A Tale of Demand and Obsolescence

The Supreme Court has just delivered its judgment in the case of Telereal Trillium –v- Hewitt (VO) [2019] UKSC 23, overturning, by a majority of 3:2, the unanimous decision of the Court of Appeal, at [2018] EWCA Civ 26, which itself reversed the decision of the Upper Tribunal, which itself overturned the decision of the Valuation Tribunal.  Like Baker Britt –v- Hampsher (VO) this was one of those cases in which the winner succeeded, even though a majority of those deciding the appeal voted against him.  Why was that? Perhaps because the case proceeded, from the Lands Chamber onwards, on the basis of a joint position paper (“the JPP”) agreed between the parties, part way through the hearing by the Chamber, which had the effect of limiting the cross-examined evidence put before the Chamber for its consideration.  

No further appeal is permissible on matters of fact or valuation from the Lands Chamber, and so the hands of the superior courts were somewhat tied.   Further, the agreed questions of law upon which leave to go to the Court of Appeal was given, were not drawn in such a way as their Lordships might have approved.  I am (as always) open to correction, but it seems to me that the Court of Appeal answered the question as put, while their reasoning was explained in the dissenting judgment in the Supreme Court, while the majority, led by Lord Carnwath (himself a man of considerable experience in the Lands Tribunal) identified what they saw as the real issue, and answered that, in context.

The determining issue was held to be whether, against the agreed legal and factual background, the statutory hypothesis - 

“... 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.” 

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. The property was vacant, however, by 1 April 2010, the date on which the 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’). 

The hereditament was entered into the 2010 compiled list, at a rateable value of ￡490,000 reflecting th VO’s view that there were other office buildings in the area of similar age and quality, occupied by public sector tenants at rent of the same order. However, the Valuation Tribunal reduced the rateable value of Mexford House to ￡1. 

The VO appealed to the Upper Tribunal, before which the matter was dealt with by way of a full-rehearing on fact and law. In cross-examination, the VO accepted that, as at the antecedent valuation date he could not identify any person in the real would who would bid for the tenancy of Mexford House, although he noted that there was demand for other (occupied) properties which were comparable, in the light of those comparable properties he sought a final assessment of rateable value ￡370,000. 

After the VO’s evidence, counsel for both parties informed the Upper Tribunal that the issue between them could be decided “as a matter of law upon an agreed basis of fact”. No other evidence was heard. The parties lodged before the Upper Tribunal the JPP, in which they agreed that at the time of the antecedent valuation date, nobody in the real world would have been prepared to occupy the property and pay a positive price. They agreed that the rating hypothesis requires the existence of a hypothetical tenant to be assumed, but the question was whether the same hypothesis 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, or by other criteria. It was agreed that, if the answer was “yes”, the correct rateable value was ￡370,000; but if “no”, ￡1. 

The Upper Tribunal answered “yes”, so it allowed the VO’s appeal and fixed the rateable value at ￡370,000. The Court of Appeal allowed Telereal Trillium’s appeal and restored the Valuation Tribunal’s assessment of ￡1, on the basis that there was no demand in the market for occupation of Mexford House. The VO appealed to the Supreme Court, which considered the same question as both the Upper Tribunal and the Court of Appeal. 

The Court of Appeal was unanimous in its view, going no farther than the JPP and the question posed by the Upper Tribunal for their determination, that the market was saturated, that there was no demand for the hereditament and that, following the ratepayer’s submissions, the office market in the Fylde had declined, and that the hereditament, although capable of beneficial occupation, was, in effect, doomed to either a major refurbishment or demolition – it had become obsolescent and had reached the end of its useful life.

The judgment of the Supreme Court, however, although notionally split, was unanimous on the major issues, the major difference between the judges apparently being that the majority took the view that, (per Lord Carnwath) the court must take the JPP as it stood: it could not look beyond it to evidence which was not referred to by the Upper Tribunal, nor attempt to resolve issues which were left unresolved by agreement. However, in so far as there were differences as to its interpretation, the court was entitled to look at the context in which it was arrived at, and the state of the evidence as recorded by the Upper Tribunal at that time.  This finding, and the analysis of the cases by Lord Carnwath, enabled the court to reverse the decision of the Court of Appeal.

The review of the authorities will repay study, as it distinguishes between land “struck with sterility”, property which has reached the end of its useful life and hereditaments which are merely unlet and unoccupied at the material day for valuation. The review of the well-known authorities is one which should be helpful to practitioners.

 Lord Carnwath approves of the Upper Tribunal’s reliance on London County Council v Church Wardens and Overseers of the Poor of the Parish of Erith [1893] AC 562, from which was extracted the proposition that “the true test is whether the occupation is of value”, contrasted with land that was “struck with sterility in any and everybody’s hands (see paras 36-42 of the judgment). Cases such as Hoare v National Trust [1998] RA 391and Tomlinson v Plymouth Argyle Football Co Ltd (1960) 31 DRA 788, referred to by the Court of Appeal, did not assist the ratepayer, as in those cases the absence of alternative tenants was due to the inherently burdensome nature of the properties, rather than the state of the market (see paras 46-48 of the judgment). 

Again, Lord Carnwath endorses the distinction drawn in previous Land Tribunal cases between a hereditament which is unoccupied merely because of a surplus between supply and demand in the market, and a hereditament which has “reached the end of its economic life” (para. 55). The VOA’s guidance (in the Rating Manual) on whether a property is obsolete lists several relevant considerations, including whether the property was occupied at the antecedent valuation date, and whether there are other similar properties in the locality that are occupied (para. 56). This highlights at least some of the issues of fact which may become relevant in drawing the distinction in particular cases, but which, by agreement, the Lands Chamber in this case was not required to resolve (para. 57). 

Whether the building is occupied or unoccupied, or an actual tenant has been identified, at the relevant date is not critical. Even in a “saturated” market the rating hypothesis assumes a willing tenant, and by implication one who is sufficiently interested to enter negotiations to agree a rent on the statutory basis, with some kind of a bid, the hypothetical value being that of the occupation to the occupier. There is no reason why, in the absence of other material evidence, the level of that rent should not be assessed by reference to “general demand” derived from “occupation of other office properties with similar characteristics” (para. 58).  Some useful examples are given in the judgment, reminding us that correctness must not be sacrificed to uniformity (per Ladies Hosiery) but reminding us that all relevant factors must be taken into account in each case.

It is significant, perhaps, that the dissenting judgment agrees, substantially and substantively, with that of the majority as to the law, but differed really only on the extent to which the court was able to “fill the gaps”, as it were, when evidence and argument had not been offered, in full, below, by looking at the context in which the decision of the Lands Chamber was reached, and at the state of the evidence as recorded by the Upper Tribunal at that time, in so far as there were differences as to its interpretation.  The dissenting judges took a more restrictive view than the majority