You should read this if you are responsible for (1) the P and L of high-investment real estate or infrastructure, which is rateable or (2) business rates.

This week’s case which examines the hypothetical basis on which a rateable value is assessed concerns a power station.

The hypothetical tenancy which is valued for rating is for a term from year to year but with an indefinite prospect of continuance. The valuer assesses the probable duration of the occupation the parties to the hypothetical letting would anticipate.

In a recent appeal to the Upper Tribunal, the ratepayer was the operator of a gas-turbine power station.

The ratepayer’s valuer said that the cost of gas for the turbines and the price of electricity generated were never fixed more than two years ahead. Therefore, the rent payable for the hypothetical letting would never be fixed for more than two years. Each party would know that the other could terminate the tenancy and trigger a new negotiation of the rent, from year to year.

The valuer’s conclusion was that a tenant would not pay more than a nominal rent to occupy the power station for a period that might not exceed two years.

The Upper Tribunal had none of that.

Where a property involves a considerable initial investment, the valuer might conclude that the parties would expect a lengthy continuance of the tenancy.

Thus, the valuer had mistakenly valued assuming only two years of occupation by the tenant.

The outcome was dramatic. Instead of a nominal rateable value of £1, the Upper Tribunal assessed the rateable value at £1,012,500.

This case emphasises the need to step back and test a valuation conclusion against the commercial background.

Source Hardman (Valuation Officer) v British Gas Trading Limited [2015] UK UT 0053 (LC)