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To give a concrete example, if an office building has been newly constructed or recently refurbished, its owner will typically have installed raised floors and suspended ceilings, basic mechanical and electrical services including lighting and air conditioning, a fire detection system and basic internal finishes. By marketing the building in this condition, the owner will hope to generate interest from the widest range of potential occupiers. Once a letting has been achieved, the new tenant will be free to fit the building out to meet its own requirements. The tenant’s fitting out work will bring the building into a “Category B” condition and is likely to include the installation of kitchens and tea points, partitioning, the re-routing of air-conditioning and power points to accommodate its preferred layout, and the addition of IT infrastructure.
Where the tenant wishes to perform alterations or fit out while taking the lease, the commercial deal can reflect how the cost and benefit of those works are to be shared between parties. If the tenant chooses to alter the premises during the term of the lease, the rent review clause in the lease (if the lease provides for rent review) can direct the disregard from valuation on rent review of the improvements performed by the tenant at its cost, on the terms agreed between the parties. The assessment of rent on a business lease renewal also disregards most improvements funded by the tenant.
Rating does not work in this way. The statutory basis of valuation for rating states that a rateable value is an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year on various assumptions. There is no disregard of tenant’s improvements. This “rating hypothesis” requires the valuer to assume what does not happen in reality, namely that the premises are let by a willing landlord to a willing tenant in fitted out to Category B standard, even though in the real world that may not be the way the deal is done.
The rating hypothesis requires us to imagine that the landlord has fitted out the building to Category B standard in a way that meets the tenant’s needs, to make the hypothetical tenant a willing tenant. And in circumstances where the Category B works would typically have cost a 6 or 7-figure sum, then of course the tenant would pay more for premises already fitted out to his requirements than he would pay for premises on which he was going to have to spend that sum.
The Upper Tribunal has just decided two appeals concerning modern high quality office buildings such as are usually offered to the letting market in a “Category A” condition, in which the only issue was how the Category B uplift was to be valued.
A practical difficulty was the absence of comparable evidence of value for properties let in Category B condition. Comparable evidence should be used where possible. Grade A offices let in Category B condition are generally sub-lettings, or lettings following a business failure where the property is back in the landlord’s hands with the Category B fit-out still in place, and so properties relied upon as comparables have to be treated with caution.
The Tribunal asked if, in the absence of useful comparables, a realistic approach to the assessment of the value of the Category B fitting out work was to look at the cost of that work to the tenant, seen either in the landlord’s contribution for that cost or in the tenant’s actual expenditure.
No comparable market evidence for the value of the Category B uplift in newly fitted Grade A offices was found in the present appeals. Having accepted that, the Tribunal held that the amortised cost to the tenant of doing the Category B fitting out work itself may be the best, or at least very significant, evidence of the annual value to the tenant of the property in Category B condition.
The outcome was that the Upper Tribunal found a valuation reason to support the rating valuations of the two premises which were the subject of the appeals. Cases such as these turn on the valuation evidence specific to the individual case. Tenants of office premises contemplating improvement works should take advice from their rating agents as to the impact on their liability for rates and any available reliefs.
See Hutchings (Valuation Officer) v Shoosmiths LLP and another [2025] UKUT 224 (LC)
If you have any questions about the areas covered in this article or need further advice, then please contact one of our expert Real Estate Dispute Resolution solicitors by email or call +44 (0)3333 231 580.
