Last edited 30 Jul 2014

Choice of method for rating valuation

Contents

[edit] Introduction

Today rating valuers will use the rental method of valuation if adequate evidence is available, but they should not necessarily rely entirely on that method. They may well decide to investigate other methods of valuation to see how these support the rental valuation. There may be much dispute in evidence presented to a tribunal as to which method of valuation gives the most accurate result.

If the rental method is the best method of valuation, which is the second best? There is no absolute answer to this question. However, remember that the contractor’s method is based on the major fallacy that the cost of property is necessarily equal to its value. For example, if it cost a large sum of money to buy a piece of land and erect a building, the contractor’s method would presuppose that the completed building would let for a high rent - but this is not necessarily so. Many buildings would cost a great deal of money to build (or rebuild) but would not command a proportionately high rent. Property developers frequently have financial difficulties because a project has cost more than it can be sold for.

Although the contractor’s method may make allowance for the age and obsolescence of a building, it is based on this assumption: that cost and value are equal. The method makes no allowance for the fact that the value of any item is determined by its supply and demand. The profits or accounts method assumes that the rent a tenant will pay for a property depends on the profit they can make. This is probably a more reasonable assumption than that on which the contractor’s method is based, but it is not necessarily correct. In general, however, the profits or accounts method will produce a more correct assessment than the contractor’s method, though less accurate than the rental method.

Sometimes the profits method either cannot be used or will not result in an accurate answer - for example, where there are no profits or accounts on which a valuation can be based, such as a town hall or sewage disposal works. In other cases, despite the existence of a set of accounts or even a profit, profit-making is not the sole reason for occupying the hereditament. A local authority may operate a seaside pier, not primarily to make a profit but in order to attract visitors to the town. The pier may make a loss, but the local authority might be prepared to pay a rent for it in order to attract visitors. At one time the courts considered the profits method of valuation only if there was no rental evidence and if the hereditament enjoyed some element of monopoly. (See Robinson Bros (Brewers) Ltd v Houghton and Chester-le-Street AC (1937).) Those days have passed, following the case of Garton v Hunter (VO) (1968) already mentioned.

So although the rental method of valuation is, on the face of it, the best method of valuation, there are circumstances when one or more than one of the other methods of valuation must be used, for example when there is no valid rental evidence or where the validity of most or all of the rental evidence is in doubt.

As a general guide, in cases where there is no rental evidence, either direct or indirect, the profits or accounts method can be used in preference to the contractor’s method.

Note that:

  • In Hoare (VO) v National Trust and National Trust v Spratling (VO) (1997), the profits method was used for valuing historic houses, confirmed by the Court of Appeal (1998).
  • In Wealden DC and Eastbourne DC v Allen (VO) (2001), the contractor’s test was used by the Lands Tribunal for local authority leisure centres.

In considering a ‘tone of the list’ valuation, the information required (ie rents or, where appropriate, accounts for a profits method valuation) may be lacking. In this case it is usual to consider that other assessments appearing in the valuation list on comparable property are correct, and the assessment on the property in question can be compared by analysis with them. However, always remember that the content of the Rating List is simply the VO’s opinion of value for each hereditament, and can be challenged.

[edit] More than one valuation

From the above, it will be seen that it is not only possible but sometimes desirable to prepare two or even three valuations of one property, using different methods of valuation. For example, if there were some doubt as to the validity of the rent paid for a commercial caravan site, it would be possible to make three valuations:

  • Rental valuation, based on the rent paid for the site or for similar sites.
  • Profits valuation, based on the accounts of the occupier.
  • Contractor’s test valuation, based on the cost of buying the land, erecting the site buildings, and providing hard-standing and services.

Where there is rental evidence on the property itself and/or comparable properties, this should be given greater reliance than the other two methods. Remember that in normal circumstances the three methods are likely to give substantially different answers - despite the impression given in the second Lands Tribunal decision in Garton v Hunter that the three methods would usually produce similar answers.

[edit] One valuation but more than one method

It is sometimes possible and even necessary to use more than one method within a single valuation. For example, a non-profit-making sports ground commonly comprises the land on which the sport takes place, together with a pavilion. The valuer may find rental evidence which they can use to value the land, but there will seldom be any evidence of the additional value created by the pavilion. This is because sports grounds are commonly let on terms that the tenant will erect a pavilion themselves. In such a case the value of the land might be deducted from the rent paid (because rental evidence is available and because the rental method is the best method), and the pavilion might be valued by the contractor’s method (based on the cost of construction). See Example 6.


[edit] Example 6

Value for rating purposes the local cricket club ground. A rent of £2000 pa exclusive of all outgoings (agreed in 2003) is paid for the land, and the club erected a pavilion in the same year at a cost of £20,000.

Valuation £ £
Land - net rent paid (close to antecedent valuation date) 20,000
Pavilion - ECV, say cost 2,000
@ 5.0% (1)

0.050

RV

1,000

1,000

(1) This follows the 1994 regulations, which apply where a valuation is being ascertained by reference to the notional cost of constructing or providing the hereditament or any part of it.


As another example of two methods being used within a single valuation, a factory will normally be valued by the rental method, whilst the plant and machinery might be valued by the contractor’s method.

[edit] Valuation of different types of property

It is neither possible nor necessary in a course of this length to deal in detail with the valuation of every type of hereditament. However, you must be able to:

  • choose the most suitable method or methods for each type of rateable hereditament;
  • understand the principles underlying each of the methods.

[edit] Use of the methods in practice

Many if not most day-to-day rating valuations are done within the ambit of the rental method explained above. This does not diminish the importance of the other methods, but indicates only that most hereditaments can simply be valued by reference to direct or indirect rental evidence.

Sometimes the value of one of a series of hereditaments is settled by agreement between the parties. Subsequently this agreed assessment is analysed to a value per comparative unit, which is applied to the remaining hereditaments in turn to show how over-assessed they are. This is clearly advantageous as a means of achieving reduced assessments, especially where the first of the series is deliberately selected as having a low price per comparative unit from the outset.

This is not another method of valuation, even though it may be being held out as such. It might be a means of reaching an answer, but valuation for rating means just that:

  • Rating valuations have to be done following one of the three basic methods, or by formula. Comparative units can assist but they cannot dictate values. Rating values are tied to rents and rents are always the starting point, provided they exist and are analysed correctly.

Agreed assessments simply demonstrate the opinion of rateable value of the two valuers (or VO and ratepayer) involved for a particular property. In fact, in the Wealden and Eastbourne v Allen (VO) cases, assessments of other local authority leisure centres had been settled by agreement between the VO and professional surveyors, but the Lands Tribunal specifically discounted these in favour of a fresh examination of the available evidence. The Lands Tribunal held that the motives of a ratepayer in agreeing to settle an appeal may not be purely the accuracy of the assessment, which therefore clouds the reliability of that agreement as evidence for other hereditaments.

[edit] Summary of choice of methods

  • If a statutory formula has been prescribed for a particular class or hereditament, then that formula and no other method must be used.
  • If there is no statutory formula but the hereditament is of a class which is generally let in the open market, or there is otherwise rental evidence available, then the rental method should be used. However, if there is a genuine scarcity of valid rental evidence, a profits or a contractor’s valuation may be made in addition.
  • If there is no statutory formula, and the class of hereditament is seldom if ever let in the open market, and there is no rental evidence, then the valuation must be made by the profits and/or the contractor’s method. The profits method is more likely to be appropriate where there is an element of monopoly attached to the hereditament - either a statutory or factual monopoly. The profits method is also likely to be appropriate when one of the main objects of the occupier is to make a profit. The contractor’s method will be used if there are no suitable profits or accounts.

If there is doubt as to the correct method in the light of the decision in Garton v Hunter (VO) (1969), the valuer would produce more than one valuation, using a different method for each. They should, however, place greater reliance on the rental method where there is genuine rental evidence available.


This article was created by --The College of Estate Management 17:10, 6 December 2012 (UTC)

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