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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 (for example, 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.)
No disregard
Rateable value is defined in accordance with paragraph 2(1) of Schedule 6 to the Local Government Finance Act 1988. It is equal to the rent at which it is estimated the rateable unit or hereditament might reasonably be expected to let from year to year on the assumption that the property is in a state of reasonable repair when let, and on the basis that the tenant undertakes to pay all usual tenant’s rates and taxes and to bear the cost of the repairs, insurance, and other expenses necessary to maintain the property in a state able to command that rent.
It does not matter who carried out or paid for the fitting out. The Cat B fit out is valued. That a tenant who has paid for improvements is being taxed on their own expenditure is just unfortunate.
The comparables
The valuation of an office property in a Cat B fitted out state should always place most weight on the market evidence of Cat B lettings. Such lettings tend to be scarce, or generally unhelpful, certainly when valuing large floorplate offices. In the absence of reliable Cat B evidence, valuers have adjusted Cat A rents, where there has proved to be evidence, by adding an uplift to reflect the value of the element of the Cat B fit out that would have general market appeal (i.e. where an incoming tenant would be expected to make use of it, rather than ripping out and substituting their own fit out).
The cases
Three recent decisions of the Upper Tribunal have provided some direction as to how to value Category B fit out works for rating purposes.
The first decision (Acenden) concerned a large floorplate office building in an out-of-town business park close to Maidenhead.
The second decision (Shoosmiths and Mando) concerned offices in the centre of Liverpool and Manchester.
The third decision concerned two hereditaments, within 85 Uxbridge Road, London, W5, and another being the 4th floor, 9 Appold Street, London, EC2.in the Broadgate Quarter. The Broadgate Quarter is located on the fringe of the City, north of Liverpool Street Station and south-west of Shoreditch High Street station.
The points debated in these cases as to how to value the Cat B fit out support the following propositions.
The argument that Cat B works are not of value to a hypothetical tenant, because fit out by one incoming tenant is not necessarily of value to a subsequent tenant, will not succeed at least up to the Upper Tribunal and evidence to the contrary.
The issue is, thus, not whether to value the Cat B works, but how to do so.
The starting point is to agree (as may well be possible) the rental or rateable value for the premises fitted out to Cat A. In a normal market, there will be transactional evidence available.
Evidence of lettings of space fitted out to Cat B finish will be hard to find. In the Acenden case, the valuation experts did not find a basket of useful Cat B lettings. The Upper Tribunal (UT) lightly chided the valuation witnesses for not having done better. The witnesses were accomplished professionals, and it is more likely that no more evidence was produced because it did not exist.
The Tribunal re-stated a preference for reliable Cat B rental evidence but, in the absence of any, was prepared to accept that a Cat B rent could be constructed from adding to a Cat A rent an amortised cost of Cat B fit out. Where the available comparables are of no assistance, then cost is the only appropriate measure of value.
The UT did not accept that one should amortise an amount being the average Cat B cost drawn from a number of “comparables”. That approach demonstrated to the UT the unreliability of the ‘adding Cat B costs’ method.
London agreement
Following the UT’s decision in Acenden, the VOA came to an agreement with a group of leading national rating agents known as the ‘G7’ as to the appropriate uplift for Cat B fit out, settling at £25 per sqm.
Period for amortisation
Cost should be amortised over the period to the end of the lease. The Tribunal agreed with the ratepayer’s expert that, where a lease included a break clause, the rental analysis should run to the break date rather than over the whole lease term.
Sub-lettings
Cat B lettings were acknowledged to be rare, only generally occurring when an existing tenant was seeking to dispose of space by underletting it. The UT would accept evidence from sub-lettings per se. There is nothing in the rating hypothesis to suggest that the hypothetical landlord is a freeholder; he or she is simply a lessor. If a market is made up largely of sub-letting evidence, which physically is proximate and similar to the appeal property, there is no reason why it should be excluded. Indeed, it might be the best guide to value.
Indexation
There is a method of indexation of values derived from adjusting comparables whose valuation date differed from the subject premises by 1.1% per month, capped at 12 months. To this, the UT “raised an eyebrow”. The UT’s position is that the further one moves away from the valuation date, the less weight can be safely applied to a transaction.
Contractor’s basis valuation
The Upper Tribunal has heard arguments from ratepayers that a Cat B valuation which is based on amortising the cost of the Cat B works should adopt the statutory discount rate prescribed for contractor’s basis valuations. To date, the Upper Tribunal has not been persuaded, but some rating valuers are looking forward to a case where this point can be tested to the full.
Category B fit – out the solution?
The valuation of Cat B fit out is a hot issue. Rating Agents, and their clients, will be on the lookout for opportunities where sufficient value is at stake to explore further the issues of law and valuation which are relevant.
See Appeals by Dyer (VO) and Johnson (VO) [2026] UKUT 158 (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.
