’s estate for the purposes of inheritance tax. By virtue of section 38 of the Inheritance Tax Act 1975, “the value at any time of any property shall for the purposes of capital transfer tax be the price which the property might reasonably be expected to fetch if sold in the open market at that time…”. The parties before us were in agreement, as they had been below, that the open market which has to be assumed under section 38 is materially identical to the open market posited by the rating hypothesis. The leading judgment was delivered by Hoffmann LJ, with whom Waite and Neill LJJ agreed.

34. After pointing out at 371 that certain things “are necessarily entailed by the statutory hypothesis”, for example that the property “must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale”, and that “the hypothesis must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before putting it on the market”, Hoffmann LJ continued as follows, at 372a:

“In all other respects, the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper enquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually play no part in the calculation. The inquiry will often focus on what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others, but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened. ”

35. It can be seen, therefore, that the hypothetical purchaser, or in the present context the hypothetical lessee, “embodies whatever was actually the demand for that property at the relevant time”, and that the valuation is a “retrospective exercise in probabilities, wholly derived from the real world.”

36. Hoare v National Trust [1998] RA 391 was a rating case in which this court, overturning the decision of the Lands Tribunal, ascribed only a nominal rateable value to two historic houses (Petworth House and Castle Drogo) owned by the National Trust. The Lands Tribunal had found that, in the hypothetical market, there would be only one hypothetical bidder, namely the Trust itself, and that despite the Trust’s established policy of only taking on properties with a substantial endowment, it would have paid a substantial rent for the properties to reflect their great historical and cultural value. The notional rent was calculated as 3% of the gross receipts of each property. In allowing the Trust’s appeal, this court emphasised the need to depart from reality no further than the statutory hypothesis requires. Peter Gibson LJ called this (at 415) “the principle of reality”, and pointed out that where there is only one potential bidder for the property in question, “the hypothetical lessor is in a weaker bargaining position”. Peter Gibson LJ did not need to consider the more extreme position where, as in the present case, there was no potential bidder for the hypothetical lease; but the logic of the reality principle would appear to dictate that, in such circumstances, no hypothetical lease at a positive rent could have been concluded.

37. To similar effect, Schiemann LJ said at 408:

“The statutory hypothesis is only a mechanism for enabling one to arrive at a value for a particular hereditament for rating purposes. It does not entitle the valuer to depart from the real world further than the hypothesis compels.”

After referring to the matters which the Lands Tribunal had taken into account, Schiemann LJ then said at 409 that, had the Tribunal taken the characteristics of the hypothetical landlord into account, it would have found:

“no reason to suppose that the hypothetical landlord would have been in a position where he would have been able to drive the Trust to accept rental as well as repairing responsibilities. One must bear in mind that the hypothetical landlord in the present cases would be faced with a situation in which, on the Tribunal’s findings, there are no other bidders for the tenancy. All this points to a nominal hypothetical rent.”

Again, I would observe that the same conclusion would seem to follow, a fortiori, if there were no potential bidder for the tenancy in the real world.

38. In another case involving a sole potential tenant (Plymouth Argyle Football Club) for a football ground, Tomlinson v Plymouth Argyle Football Co Ltd (1960) 31 DRA 788, Pearce LJ warned at 793 that:

“The court must not assume hypothetical tenants for the hereditament if there is in respect of that particular hereditament no reasonable possibility of such tenants existing. In Great Western and Metropolitan Railway Cos. v Hammersmith Assessment Committee Lord Buckmaster said ([1916] 1 AC 23 at 35):

“The phrase “hypothetical tenant”, which has for a long time described the character of the tenancy, must not be allowed to introduce the idea of creating hypothetical competitors or hypothetical circumstances by which to fix the rent.”

In this case it is clear that there could be no hypothetical tenant other than the ratepayers for a league football ground with its large grandstand accommodation and other equipment needing some thousands of pounds to be spent annually in maintenance. There was no evidence that some tenant might be found for some alternative use and without such evidence it is wrong to assume it.”

39. Another important principle of the law of rating is that “each hereditament should be independently assessed”: see Ladies Hosiery and Underwear Ltd v West Middlesex Assessment Committee [1932] 2 KB 679 at 686, per Scrutton LJ. Later in his judgment, Scrutton LJ said at 688:

“The appellants here, however, say that besides the principle of independent valuation, there is another vital principle: that as between different classes of hereditaments, and as between different hereditaments in the same class, the valuation should be fair and equal. I agree, but in my view there is a third important qualification, that the assessing authority should not sacrifice correctness to ensure uniformity, but, if possible, obtain uniformity by correcting inaccuracies rather than by making an inaccurate assessment in order to secure uniform error.”

40. With this principle in mind, the Upper Tribunal in the present case rightly accepted at (paragraph 50 of the UT Decision) that, if the correct rateable value of Mexford House having regard to the statutory formula were only £1:

“it would be impermissible to conclude that the value shown for Mexford House in the valuation list should be an incorrect larger figure for the purpose of securing uniformity with other office buildings shown in the list.”


41. In the light of these well-established principles, I consider that there can be no real doubt about the answer in the present case. On the agreed factual basis that nobody in the real world would have been prepared to occupy Mexford House at the AVD and to pay a positive price for doing so, it is in my judgment impossible to say that there was any actual demand in the market for such occupation. In the absence of any actual demand, there is no principle of law which requires such demand to be assumed. The only relevant assumption inherent in the rating hypothesis is that an agreement will be reached between the notional lessor and the notional lessee, but this requirement is satisfied by assuming a letting at a nominal rent. It would be contrary to the reality principle, and to the repeated emphasis in the authorities on the need to examine the actual balance between supply and demand in the real market, if the requirement to assume a concluded letting were elevated into a requirement to assume such a letting at a substantial rent which nobody in the real world would ever have been willing to pay. The existence of any such supposed principle of law would also be impossible to reconcile with the cases which show that, in an appropriate factual context, application of the rating hypothesis to premises which are capable of beneficial occupation can nevertheless yield a rateable value of nil or a nominal amount.

42. The factor which makes the present case unusual is the existence of broadly comparable office properties, such as Hesketh House in Fleetwood, which were occupied by public sector tenants at rents comparable to that for which Mr Hewitt contended. The evidence was, however, that there was no surplus public sector demand which would have enabled Mexford House to be re-let on the assumption that it were vacant. In other words, the relevant market was saturated, and there was simply no evidence of any demand at all for Mexford House. Hence the stark terms of the agreement between the parties recorded in paragraph 3 of the Joint Position Paper, and the valuation officer’s acceptance (in paragraph 4) “that there was nobody in the real world who would be prepared to pay or bid a positive price for Mexford House at 1 April 2008.”

43. In my judgment, all the attempts which Ms McCarthy skilfully made, in her written and oral submissions, to conjure an assumed demand for Mexford House out of the rating hypothesis and the existence of a “general demand” for other comparable office properties come up against the same two fatal objections. First, they seek to turn into a question of law what is in truth a question of fact about the particular state of the relevant market in North West Lancashire in April 2008. Secondly, they gloss over the critical point on the facts, which is the saturation of the relevant market and the absence of any potential tenants in the real world for Mexford House. In a sense, it may seem anomalous that Telereal Trillium should obtain the benefit of a nominal rateable value for Mexford House at a time when other comparable properties in the neighbourhood are still occupied by tenants paying substantial rents; but this is again no more than a consequence of the particular market conditions on the ground at the relevant time. To conclude otherwise, in the interests of uniformity, would be to fall into the very error against which Scrutton LJ warned in the Ladies Hosiery case. Moreover, I see no reason to suppose that the result would have been any different in principle if it were one of the other comparable properties, rather than Mexford House, which had been vacated by its tenants (or was about to be vacated) on the AVD. In a saturated market, there is still a proper basis for a substantial rateable value while the existing tenant remains in occupation and pays a substantial rent for the hereditament; but that situation changes once the property becomes vacant, because there is no longer a potential tenant available to take it on the statutory terms required by the rating hypothesis.

44. I would also emphasise that every case will turn on its own facts, and other cases are probably unlikely to replicate the unusual feature of this case whereby the Upper Tribunal was invited (and agreed) to proceed on the basis of the assumed facts set out in the Joint Position Paper. In saying this, I intend no criticism of the parties in the present case, or of the Upper Tribunal who were understandably willing to adopt a way forward placed before them by experienced counsel. Nevertheless, tribunals need to bear in mind that they owe a duty to the general body of ratepayers, as well as to the parties, to reach the correct conclusion when they hear a rating appeal. They should, therefore, be cautious before agreeing to a procedure which might appear to encroach on their fact-finding role, or to foreclose avenues of enquiry which they wish to pursue.

45. In the present case, the Upper Tribunal were perhaps less inhibited than they might otherwise have been in agreeing to proceed as the parties suggested, because they still felt able to reach the conclusion that the valuation officer’s appeal from the decision of the VTE should be allowed. As I have sought to explain, however, this conclusion was not in law open to them on the assumed factual basis set out in the Joint Position Paper. The main respects in which the Upper Tribunal went wrong in their analysis are to my mind convincingly set out in Mr Glover’s skeleton argument, and may be summarised as follows.

46. First, the Upper Tribunal were wrongly influenced by passages in the speech of Lord Herschell LC in London County Council v The Churchwardens and Overseers of the Poor of the Parish of Erith [1893] AC 562 which were directed to the logically prior question of whether the premises were in rateable occupation at all, which is not in issue in the present case, rather than by the guidance given by Lord Herschell about the rating hypothesis itself at 588. In the Erith case, the House of Lords heard together three appeals from quarter sessions. The subject matter of the appeals concerned various outfall works, pumping stations and sewers occupied by the LCC, which was the ratepayer in each appeal. It was found that, while used as part of the metropolitan sewage system, the premises in question were incapable of yielding a profit and could not be worked except at a loss, but had the premises been in the possession of a private owner, the LCC would have been prepared to rent them for the amounts assessed by the order of quarter sessions. Before the House, two principal questions arose: first, whether the pumping stations and works were rateable at all (in modern terms, whether they constituted a rateable hereditament); and secondly, if so, whether, in valuing those hereditaments, the LCC was to be considered as a possible hypothetical tenant. If the answer to both questions was affirmative, there was no challenge to the rateable values ordered by the quarter sessions.

47. In answering the first of those questions, the House decided that occupation could be beneficial even if it were not profitable. There was a real benefit to the LCC in being able to pump and transport the sewage. It was in this context that Lord Herschell stated that the true test is whether the occupation is of value, and contrasted the position where the land was “struck with sterility” into whosesoever hands it came, with the result that its occupation could be of no value to anyone. The Upper Tribunal wrongly considered this principle to be relevant to the question which they had to address, whereas it goes only to the undisputed issue of rateability. (There is also the further point that, since the Local Government Act 1966, unoccupied property has been rateable, so the relevant test of rateability is no longer whether the property is in beneficial occupation, but rather whether it is capable of beneficial occupation. In the present case, it was agreed that Mexford Hose was capable of beneficial use as offices).

48. Secondly, although the Upper Tribunal quoted at length from the judgment of Hoffmann LJ in IRC v Gray, their actual reasoning appears to be inconsistent with the concept of the actual open market described by Hoffmann LJ. In paragraphs 100 and 104 of the UT Decision, the Tribunal wrongly treated the requirement to assume a letting under the rating hypothesis as importing a level of demand that, on the agreed facts, simply did not exist. They then wrongly characterised Telereal Trillium’s position as attributing to the hypothetical tenant “the characteristics of not wanting the tenancy at all”, whereas the agreed position was not that nobody would have been willing to occupy Mexford House at all, but rather that nobody would have been prepared to occupy it on the statutory terms and also pay a positive price for the privilege of doing so.

49. Thirdly, at paragraph 102, the Upper Tribunal considered that the public sector occupiers of the comparable premises, if not already accommodated in them, would have been able to enjoy beneficial occupation of Mexford House, and to find such occupation “of substantial value”. That may have been so, but the actual position was that the other public sector tenants were already accommodated elsewhere, and they would not have been available as potential tenants for Mexford House on the actual market which existed at the relevant time. Furthermore, the effect of paragraphs 2(5) and (7) of Schedule 6 to the 1988 Act is that the valuer must assume that all the comparable properties were occupied and used on the material date by their existing tenants.

50. Fourthly, the Upper Tribunal appear to have taken the view that a nominal rateable value is only permissible in law where the hereditament is either intrinsically valueless (“struck with sterility”) or where the tenant’s responsibilities are so onerous that no beneficial occupation of the property is possible in a commercial sense. The Tribunal derived these two categories of case from Lord Herschell’s speech in Erith, and from the decision of this court in Hoare v National Trust; but I can find no warrant for treating these catagories as exhaustive, or as precluding the same conclusion in a case where the evidence drawn from the market is that there was no tenant who would pay a positive rent for the relevant hereditament.

51. In conclusion, I would briefly mention one ingenious variation on her argument which Ms McCarthy put forward in her oral submissions. Starting from the position that the comparable properties must all be taken to have been occupied as they in fact were on the material date, she submitted that the notional tenant required by the rating hypothesis would then have had no alternative but to take a lease of Mexford House, there being no suitable alternative property vacant in the area. Accordingly, she said, the notional landlord would have been able to exact a rent from the notional tenant similar to that in fact paid by the tenants of the comparable properties. The fallacy in this submission, in my judgment, is that once again it presses the rating hypothesis further than the reality principle permits. The notional tenant embodies demand in the actual market. If there is no such demand, because the market is already saturated, the rating hypothesis cannot itself be used to manufacture a non-existent demand from thin air.


52. For all these reasons, I would allow the appeal and restore the conclusion of the VTE that the rateable value of Mexford House on the AVD was £1.

The Senior President of Tribunals:

53. I agree.

Davis LJ:

54. I also agree.


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