In this section
1.1 This practice note has been amended following the Court of Appeal’s decision in Newbigin (VO) v. Monk  EWCA Civ 78 and replaces the previous practice note in its entirety. For the avoidance of doubt, the original appendix to the practice note, an extract from Hansard containing the text of the speech made by Baroness Farrington on 5 May 1999, is not retained. The content of this practice note has been discussed with representatives of the RICS, the RSA and the IRRV.
1.2 It has been prepared based on the Court of Appeal decision and does not reflect the outcome of the current appeal by Messrs Monk to the Supreme Court. Given the appeal to the Supreme Courtoutstanding cases may not be capable of being settled on the basis of this current guidance.
2.1 The Local Government Finance Act 1988 (“the 1988 Act”) requires non-domestic property in England and Wales to be valued for rating purposes on a number of assumptions, including 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”. This practice note addresses how this assumption operates, in the light of Newbigin (VO) v Monk.
3.1 The 1988 Act as amended by the Rating (Valuation) Act 1999 (“the 1999 Act”) sets out, in Schedule 6, how properties are to be valued for rating.
3.2 Following the 1999 Act, paragraph 2(1) of Schedule 6 to the 1988Act reads:
"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:
- the first assumption is that the tenancy begins on the day by reference to which the determination is to be made;
- 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;
- 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."
3.3 In determining rateable value the legislation requires a valuation at the antecedent valuation date (‘AVD’) on the statutory basis but taking into account particular physical circumstances as they are on the compilation day or, where the RV is being determined with a view to making an alteration to a list, the material day. The physical circumstances are set out in sub-paragraph 2(7) and are to be taken to be as they are assumed to be on the compilation or material day as appropriate (see Rating Manual Volume 2 Section 3).
3.4 Sub-paragraph 2(8A) makes it clear that the state of the hereditament at any time relevant for the purposes of a list shall be assumed to be the assumed state of repair under subparagraph 2(1). The first assumption simply explains the hypothetical tenancy begins on the AVD. The effect of the second assumption is to override the actual situation at the compilation date or material day and replace it with an assumption of reasonable repair.
4.1 As the lead judgment of Lewison LJ in Monk indicates, to operate the statutory assumption, the following questions arise:
- Is the hereditament in a state of reasonable repair?
- If not, can the works which are required to put the property into a state of reasonable repair properly be described as “repairs”? (‘the repair question’), and
- Would a reasonable landlord consider the repairs to be economic? (‘the economic question’)
4.2 If the answer to question 1 is that the hereditament is already in a state of reasonable repair, then there is nothing to be assumed, and the hereditament can be valued on its actual state. If it is not in such a state, however, then it must be assumed to be in such a state providing the works which would be required to put the property into reasonable repair can properly be described as “repairs”, and providing such works are not uneconomic.
4.3 At the outset, four points are to be noted.
- the assumption relates to the whole hereditament and not its component parts. So the complete installation of an electrical system may still be repair even if that system had been completely removed.
- inherent to the notion of repair is disrepair, i.e. deterioration from some previous physical condition.
- it is not a question of looking at the intentions of the actual owner or evidence of whether there is a scheme of alteration. What needs to be considered is whether it would be economically reasonable to restore the hereditament to a former state. A hereditament which is incapable of beneficial occupation in its actual state still falls to be valued according to the statutory approach. If the works required to enable occupation fall within the definition of “repair” and it would be economic to repair it to a state of reasonable repair, it must be valued in such a state.
a). State of reasonable repair
4.4 The question of whether the hereditament is in a state of reasonable repair will fall to be answered in light of the state of the hereditament on the compilation or material day as appropriate (see paragraphs 4.11-4.20).
4.5 The Valuation Officer must begin by asking whether the hereditament in its actual state is in a condition such as to make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it: Proudfoot v Hart (1890) 25 QBD 42, Monk para 24. The starting point for that question is the description of the hereditament in the list: where, for example, the hereditament was described in the list as “offices and premises”, the inquiry would be whether it was in reasonable repair as offices and premises.
b). The repair question
4.6 If the hereditament is not in a state of reasonable repair, then the next question is whether the works which are required to put the property into a state of reasonable repair can properly be described as “repairs”.
4.7 Disrepair being the converse of repair, a state of disrepair connotes a deterioration from some previous condition. Therefore to determine what works are required to put the property into a state of repair, it is necessary to compare the hereditament in its actual state with its previous state (i.e. when it was in a state of reasonable repair): Monk paragraph 26.
4.8 That is not to say, however, that the works to put it into a state of repair need necessarily be such as to put the hereditament into exactly the same state as it historically had been in. The concept of ‘repair’ is broad enough to allow some alterations which may result in differences to the historic state. For example, in Monk, the Court of Appeal applied the test identified by Buckley LJ in Lurcott v Wakely, namely:
"Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion."
4.9 It should be noted that this test – whether the alterations went to the whole or substantially the whole of the structure or only to a subsidiary part – is not the only test of repair. In Monk, the Court of Appeal noted that in McDougall v Easington District Council (1989) 58 P & CR 201, three different tests emerged from the cases which could be applied separately or concurrently as the nature of the case requires:
"(i) Whether the alterations went to the whole or substantially the whole of the structure or only to a subsidiary part;
(ii) Whether the effect of the alterations was to produce a building of a wholly different character than that which had been let;
(iii) What was the cost of the works in relation to the previous value of the building, and what was their effect on the value and lifespan of the building."
4.10 Therefore works may fall within the repairing assumption even if it would mean that an element is replaced rather than repaired (for example, it may be more economic to replace a defective window with a new window) and/or where the works involve a degree of improvement (for example, if repairs to lighting included such improvement as was necessary to comply with Building Regulations or other legislation affecting building works).
c). The economic question
4.11 Only if the repairs would be considered economic can one assume the state of reasonable repair that they would produce. The cost of repairs and the hypothetical landlord’s attitude to undertaking repairs is to be considered as at the AVD. The question of what is economic for a landlord will vary from situation to situation. What is likely to be economic for a building in one town may not be economic for an identical building in another town where rents are lower. It is fundamentally an economic test based on the hypothetical landlord’s likely assessment of what will be the economically reasonable option to pursue. In essence it is a comparison of likely future rental income flow against the cost of repairs.
4.12 The principle of rebus sic stantibus means the hypothetical landlord does not have the option of redeveloping the hereditament. What may be the real world best option of total redevelopment of the site is not open to the hypothetical landlord: the choice is between:
- repairing (if it is an economic proposition at the AVD),
- doing some repair, or
- doing no work. The question is not whether the repair work would be done but whether it could be done economically.
4.13 In the case of Thomas and Davies v. Denly (VO)  the Upper Tribunal was content to accept it was economically reasonable for repairs to be undertaken where the present value of the hereditament assuming repairs were undertaken significantly exceeded the value in disrepair.
4.14 Cost of repairs and the hypothetical landlord’s attitude to undertaking repairs is to be considered as at the AVD. The physical state of the property is imagined brought back to the AVD and consideration given to what would have been economically reasonable then.
4.15 Where repair is considered to be uneconomic the hereditament should be valued rebus sic stantibus in disrepair.
4.16 The genesis of the economic reasonableness test lies in the case of Saunders v. Maltby where Lord Denning said that the hypothetical landlord would not do all repairs but only those that were economically reasonable. This case and a number of old domestic rating cases examined the question in the context of valuation to the former Gross Value definition (which assumed a landlord’s repairing liability) but more recently a VT case (reported in Rating Appeals) Princes St Ltd (Ipswich) v. Bond (VO) gave some useful guidance. In that case the VT took the view that any reasonable landlord would look at the local property market, consider the location of the premises, the likelihood of finding a tenant for the actual property, the likely length of any lease, whether further tenants were likely and from these answers determine over what period the landlord would be prepared to spread repair costs. For a prime property in a buoyant market it could foresee a long period of occupation and, as a consequence, amortisation could be expected to be over a similar period. For a very poor property, where similar properties were vacant, only a year might be expected.
4.17 Evidence was given that the likely letting was for a 10 year lease with a five year break clause. The tribunal considered, having regard to the state of the market at the antecedent valuation date, a likely landlord would amortise the cost of repairs over a five year period to the first break clause. Amortising the repair cost figure gave £55,000pa, after making an allowance for contingencies. This was the same as the total rateable value. On this basis there was nil profit to the landlord in undertaking the repairs for the first five years. The valuation tribunal noted, however, that there was no evidence to suggest the property would definitely not let after five years. A landlord who by his very nature is in the business of taking risks to make a profit would take this risk. Therefore the costs could not be said in the mind of the hypothetical landlord to be uneconomic. The rateable values were confirmed.
4.18 The approach was broadly followed in Thomas and Davies v Denly (VO) in the Upper Tribunal. In this case the Upper Tribunal examined whether works of repair to a car showroom would be economic. The VO adopted a similar approach to the Ipswich case preparing three calculations showing the present value of the landlord’s interest assuming no repair works were carried out and with varying levels of rent reduction to reflect the lack of repair. These were compared to the likely rent if repairs were done but deducting from the capitalised rent the likely cost of repairs. Comparing the valuations the Tribunal considered the hypothetical landlord would have regarded the repairs as economic. The repair works represented 5.65 YP on the rent.
4.19 The situation in Thomas and Davies was perhaps slightly unusual in the premises still having a rental value, albeit for a few years only, even if no repairs were done. Nonetheless the effective comparison is the same:
Rent assuming no repairs are done
X YP % for y years
Rent assuming repairs are done
X YP % for z years
LESS cost of repairs
4.20 It may be economically reasonable to undertake repair works to some part of the hereditament but not to all parts. For example it may be economically reasonable to repair the roof and the ground floor of a shop but not its dilapidated first floor and damp basement. However, the subject of the repair test is the whole hereditament and not its various parts. It is not correct to apply the test of what is economically reasonable separately to each individual component or part of the hereditament e.g. a particular window, a floor or an air conditioning system without considering the whole. The question is whether, in the context of the whole hereditament, it is economically reasonable to envisage the repair work being undertaken. In the example, if it was judged not economically reasonable to repair the first floor and the basement then these should be valued as they are, whereas as the repairs to the ground floor and roof are judged economically reasonable these should be assumed to be repaired. As the landlord would not do all of the repairs, the landlord would, instead, accept a lower rent for the premises consistent with only having repaired part of the hereditament (see Marshall v. Ebdon (VO) 1979 RA 238).
4.21 Reasonable repair may mean that an element is replaced rather than repaired as it may not be economic to repair certain elements e.g. it is often more economic to replace a defective window with a new window.
4.22 Some repairs may well include an element of improvement and any works would be expected to comply with Building Regulations and any other construction based legislation in force at the time of the AVD.
5.1 In the light of the foregoing discussion, some observations are made about particular scenarios, stressing however that the application of the principles identified above will have to be applied to matters of fact in any particular case.
The treatment of buildings damaged by fire, bomb, storm, flood, etc.
5.2 There is no exceptional treatment of buildings damaged by fire, bomb, storm or flood. The statutory assumption applies irrespective of the reasons why a hereditament is in a particular state, and the steps identified above are to be followed in the normal way.
Hereditaments which appear potentially to be in the process of change to new hereditaments or a new use
5.3 Because the valuation approach will vary depending on whether the works are internal or external to the hereditament, it is essential on receipt of a proposal that the VO correctly identifies the unit of assessment.
5.4 If the VO considers that the hereditament identified in the proposal no longer exists, then appropriate steps should be taken to alter the rating list as soon as possible. This would be by deletion where there has been complete demolition or dividing or merging assessments in other cases.
5.5 Special care needs to be taken in respect of vacant multi-storey office blocks and other buildings which were previously let in parts and assessed as a number of individual hereditaments. The usual position is that the existing hereditaments remain in existence until there is some overt act demonstrating single occupation or new hereditaments have come into existence perhaps as a result of works.
5.6 Likewise, for hereditaments which appear to be in a process of being converted from one use to another it is impermissible to consider what they might become: all that is required is to examine the property as it is on the material day, to compare it in its actual state with its former state, to consider whether such works as to return it to a state of reasonable repair could properly be described as repairs, and then to determine whether the hypothetical landlord would consider the cost of such repairs economic.
Hereditaments where works are under way
5.7 Works may be underway in the hereditament at the material day. However, the approach remains the same whether repair works are actually underway or not, even though there may sometimes be difficult questions of fact to determine.
5.8 It is important to recognise that repairing to a state of reasonable repair does not require the assumed state to be identical to some historic state: some improvement, for example, is possible within the concept of ‘repair’. Likewise, some changes to a property may not be relevant to valuation as a hereditament at all, such as some non-structural changes, or the insertion or removal of elements of plant and machinery to be excluded from the valuation of the hereditament under the Valuation for Rating (Plant and Machinery) (England) Regulations 2000.
5.9 Works underway may be simply repair works or other works. If the works are repair works then they are deemed to have already been done – providing they are economically reasonable - on the same basis as if they were repairs needing to be undertaken and not yet commenced. (Civil Aviation Authority v. Langford (VO) and Camden BC  RA 369). It follows that no allowance to reflect the ongoing repair works should be made if it is economically reasonable for them to be done by the hypothetical landlord as at the AVD.
5.10 Other works may involve removal, demolition, renewal and all sorts of change. The test is simply whether it would be economically reasonable to repair the hereditament. Disrepair connotes a deterioration from some previous physical condition rendering the premises worse than at some earlier time. It does not matter what has caused that deterioration.
5.11 Works may be underway to convert the existing hereditament to something different. Again the test is whether it would be economically reasonable to repair the hereditament back to what it was.
5.12 The only kind of work that can be assumed to have been carried out is work that can properly be described as work of repair. Work which is not repair cannot be envisaged being undertaken unless minor and the sort of work a tenant might do at the start of a tenancy. Work to ‘unpick’ new work of construction cannot be envisaged.
5.13 Where new work of construction has been undertaken then, unless minor, it cannot be assumed to be undone as this would offend the rebus sic stantibus principle. What needs to be considered is whether it is economically possible to repair the hereditament notwithstanding the new work. It may be that new walls would not affect the value of the hereditament but equally it may be that new construction might seriously affect the rental value of the existing hereditament possibly making some areas unusable, even assuming reasonable economic repair, for their previous use. In this case it may well be, as a consequence, that repair work will not be economic and a nil or reduced valuation will be appropriate.
5.14 Structural damage, whether it was caused accidently or deliberately, is usually repairable and would be classed as repair (though it may not be economically reasonable to undertake). The opening of a wall to allow an extension to be built would be damage but damage probably capable of repair. However, once new work is undertaken to the wall then it will not be repair to undo the work and it must be envisaged as remaining, rebus sic stantibus.
5,15 The actual intentions of the owner in undertaking works are not relevant. What has to be considered is whether any damage can be economically repaired and what is the effect on value of any new work which is not repair.
5.16 The economic test applies to the whole hereditament but normally the test of whether something is or is not repair is likely to apply individually to each separate building within a hereditament. Usually a building will only be demolished if it no longer has any economic value. Even so, it would not be repair to reinstate the building because the work would go to the whole or substantially the whole of the building. The exception will be where the building is so essential in use to the whole hereditament or other parts of the hereditament that it would be reasonable to regard its reinstatement as repair in the context of the whole hereditament.
5.17 If the works are found not to be "repairs", then the property must be considered rebus sic stantibus. The principle of rebus sic stantibus restricts the extent to which it can be assumed that a hypothetical landlord or tenant can alter the property.
5.18 The decision in Scottish & Newcastle (Retail) Ltd v Williams (VO)  RA 119 confirmed minor physical changes can be taken into account without offending the principle of rebus sic stantibus.
5.19 Rebus therefore imposes a tight restriction on the changes that can be envisaged to the hereditament. Significant changes to the structure would offend the rebus principle.
Should a stripped out building be considered in the same way as an incomplete building?
5.20 An apparent anomaly could arise where two properties are in a similar condition, one having been stripped of essential services and one which has been substantially built but which remains incomplete. However, the stripped out building remains a hereditament to be valued on conventional principles. By contrast, as confirmed in Porter (VO) v. Trustees of Gladman SIPPS  RA 337, there is no scope for including in a rating list a new building that has never been in repair even if it is very nearly ready for occupation unless the completion notice procedure has been followed.
6.1 Different considerations apply in respect to the state of repair of areas external to the hereditament. Works external to the hereditament are not covered by the provisions of the 1999 Act and no assumptions in respect of these can therefore be imported by virtue of the provisions of this Act. The condition of areas external to the hereditament should be considered as they actually are at the material day.
6.2 However, Woodfall’s ‘Landlord and Tenant’ states that "where the landlord retains in his possession and control something ancillary to the premises demised, such as a roof or staircase, the maintenance of which in proper repair is necessary for the protection of the demised premises or the safe enjoyment of them by the tenant, the landlord is under an obligation to take reasonable care that the premises retained in his occupation are not in such a condition as to cause damage to the tenant or the premises demised".
6.3 It follows that there is an implied obligation on the landlord to ensure that the property demised is not adversely affected by other parts of the building retained within the landlord's control. This approach reflects the reality of the real world and would place a repairing obligation on the landlord in respect of certain common parts which are required for the safe enjoyment of the hereditament including maintaining reasonable access to the property even though it may not be in the landlord’s control, e.g. stairs, lifts, access, lighting on stairs, etc.
6.4 There will be many services in multi-occupied buildings which are provided by the actual landlord which are essential to the satisfactory occupation of the hereditament. It is reasonable to assume that they will also be available to the hypothetical tenant, for payment of a service charge, to the extent that they exist from time to time. It can be inferred that the hypothetical landlord will need to maintain the supply. As with other physical matters in the locality, they should be taken to be as they are on the material day, but with the real prospect that they will be maintained within the landlord's control. For example, in Murphy (VO) v Courtney plc  RA 1, repair works were required to the air conditioning in both the hereditament and the central plant room. The Lands Tribunal Member accepted that the tenant would expect the works to the central plant to be completed by the landlord as a condition of the grant of the hypothetical tenancy and such costs would not be recoverable as part of the service charge.
6.5 The rating hypothesis makes no assumption about who is the landlord of other hereditaments and so it may be that the landlord of other floors in a building or on an estate development is different from that of the hereditament being considered. Nonetheless it is reasonable to infer there will be mutually binding covenants between the landlords to ensure necessary access and services are maintained to the benefit of all.
6.6 The cost of ongoing maintenance of central plant, including provisions for eventual replacement, are matters which are usually included in service charges. Any such liability may be reflected in a tenant's rental bid.
6.7 Works to other hereditaments or to the common parts of the building containing the hereditament being considered do not fall under the repairing assumption of the hypothetical tenancy. They represent real world physical changes in the locality and should be considered as being as they are at the valuation date. Their likelihood of completion is also something to be taken into account as they are not subject to the rebus sic stantibus rule being in the ‘locality’ rather than the hereditament..
6.8 The situation may be met where an owner is substantially refurbishing and altering an existing building assessed in parts. Each hereditament should be considered individually and the test of what would be economically reasonable applied to the hereditaments individually not collectively. If it is economically reasonable then the subject hereditament will be deemed in repair. However the other floors should be viewed as they actually are at the material day. This may have a detrimental effect on the value of the hereditament being considered in the same way as other external MCCs. The effect may vary over time and require successive amendments to the rating list to reflect a significant change in disability.
7.1 It is always important in rating valuation to establish the effective date for an alteration. Usually this can be found by looking back from the material day to when the valuation would still have been the same had the material day been that earlier day. In some cases the material day and effective date are the same.
7.2 It follows from the foregoing principles that where there has been a conversion in the nature of the hereditament the effective date will not necessarily be the commencement date of the conversion works.
7.3 The valuer needs to consider the physical factors listed in Schedule 6 para 2(7) as they are on the material day but envisaged as at the AVD. If it is considered the hereditament has a nil valuation on those facts, perhaps because repair is not economic either due to the degree of damage or because new work renders the building of no value for its previous mode or category of use (typically as shewn by its existing description in the rating list), then the effective date will need to be determined. This will be the date when the hereditament first reached the state when it was in a sufficiently damaged or poor state to justify the nil valuation.
7.4 Consider, for example, a hereditament that has been converted from a factory to offices. At the material day, it is concluded that the hereditament cannot economically be repaired as a factory, and so the statutory assumption does not operate to put the hereditament in a state of reasonable repair. That being so, the effective date may be earlier than the material day, but it will be necessary to estimate when that point of change (at which point, it was no longer economic to return the hereditament to a state of reasonable repair as a factory) occurred. This will probably not be from the mere start of the works of conversion.