AHED MAHMOD v ANGELA ANNAMALAI (VALUATION OFFICER) [2018] UKUT 20 (LC)

UPPER TRIBUNAL
LANDS CHAMBER
[2018] UKUT 20 (LC)Case No RA/20/2017
Between
AHED MAHMODApplicantANGELA ANNAMALAI (VALUATION OFFICER)Respondent
Before
A J Trott FRICSVenue the Royal Courts of Justice, Strand, London WC2A 2LLDate 23 January 2018Hearing 4 December 2017Property: 43 (part) Mitcham Lane,, London,, SW16 6LJCatchwords: RATING – valuation – vehicle repair workshop – property in disrepair – whether repairs would be considered uneconomic by a reasonable landlord – valuation approach to be adopted – appeal dismissed – Schedule 6 paragraph 2(1) Local Government Finance Act 1988
[1]This is an appeal by Mr Ahed Mahmod the occupying underlessee of a vehicle repair workshop and premises at 43 (part) Mitcham Lane, London SW16 6LJ against a decision of the Valuation Tribunal for England (“VTE”) dated 10 January 2017 determining the rateable value of the subject hereditament at £9,750 with effect from 1 April 2010.[2]The sole issue in the appeal is whether the VTE was wrong to determine that a reasonable landlord would not consider necessary repairs to the hereditament to be uneconomic.[3]The appellant appeared in person and was assisted by his son, Mr Hassan Mahmod. They both gave evidence of fact. The appellant also relied upon a report on building costs prepared by Mr Adam Mazalla-Tomlinson MRICS, the managing director of Templar Consultants. Mr Mazalla- Tomlinson was not called to give oral evidence.[4]Mr James Feltham, a technical adviser with the Valuation Office Agency, appeared for the respondent and called the valuation officer, Ms Angela Annamalai MRICS, as an expert valuation witness; and Mr James McLearon MRICS, a surveyor with the Built Environment and Minerals Surveyors Team at the National Specialist Unit (VOA), as an expert building surveyor.[5]The appeal was heard under the Tribunal’s simplified procedure. Facts I derived the following facts from the evidence.[7]The appeal hereditament is located on the A216 in a mixed residential and commercial area. It was built over 100 years ago and originally formed part of a larger garage and premises which was subsequently divided into two hereditaments. The appeal property comprises a single storey industrial unit with brick walls and a steel lattice framed roof. Part of the roof is pitched and tiled and part (to the rear) is flat. The eaves height is approximately 3.7m. There are concrete floors on split levels.[8]The main entrance to the unit is by a full height roller shutter door. Access is gained from Mitcham Lane across a forecourt spanning the width of the whole of the original building. There is a further door to the left of the main entrance with three steps leading down to the main work space. At the rear of the property are two storage areas. To the left is a store with a raised floor some 4 0.85m above the main space which is reached by five steps. On the right is another storage area which is at the same level as the main workshop. The rear storage areas have a flat roof.[9]The hereditament also contains a basic office area and toilet facilities (a WC and hand basin). There is a hot water heater unit. The hereditament does not have its own cold water supply or independent drainage. These services are provided by connections from the neighbouring unit. The waste from the WC is pumped through a 40mm pipe. The hereditament is unheated.[10]The gross internal area of the hereditament is 240.28m2 comprising: Main workshop: 127.75m2 Raised store: 53.78m2 Rear store: 58.75m2 The total area is slightly less than that adopted by the VTE (240.92m2) and follows a re-measurement of the property.[11]The condition of the property was poor at the material day (25 March 2015). There were slipped and missing roof tiles leaving holes in the roof covering with material water ingress that had compromised electrical installations and led to damp penetration and saturation. Guttering was defective including a valley gutter at the junction of the flat and pitched roofs.[12]Mr Mahmod took an underlease of the subject hereditament on 8 May 2008 for a term of just over 21 years commencing on 28 December 2007. The initial rent was £20,000p.a. subject to review and was apparently on a partial repairing and insuring basis. Rating history[13]The compiled 2010 local non-domestic rating list entry for the appeal hereditament was a rateable value of £13,000. This was subsequently reduced to £12,000 to reflect corrected floor areas and a 2.5% discount for the lack of heating. Following Mr Mahmod’s proposal and the subsequent appeal the valuation officer adjusted the rateable value to £11,000 to allow for revised floor areas and an allowance for the variation in floor levels to the rear of the property. By the time of the substantive VTE hearing in December 2016 the valuation officer was proposing a rateable value of £10,250 to take into account yet another revised floor area, an allowance of 5% in respect of the poor layout to part of the hereditament and a 10% allowance for the lack of mains water.[14]The VTE determined the rateable value at £9,750 based on a main space rate of £50 per m2 less 2.5% for lack of heating, 10% for the lack of a direct water supply and 5% for poor layout and variations in floor level, the latter to apply across the whole, rather than part, of the measured area. Statutory provisions 5[15]Schedule 6 paragraph 2(1) of the Local Government Finance Act 1988 states:
“The rateable value of a non-domestic hereditament … shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year on these three assumptions: (a) The first assumption is that the tenancy begins on the day by reference to which the determination is to be made; (b) The second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic; (c) The third assumption is that the tenant undertakes to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command the rent mentioned above.”
Where the rateable value is determined with a view to making an alteration to a compiled list, matters affecting the physical state or physical enjoyment of the hereditament shall be taken to be as they are assumed to be on the material day (Schedule 6, paragraphs 2(6) to (7)). The case for the appellant[16]Mr Hassan Mahmod explained that the disrepair of the property meant that it could not be occupied or used during periods of wet weather, sometimes for as long as three days. The existence of disrepair meant that the appellant could not operate his business normally.[17]The appellant relied upon the report of Mr Mazalla-Tomlinson for an estimate of the cost of undertaking necessary repairs. The estimated cost at 14 November 2017 (the date of the report) was £68,500 excluding VAT. The equivalent cost as at 1 April 2008 (the antecedent valuation date (“AVD”)) was £56,000 excluding VAT. The works included a new roof covering, repairs to the decayed fabric of the building, structural repairs and “improvements to the welfare facilities”. No breakdown of the cost was provided.[18]Mr Mahmod looked at the cost of repairs by comparison with the rateable value. He said that in Newbigin (VO) v Monk [2017] UKSC 14 that ratio was 3:1 and in Barber (VO) v Cerep III TW Sarl [2015] UKUT 0521 (LC) it was just under 2:1. In those cases the rateable values were reduced to £1 and £0 respectively. In the current case the ratio of repair costs to rateable value was 6.9:1 using Mr Mazalla-Tomlinson’s cost estimates, or 5.6:1 using the respondent’s figures. The cost of repair was even three times greater than the actual rent of the property. Given that the ratio in the subject case was considerably higher than those in Monk or Barber, Mr Mahmod said that the rateable value of the subject hereditament should be similarly reduced. The necessary repairs would be considered uneconomic by a reasonable landlord. 6 The case for the respondent[19]Mr McLearon said that he had inspected the property on 16 June 2017. He explained his findings and gave an itemised breakdown of his cost estimate for repairs of £44,500 as at the AVD including preliminaries, fees and a contingency but excluding VAT. This was a lower figure than his colleague Mr Adrian Jones had given in August 2016 (£51,277) but Mr Jones had not inspected the property. Mr McLearon included the cost of providing basic heating, a new cold water supply and a separate waste system. Mr McLearon thought that the works would take about 3 months to complete.[20]Ms Annamalai said she accepted the rateable value of £9,750 as determined by the VTE. This was based on an unadjusted rate of £50 per m2 which Ms Annamalai said was well supported by both rental and assessment evidence, details of which she provided in her expert report. In fact Ms Annamalai considered that the available rental evidence, including the rent payable on the subject hereditament, indicated that the rateable value was too low, but she accepted that a tone of the list had been established and that the VTE’s determination of the rateable value was consistent with it. The only issue was whether a further allowance was due because of the poor condition of the property. Both parties agreed there was a need for repairs, although it had not been possible to agree their extent or cost.[21]In considering whether the repairs would be uneconomic Ms Annamalai relied upon the Tribunal’s approach in Thomas and Davies (Merthyr Tydfil) Limited v Denly (VO) [2014] RA 515. In that case the Tribunal, Mr N J Rose FRICS, determined that repairs were not uneconomic having compared the value of the freehold interest in the building in its existing state of disrepair at a reduced rent to its freehold value assuming the repair works were carried out and making a deduction for the cost of repair.[22]Ms Annamalai undertook a similar analysis in the present appeal. She took the rent payable for the property in disrepair to be 75% of the rateable value, i.e. £7,325 (rounded), and capitalised this for five years at 12% to give a capital value of £26,370 if no repairs were undertaken. She said that after five years the property would not be capable of occupation in an unrepaired state. The yield of 12% reflected the poor existing state of the property and its limited life span.[23]Ms Annamalai then valued the property assuming the repairs had been carried out. She capitalised the rental value of £9,7501 into perpetuity at 10%2 and deducted costs of £45,5003 to give a capital value of £52,000. Since this figure exceeded the capital value of the hereditament in disrepair Ms Annamalai concluded that the repairs would be economic to undertake. Discussion 1 The value upon the assumption that the hereditament was in repair 2 A lower yield of 10% was adopted because the rental value of a repaired property would be more secure 3 The correct figure is £44,500 and therefore the correct capital value should have been £53,000 7[24]The rateable value of £9,750 represents the value of the subject hereditament in a state of reasonable repair. But Mr McLearon’s cost estimate included three amounts for works that I do not consider to be repairs:(i) The provision of heating;(ii) The provision of an independent cold water supply; and(iii) The provision of a separate waste system for the WC. The total cost of these items was £9,863 excluding VAT. In my opinion the cost of putting the subject hereditament into a state of reasonable repair should be reduced by this amount which means, on Mr McLearon’s figures, the cost of repair would be reduced to £34,6524.[25]Mr Mazalla-Tomlinson estimated the cost of repairs at £56,000 excluding VAT as at the AVD but he did not provide an itemised breakdown of the total figure. He was not called to give evidence and his expert report was therefore unexamined. It appears that Mr McLearon was not aware of Mr Mazalla-Tomlinson’s involvement until a week before the hearing and the two experts were unable to discuss the case in the short time available (Mr Mazalla-Tomlinson’s report is dated 17 November 2017). Under the circumstances I prefer the evidence of Mr McLearon who gave a detailed cost analysis and was cross-examined on it.[26]Mr Mahmod criticised Mr McLearon’s evidence because the cost of the works was significantly less than the figure identified by the respondent’s first building surveyor, Mr Jones. But unlike Mr McLearon, Mr Jones had not inspected the site, relying instead upon plans, photographs and the valuation officer’s file. I am satisfied that Mr McLearon’s estimate is the most reliable and I adopt it.[27]I accept Ms Annamalai’s yield differential of 2% to reflect the difference in risk between the unrepaired property and the property when assumed to be in a state of reasonable repair.[28]Ms Annamalai’s analysis was a straightforward comparison between the capital value of an income stream of £7,325 capitalised for five years and an income stream of £9,750 capitalised into perpetuity less the cost of the repair works. At the hearing I pointed out that the first valuation made no reference to what would happen after five years; presumably at that time the landlord would undertake the repair works. A proper analysis, it seems to me, should have included this reversionary element of value. This was a point that was considered in Denly at paragraph 66: “Ms Denly [the valuation officer] concluded from her various calculations that the repairs would be economic. She added that the hypothetical landlord also had the option of letting the appeal property as it stood and undertaking the repairs at a future date before a fresh letting. If the reduction in rent was only 10% then, depending on his attitude to risk, the hypothetical landlord might think that this was the economically sensible thing to do.” 4 £44,515 - £9,863 8[29]Appendix 1 shows the result of such a valuation from the hypothetical landlord’s perspective. This analysis shows that the capital value if the repairs were undertaken at the material date is some £3,500 less than the capital value if the repairs were deferred for five years. That being so the analysis gives a different answer to that reached by Ms Annamalai in her written report and suggests that the repairs would be considered uneconomic by a hypothetical landlord at the material day. But this conclusion depends on two key assumptions:(i) That the state of repair will not deteriorate over the next five years to an extent that no tenant would (or could) occupy the hereditament and/or that would significantly increase the cost of the repairs; and(ii) A 25% discount is a proper reflection of the difference in rent between the repaired and unrepaired states of the property.[30]Mr Hassan Mahmod said that the condition of the property had got “quite a lot worse” since the appellant took the underlease in 2008 and Ms Annamalai said in re-examination that she thought more repairs would be needed over time. This seems to me to be a reasonable assumption and I would allow an increase in costs of 10% (at AVD prices) to allow for the likelihood of further work being required if the repairs are deferred for a further five years, making a revised cost of say £38,200.[31]With regard to the appropriate discount to make from the rental value to reflect the level of actual disrepair Mr Mahmod said at the hearing that during prolonged periods of heavy rain the property became unusable, sometimes for as long as three days. This fact was unknown to Ms Annamalai until Mr Mahmod gave oral evidence and she said that had she been aware of the effect of the disrepair on the occupation of the property she would have made a larger rental discount. Ms Annamalai said that the appropriate discount would be in the range of 25% to 50%, the latter being the figure adopted by the Tribunal in Denly.[32]The adoption of a higher cost figure were the repairs to be undertaken in five years time means that the capital value of the freehold interest would be reduced from £63,983 to £61,810. This is still above the capital value were the repairs to be done at the material day and so doing such repairs immediately would still appear to be uneconomic. But this assumes a rental discount of 25% which Ms Annamalai now says is the minimum allowance.[33]Assuming that the repairs are done in five years time but allowing a rental discount of 50% instead of 25% produces a capital value of just under £53,000 which would make it economic for the hypothetical landlord to do the repairs at the material day. The point of equivalence between the immediate works being economic and uneconomic is found at a rental discount of 28.6%. If the rental discount is greater than this percentage it will be economic for the hypothetical landlord to do the works at the material day rather than wait a further 5 years.[34]I am satisfied that the appropriate rental discount to reflect the actual state of repair would be greater than 28.6% and I consider that a figure at or close to the top of Ms Annamalai’s range (50%) is supported by the evidence. 9[35]Accordingly I reach the same conclusion as the Tribunal in Denly at paragraph 80:
“Accordingly, the hypothetical landlord would have known that, if he did not carry out the repairs immediately, he would need to carry them out in no more than five years time. Meanwhile, the appeal property would be let, if at all, to a tenant who was prepared to occupy a building in very poor condition at a reduced rent. Such a tenant is likely to have been less reliable than one who could be secured if the property was in reasonable condition and there would be a real risk of rental voids during the five year period. Against that background I accept the valuation officer’s opinion that the present value of the landlord’s interest assuming the works were carried out immediately, less the cost of carrying them out, would have significantly exceeded the present value in disrepair.”
[36]The consequence of this conclusion is that, under Schedule 6 paragraph 2(1)(b) of the 1988 Act, the hereditament is assumed to be in a state of reasonable repair and the rateable value is therefore £9,750.[37]The appellant relies upon Monk and Barber to support his case that the rateable value should be nil or a nominal £1. Those cases can be distinguished from the present appeal for the reasons given by Mr Feltham in his closing submissions, and which, in summary, involved hereditaments that had been stripped out in the course of redevelopment and which could not be occupied (Monk) or where the hereditament was in disrepair, vacant and part of a larger redevelopment site (Barber). As Mr Feltham noted, the facts of the present appeal are more similar to those in Denly.[38]The appellant’s landlord told him in an email dated 16 March 2017 that he was responsible for carrying out repairs to the subject hereditament. Mr Mahmod seems to have accepted this without question and has approached this appeal on the basis that, subjectively, it is uneconomic for him to repair the property. That, of course, is not the correct statutory approach.[39]I have not seen a copy of the superior lease to which the appellant’s landlord refers in his email but I note from clause 2.1.3 of Mr Mahmod’s underlease (concerning the payment of rent) that the tenant is to pay:
“The Tenant’s Proportion of all Outgoings relating to the Building [of which the appeal hereditament forms part] and of the costs incurred by the Landlord in complying with the covenants on its part contained in the Superior Lease relating to the repair and maintenance of the Common Parts [which include the roof of the Building] save that the Tenant shall not be required to contribute towards the cost of repairing or maintaining the roof of the Building”
(emphasis added).[40]In the light of the above the appellant might wish to consider taking legal advice about the nature and extent of his repairing obligations under the underlease. Determination 10[41]I dismiss the appeal and uphold the VTE’s decision that the appeal hereditament should be entered in the local non-domestic rating list at a rateable value of £9,750 with effect from 1 April 2010.[42]The appeal was heard under the Tribunal’s simplified procedure which is not a procedure under which costs are normally awarded unless either party has behaved unreasonably or the circumstances are in some other respect exceptional. Neither party suggested that there had been unreasonable behaviour or identified any exceptional circumstances. I therefore make no order as to costs. Dated 23 January 2018 A J Trott FRICS Member, Upper Tribunal (Lands Chamber) 11 APPENDIX 1[1]Repair now Rent receivable (in repair) = £9,750 x YP perp @ 10% deferred 3 months1 = 9.765 £95,209 Less costs (rounded)2 = £34,700 Capital value = £60,509[2]Repair in 5 years time Rent receivable (in disrepair) @ 75% of rental value3 = £7,325 x YP 5 years @ 12% = 3.605 £26,407 Reversion to capital value when repaired (as above) = £60,509 x PV of £1 in 5 years @ 10% = 0.621 £37,576 Capital value = £63,983 The period that Mr McLearon allowed for the works Excluding the cost of improvements[3]The figure taken in Ms Annamalai’s report which she rounded up from £7,312.50