This is the second article in our series on business rates. If you would like to catch up with our first article, it can be found at the following link: Business rates: the 'rating hypothesis'.
In our first article we explained the concept of a 'hereditament' and the statutory assumptions on which business rates valuation is based. The rating hypothesis envisages a hypothetical tenancy that the valuer must have in mind when assessing the rateable value (RV) of a hereditament.
This second article explores valuation further, focussing on the 'rentals method' which is the most common method of valuation. Before we get into the detail of this, a refresher on the relevant statutory principles is below.
When valuing a property for business rates, two different dates matter: the 'antecedent valuation date', which fixes the rental value level, and the 'material day', which fixes the physical circumstances of the property.
Antecedent valuation date
The 'antecedent valuation date' (AVD) is a date two years prior to the commencement of a rating list, when the valuer must estimate what the property's rent would have been under a hypothetical tenancy. So, a valuer must assume that the hypothetical tenancy commenced on the AVD and determine the RV of the hereditament by reference to the market at that time.
The AVD is applied when valuing hereditaments both at the commencement of a new rating list, and for any revaluation during the course of the list.
Material day
The 'material day' is key to the valuation process, because this is the date on which the valuer must assess the physical and use conditions of a hereditament for valuation purposes.
A full list of the physical and use conditions is contained in paragraph 2(7) of Schedule 6 of the Local Government Finance Act 1988, and includes the physical state of the hereditament, the category of occupation, and the locality of the hereditament.
When the rating list is first compiled, the material day is the date the list comes into force. For the 2023 rating list, the material day was 1 April 2023.
However, where the list is altered after it has been compiled (for example, if there is a factual error or a hereditament is being added to or removed from the rating list), the material day depends on the reason for the alteration (in accordance with the Non-Domestic Rating (Material Day for List Alterations) Regulations 1992, as amended).
Valuation methodologies
The selection and operation of valuation methodologies is not a matter of law; it is a question of fact and of valuation judgement to deploy the most appropriate technique to value a hereditament.
The most common valuation method, often the starting point, is to take the rent of the hereditament in circumstances where it is actually let.
Rentals method
Where there is real-world evidence of the letting of the hereditament itself, or of comparable properties, then such real-world rental evidence will provide the basis for calculating the RV of a hereditament.
When using the rentals method, a valuer must consider:
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Fluctuations in the market between the actual rental valuation date and the AVD:
This is where the valuer may need to take into account any increase or decrease in the market between the AVD and the date of the comparable rental evidence. If the rental evidence is at a similar date to the AVD, then that would carry more weight than comparable rental evidence that is from a date long after the AVD.
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Contractual factors that may differ between the hypothetical tenancy and the comparable evidence:
This is where a valuer will need to consider any differences in the contract or lease of comparable evidence and the hypothetical tenancy upon which every RV must be based (that is set out in the statutory scheme). The hypothetical tenancy has specific requirements; for example, the property is assumed to be in a reasonable state of repair, ignoring any tenant improvements, is assumed vacant and ready to be let, and that the tenant would bear the cost of occupation associated with the property (i.e. a full repairing and insuring lease).
The valuer must factor in any differences between the assumed hypothetical tenancy and the lease of the comparable property. For example, incentives agreed between the parties of a comparable transaction, such as a rent-free period, must be factored out.
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Physical differences between the hereditament and the comparable evidence:
Any physical differences will need to be accounted for by the valuer, such as whether the comparable evidence includes parking spaces or loading areas, or if the size and layout of a property differ.
Usually to account for this, valuers will use a price per square metre that can then be applied to calculate the RV of the hereditament.
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Difference in location between the hereditament and the comparable evidence:
The other factor a valuer will need to have in mind is the locations of any comparable property and the hereditament to be valued.
The location of a property may have a substantial impact on its value, and the valuer will also need to consider the type of property in question, because, for example, office space may be more desirable in a city centre, whereas logistics space may be more desirable near a motorway.
Next time
In our next article, we will continue to explore valuation methodologies and discuss the other methods that are available in more detail.