Rating Manual section 5a: valuation of all property classes - Offices

1. Serviced Offices - An Introduction

This is an Appendix to the Rating Manual: section 6 part 3 - section 730 Offices. It mainly deals with the particular issues that relate to serviced offices, however the principles should equally apply to small office suites, which are occupied independently from any landlord or sub-lessor operating space in an inclusive manner, perhaps with some additional services. If there are any doubts whether this guidance applies to a particular situation, these should be addressed to the local Technical Lead.

Although there may be perceived similarities, this guidance should not be applied to other classes of property (such as self-storage or workshop units). The facts need to be established in each scenario and, if in any doubt, further guidance should be sought by bringing the matter to the attention of Litigation and Technical Policy Team at Chief Valuer Group, via the Technical Query Log.

2. Serviced Offices - Background

The Serviced Office concept is considered to have started in 1985 in Michigan, USA. A similar concept was developed in Brussels, Belgium in 1989. Since then, the concept has proved popular and there has been a rapid rise in the number and variety of serviced office centres around the World.

Serviced offices typically are purpose built or converted buildings where the landlord makes individual rooms or suites of rooms available for use as offices. A high degree of service is provided and this may extend beyond heating and lighting to secretarial services and access to photocopiers. An office may be taken for use for as little as a day, or a person or company may stay for a number of years.

Serviced offices are usually occupied under short term agreements on ‘easy-in, easy-out’ terms and are usually inclusive of all costs associated with running the building, which in a conventional office would be charged separately through the service charge. The rents or licence fees are typically inclusive of business rates and other services such as cleaning the demised rooms.

There are many advantages to occupiers of taking a serviced office as opposed to taking a lease of an office suite of similar size, which are reflected in a higher payment. These include:

The availability of additional facilities such as reception and waiting areas, kitchen facilities, etc.
The availability of additional services such as secretarial services, telephone answering, photocopying, fax, meeting room hire, etc
The convenience and simplicity of having a single all-inclusive monthly or quarterly bill covering all occupational costs including business rates, office cleaning, receptionist, charges for utilities such as heating, air conditioning, lighting, water, electricity, sanitary facilities, lifts, maintenance, furnishings, carpets, etc., thereby freeing the occupier to concentrate on running his business
The fact that serviced office agreements are on easy-in, easy-out agreements with no set-up costs, and very few legal formalities needed before taking occupation
The flexibility of being able to vacate at short notice

3. Serviced Offices - Identification of the Hereditament

The approach to identification of the hereditament in considering serviced offices or small offices is no different from the approach to other classes of hereditament. The guidance is available in Rating Manual: section 3 part 1.

In the past, serviced office providers or ‘landlords’ have not always wanted separate assessment of the individual offices. Reasons for this may have been related to administration of rate collection. It may be that the aggregate RV for the serviced offices in any converted building exceeded the RV of a single assessment, which may be the result of a ‘quantum effect’, or it may be that the benefits to the serviced office of the immediate physical environment increases its rental value.

This historic reluctance to accept separate assessments on individual serviced offices has changed over time. It is apparent that where preferences are expressed in favour of a particular ‘unit of assessment’ outcome, these are now at least in part driven by the workings of rate reliefs and other benefits.

Whatever preferences are expressed by those interested in the outcome, decisions on whether or not an individual serviced office suite is separately assessed should be taken on the basis of rating principles, law and practice and not what may, or may not, suit a particular landlord or other interested person.

3.1 Unit of Assessment

It is important to make every endeavour to establish the correct unit of assessment. It is ordinarily going to be one of two outcomes; either the individual serviced offices are capable of rateable occupation as separate assessments (ordinarily with a residual hereditament), or one assessment for the whole space, with the serviced office provider in rateable occupation.

Whilst the specific guidance in the Hereditament section of the rating manual at Rating Manual: section 3 part 1 must be considered in full, there are particular features relating to serviced offices that, once considered and established, should assist in making a determination.

It is essential to gain an appreciation of what is happening ‘on the ground’. This would ideally involve a physical inspection and require some specific questions to be answered; this is because it is equally important to establish how the occupations are enjoyed in practice, as it is to establish the physical facts in terms of office layouts, areas, physical configurations and qualities, etc.

For example, when considering whether separate individual cellular office space should be considered capable of separate assessment for rating purposes, questions might include:

1. Are the physical properties or premises on the ground capable of separate rateable occupation?
2. Do the ‘standard agreements’ offered by any particular serviced office provider reveal the type and length of occupations anticipated? Do these standard agreements favour very short term arrangements with a high degree of ‘control’ retained by the provider, or longer term arrangements with a good degree of autonomy afforded the office user.
3. Are the occupiers in these premises (or the occupations) anticipating a reasonably long stay for the most part? Have most been there for a while – or if these are new occupations, are they likely to be there for a while?
4. Is the physical and operational ‘presence’ of the landlord ‘on the ground’ relatively slight and proportionate with the numbers of individual users and individual offices available? In other words, does the serviced office provider have a fairly minimal presence relative to the office users – even though for a multi floor office building used as serviced offices, this could be fairly large when looked at in isolation?

*5. Is the serviced office provider’s role primarily that of regulation, administration and reasonable service provision?

3.2 Rateable Occupation

The individual units will be hereditaments, providing the facts of occupation show that the occupiers of the individual units are in rateable occupation. A useful case on a similar situation, though it actually concerned workshop starter units, is Re the Appeal of Heilbuth (VO) [1999] LT RA 109. In Heilbuth, the VT had decided that 55 starter workshop units in Enfield, converted from a 1930s factory, should be assessed as a single hereditament. The VO made an appeal to the Lands Tribunal.

The Lands Tribunal in Heilbuth had to decide whether the individual licensees were in rateable occupation, or whether the whole centre was in the landlord’s occupation. They considered whether the occupations of the individual licensees had the ingredients of rateable occupation; being ‘actual’, ‘beneficial’, ‘exclusive’ and ‘not too transient’. There was no dispute that the licensees were in actual occupation and it was of benefit to them. The question was whether the other two ingredients of rateable occupation were present, i.e. whether the occupation was exclusive and not too transient. The Tribunal reviewed the previous precedents and set out what it considered to be the main tests in these situations:

3.3 Exclusivity

The Lands Tribunal in Heilbuth approached the issue of exclusive occupation in terms of who is in paramount occupation or control; is it the landlord or the licensee? The Lands Tribunal considered the licence agreements between the parties, and whether a licensee could reasonably expect to be able to carry out its business during normal business hours without interference or interruption by the landlord. It also considered the ‘facts on the ground’. Despite retaining keys and control to the main gate, the Landlord was held not to be in control of the licensee’s occupations; the landlord also had keys to the individual units so he could easily check on matters such as electrical safety etc. However, the Lands Tribunal held paramount control remained with the licensees, because having keys did not give the right to the landlord to conduct business in the units. It was the licensee who had the paramount use and control of its unit for its particular purpose.

The Lands Tribunal did not find the exclusivity of the licensees affected by the landlord retaining control over the main gate or having a duplicate set of keys to the units in order to enter for a variety of purposes. This did not give the landlord a right to occupy or conduct business in the units or give it paramount control.

3.4 Transience

The Lands Tribunal in Heilbuth decided on the question of transience by having regard to the standard licence terms governing occupation and the evidence of the actual periods of occupation over the previous years at the business centre. The terms of the licence suggested an expectation of continuing occupation on a monthly basis and set out a 6 monthly pattern of review. In conjunction with this, the actual pattern of occupation showed that over half the units were occupied for periods of between 1 and 5 years. Having regard to this evidence, the Lands Tribunal Member was satisfied that the requirement of sufficient permanence was in place.

It is important to note that a good proportion of occupations were for periods of less than 1 year, and the landlord demonstrated considerable control over the common parts. Yet it was the standard licence terms and the overall picture in terms of occupation ‘on the ground’ that led the Lands Tribunal to conclude that the occupations in Heilbuth were sufficiently permanent.

3.5 Paramountcy of Control

VOs will need to judge in each case whether the landlord retains such control over the units that it is not possible to regard the office users as being in control of their own units. The degree to which the landlord can interfere with the office user’s use of the room or rooms is relevant. If the landlord is only providing a desk, or room but not a designated room, this will strongly indicate the landlord is in control. However, if the landlord retains the right to move the office user to a different office unit at will, but in practice rarely or never does so, this will not defeat the facts showing the office user has occupation ‘on the ground’.

The greater the services provided, the less likely the individual units are separate hereditaments.

Length of occupation can also assist in indicating paramount control, as well as demonstrating the occupation is not too transient. The test of transience applied to existing hereditaments looks at likely occupation as well as what actually occurs on the ground.

In Brook (VO) v Greggs Plc [1991] LT RA 61, which concerned a market in Manchester with permanent shuttered stalls; there was a small proportion occupied on full Landlord and Tenant Act protected leases, a good number of licences and some quite transitory occupations. The Lands Tribunal took an overall view of the property and did not distinguish between individual units in terms of the pattern of previous occupation. In order to properly consider this aspect regard should be had to both the quality and duration of previous patterns of occupation and also the standard form of licence agreement used. The occupation of each unit should be considered individually as a starting point, but it is certainly not where the enquiry ends.

The Heilbuth and Greggs cases demonstrate that occasional short periods of occupation would probably not result in one overall assessment, as long as a good proportion of the individual units are in fact occupied on a more long-term basis and the nature and intention in the licence agreements indicate paramount occupation and control is intended to remain with the individual occupier in respect of his or her occupation.

4. Serviced Offices - Residual hereditament

Within some business centres, there may be accommodation that is used on a more informal, flexible and possibly daily basis. Where this is significant, it should be excluded from the consideration outlined above and dealt with as part of the operators’s residual hereditament.

The residual hereditament featured in the Greggs LT decision, and will consist of all the property that is retained under the paramount occupation and control of the serviced office provider (or ‘landlord’). It would typically include the entire space in the occupation of the serviced office provider, save that which is assessed separately. The value attributed to that ‘residual hereditament’ should be based on value to occupier in the ordinary manner. Value should ordinarily be ascribed to areas such as separately charged-out meeting rooms or offices retained by the landlord’s business, space used for break-out areas, kitchens, stores, cleaners’ space, touch down areas, other meeting rooms, photocopying etc. By its very nature, there is ordinarily one ‘residual hereditament’, as it is will be connected by circulation space and corridors, whether or not these elements are ascribed a value. It follows that areas of no specific value in themselves will still contribute in terms of providing contiguity, in most cases enabling one assessment to be made for the ‘residual hereditament’. Occasionally there may be more than one residual hereditament; however, in all cases when establishing the type and number of ‘residual hereditaments’, the usual unit of assessment considerations apply.

Space used as reception areas will require careful consideration. The determination of value will depend on the facts in each case and the adjustment and analysis of local market evidence. Circumstances relating to each property will vary according to lay-out and configuration, etc. Most large multi-let buildings will have a reception area on the ground floor, which is provided by the landlord and funded from the service charge. From a valuation perspective these areas (within reason) in large multi-let buildings are normally not separately assessed, their value being reflected in the main space price. Occupiers within multi-let buildings will often also provide their own reception at the entrance to their own individual occupation. These types of reception areas should be valued at full main space rate. It is important that reception areas for serviced offices are considered on their own facts, and treated in the same way as the similar receptions in other offices in the same location.

Whilst acknowledged not to be binding precedent, there have been some VTE decisions that have touched on the issue of treatment of reception areas in ‘residual hereditaments’.

In Mr J Slater v Grace (VO) [2013] VTE, Case 237218260670/125N10, the panel considered the assessment of elements of the ‘residual hereditament’, being the reception and meeting rooms. The issues before the panel were; the basic price to be adopted for the meeting rooms and the treatment of the two stores either side of the reception desk. The panel noted that one store contained a photocopier, which was available for use by persons renting the meeting rooms and the other store was used partly as a cloak room, also for people renting the meeting rooms. Having regards to the floor plans, the panel noted that the store rooms were located on either side of the reception desk area, which was agreed to be part of the residual hereditament. The panel was satisfied that the stores were ancillary to the reception desk, and therefore, like the reception desk, they should also be included in the residual hereditament. The Tribunal decided that, as the reception was not considered to be of value, no value should be attached to the stores.

On the face of it, the valuation decision in Slater in respect of the stores appears at odds with the more conventional approach to the valuation of storage space in offices; however, the decision is based on the facts of the case, together with the panel’s understanding of the ‘residual hereditament’ concept. It should be noted that the panel went on to ascribe a value to the shared meeting rooms as part of the ‘landlord’s’ assessment.

In Esselco Offices Properties Limited v Dunlevey (VO) [2014] VTE, Case 599022609523/537N10, the issue in dispute was whether or not the assessment for the ground floor reception was correct. The panel acknowledged that the subject property was a separate room occupied as a reception area for the entire building. The receptionist took telephone calls for all tenants, dealt with visitors to the premises and was paid by the landlord. The panel determined that the reception area, like many other office examples, should not be assessed, as it was an area shared by all the occupiers of the building. Moreover, the value of the reception area was reflected in the assessments of the offices that it served.

Both these cases demonstrate the need to consider the valuation of serviced offices in the context of other comparable offices nearby. The Slater case demonstrates how the concept of the ‘residual hereditament’ needs to be properly understood, and that the outcomes depend to a significant degree on the facts on the ground. Similarly, the Esselco decision shows that care is needed to ensure that reception areas in serviced offices are treated in the same way as reception areas in comparable office situations.

Finally, where it is recognised that frequent revisions need to be made to the ‘residual hereditament’, because individual office users expand into more (or relinquish) rooms and remain in paramount occupation of the serviced office suites, VOs should consider setting up informal but close arrangements with the landlord for notification of changes and for the VO to swiftly act on the notification.

5. Serviced Offices - Additional Inspection Considerations

The main difference between conventional offices and serviced offices will be the size range of the serviced suites and the consideration of the ‘residual elements’ i.e. reception, meeting rooms, break-out areas, stores, communication rooms, etc. In practice these ‘residual elements’ remain in the paramount control of the serviced office provider or ‘landlord’, and should be measured and recorded to enable valuation as individual hereditaments or as part of the serviced office provider’s ‘residual hereditament’ (see above).

Upon inspection the facts of occupation need to be determined. Usually the individual serviced suites or offices will be capable of being separate rateable hereditaments, providing that the individual units are in the rateable occupation of the office users. Certain facts may be established initially by internet enquiry, but wherever possible an inspection should be made. Once an inspection is underway, speaking directly with the receptionist or serviced office manager on site will help establish relevant facts. Questions to be asked should include:

What are the level of services provided? (There may be a brochure)
What are the rents (or tariffs) charged?
Are the Rents quoted in terms of price per workstation per hour/day/week/month/year?
What are the periods of stay within the serviced offices in practice?
What is the range of accommodation offered? (Is it workstations, multiples of workstations, meeting rooms, “rent-a-desk” etc.)
Can a copy of a typical licence agreement be provided?
Is there a plan available of the layout/configuration?
What are the car parking provisions?

Serviced offices should be measured to Net Internal Area having regard to the definition in the VO Code of Measuring Practice.

Survey details must be recorded and filed electronically as appropriate. This will include the usual requirements for inspection of offices, such as general description, construction, age, type (e.g. purpose built, hi-tech, converted), location, access, transport facilities, etc.

6. Serviced Offices - Valuation Approach

6.1 Serviced Office Market

In order to decide on the most effective valuation approach to employ for this class of property, consideration is required of the typical business model of how the serviced office market operates. The majority of serviced offices will have been acquired by the serviced office operator through conventional leases, where an open market rent is payable; some may be held freehold. The serviced office operator’s business will involve converting the existing office space into a suitable serviced office layout, which will suit the needs of potential serviced office tenants. The aim of the business will be to let the resultant space out, to ensure that the total fees collected exceed the fixed costs by enough to realise a profit for the operator. Where held on a head lease, a significant fixed cost incurred is likely to be the head rent paid by the operator. This implies that in order for these businesses to continue operating at a profit, the fees collected will be expected to exceed the head rent and other fixed costs over the longer term.

The rent that is charged to serviced office occupiers is often a fully inclusive charge that will normally include rent, property taxes (rates), furnishings, maintenance, heating, air conditioning, lighting, cleaning, security, etc. In addition there are often two very significant extras provided to the office users: a full time receptionist and telephone answering services. In most cases the only additional costs are for telephone and internet charges, meeting room charges and secretarial services. Such rent may be charged per person, per work station, per office suite, or per month etc.

For rating purposes the task is to value the OMRV of each individual occupation, vacant and to let. There are often little or no comparable market rents for this size of property. The rate per workstation charge is of little use, because it is inclusive of all of the costs associated with the occupation and therefore far removed from the definition of Rateable Value. Further difficulties arise because the ‘model’ for operating serviced offices can vary significantly from provider to provider and as a consequence, levels of service can also vary significantly.

An important factor to be considered is the ‘serviced environment’ in which the individual units are located. The potential rent paid by the serviced office occupiers will reflect the fact that there are a range of services available such as meeting rooms, photocopying, secretarial, kitchens and tea-points etc. located close by. When comparing with conventional (or un-serviced) offices the fact that the serviced office assessments have access to a range of ‘services’ nearby is a factor that needs considering and potentially reflecting in valuations, as appropriate.

However, whilst decided cases offer some support in passing to making an addition in valuations to reflect the proximity to additional services, they approach serviced offices in the same way as ‘conventional’ offices of a similar size in the locality; there are also warnings to avoid ‘double counting’ when it comes to considering the value to be placed on residual elements.

6.2 Review of any rental evidence

Rental evidence may be supplied on ‘Rent and Lease Detail’ (RALD) VO 6003 forms, or by a voluntary supply, such as ‘VORC’ or by spreadsheet. Additionally, to ensure proposals are properly made, and depending on the regulations in force at the time, it is typically a requirement to supply rental information with the proposal. Depending on who makes the proposal, this may require the head lease information and/or the licence fees paid by the individual serviced office operator(s).

The majority of serviced offices are held leasehold by the operators (referred to as the head lease). Therefore the amount the operator charges the serviced occupiers will have to be an amount, which will cover the existing head lease rent, plus all other associated costs and the operator’s profit.

Given the many factors that can be reflected in a serviced office licence fee which do not accord with the statutory definition of Rateable Value, it is recommended any traditional adjustment and analysis of such rents should be a last resort. There are obvious pitfalls with this approach as often it is unclear what the rent may or may not include. Similarly, comparison of individual serviced office buildings with one another can also be misleading, given the variety of services provided can vary greatly from building to building.

There may be occasions when an operator can provide an apportionment of passing rents quoting a breakdown of ‘services’ and ‘rent’. There may also be offices where the level of servicing is minimal and the rent may more easily be adjusted to the definition of Rateable Value. However these scenarios should also be treated with caution and any such evidence not considered in isolation.

Provided the breakdown of the rents are established, an analysis of any gross all-inclusive rents may provide an indication of ‘quantum’ offered by the landlord. If relying on rents paid by individual serviced office users, it is essential that rental evidence and tone levels of value of comparable similar sized offices and comparable serviced office assessments in the locality are also considered.

For more information on the approach when making rental adjustments, refer to the relevant practice note on rental adjustment in Rating Manual: section 4 - Valuation Methods.

6.3 Valuation factors to consider

Consistency: Particular care needs to be taken where serviced office operators take up space on a phased basis in the same building, or where serviced offices exist in a multi-let building also housing conventional office hereditaments. If this is the case then the resultant £/m2 applied must be consistent across all floors, notwithstanding any quantum (see below). A situation where property of a similar location, quality, size and specification is valued at different rates must be avoided.

This approach was taken by the Panel in Avanta Management Services Ltd v Azikie (VO) [2011] VTE, Case 503017409699/539N05, where the Appellants disputed the differential pricing applied by the Valuation Officer to three floors of serviced offices in one building. These were 1st floor - £339.75/m2, 2nd Floor 293.45/m2 and 5th Floor £316.15/m2. The appellants sought £250/m2 to occupations on all three floors, in line with the price adopted in the rest of the building.

The appellants argued that any office in the building should not be valued with regard to the business of the individual occupier, but ‘rebus sic stantibus’. As such, it would attract the same rent ‘vacant and to let’. The appellants also pointed out that even in applying a higher rate on the appellant’s space, the VO had not been consistent and applied different prices to the three floors in an apparent mathematical ‘division of the historical value’. In response, the VO argued the additional facilities afforded to serviced office providers should be reflected in the prices, and the differentials per floor were reasonable, as they reflected relative proximity to shared benefits. Furthermore, there should be an expectation that the sum of the parts at least cover the value of the whole. Agreeing wholly with the appellants and valuing the various offices at £250/m2, the panel determined that serviced office use is not a reason to increase the price per square metre and that serviced offices should be valued similarly to conventional offices, as they stand, in line with the principles of ‘rebus sic stantibus’.

Size / Quantum: Typically, operators will offer a quantum discount for larger takes or conversely charge / demand more for smaller takes. This needs to be considered and built into the valuation matrices. A good source of evidence as to where these break points fall can come from the prices charged by the landlord.

The adoption of quantum, often reflected in ‘size bandings’ derived from the analysis of available evidence, is considered relatively uncontroversial. A typical example is that taken from the decisions in Salon Serve v Alexander (VO) [2014] VTE, Case 281523004215/541N10 (It should be noted that this matter was subject of appeal by the ratepayer to the Upper Tribunal, which was settled by consent of the Upper Tribunal with some changes to the band boundaries and the values attributed to the bands). As a matter of interest, the bandings were determined by the VTE at 0-50m2, 50-100m2, 100-300m2 and 300-500 m2 (and the higher bands altered by UT consent order to 100-250m2 and above 250m2 respectively).

It should be borne in mind that the decision in Salon Serve is a single example based on its own pertinent facts. Local evidence of quantum derived from rental analysis would be expected to produce varying ‘size bands’ for a particular situation, perhaps with more numerous and tighter ranges. Evidence may support differential prices reflecting quantum at bands with ‘size-band’ boundaries lower than 25m2, particularly if single rooms are let.

Therefore, where evidence suggests quantum effects feature in a particular sub-location, and standard office size based valuation schemes are used, it is expected the established protocols for incorporating ‘size bands’ in all relevant valuation ‘matrices’ are adopted. This is the case even if, at the point of creation, no assessments exist in a particular ‘size band’ in the use type, sub-location or relevant geographical area. This ensures that if new small assessments do appear, they are treated consistently with existing smaller sized offices in the vicinity.

The Head Lease: Another important factor to be considered is the operator’s head lease. The rent paid is evidence of what the market is willing to pay for a larger floor space within the same building. From a valuation perspective it must be considered that the RV £/m2 applied for much smaller office assessments, fairly reflects the difference in size. Generally speaking in the office rental market it is usual to see an increase in the rent per m2 paid for smaller sized occupations. One reason smaller occupations command higher rents in part relates to the landlord needing to be able to recoup its increased costs from managing such areas. These costs may relate to any increase in voids, loss of office space caused by an increase in circulation space, an increase in administration costs and professional fees, associated with multiple lettings etc. This in part will relate to what is stated above in that the operator / landlord needs to recoup more than its fixed costs in order to make a profit. This infers that it is unlikely that the combined rental value of the smaller offices would fall below that of the head lease. Having said that, care must be taken not to arrive at unsustainable mathematical conclusions that are not based on the facts and available evidence.

Finally, the VO will need to take a stand back and look at the market as a whole. The valuer will be required to ensure the resultant £/m2, is consistent with other similar assessments across a wider area, as exemplified in Avanta. This will include other serviced offices and standard offices of a comparable size.

7. Serviced Offices - Effective Date

If it is concluded that the individual serviced offices are to be assessed separately, the effective date has to be carefully considered.

In ‘new’ serviced offices (where no previous assessment is in place), it should be relatively straightforward to assign an effective date. However, it is often more complicated for those ‘existing’ offices, that have been in assessment as one hereditament, have been operating as serviced offices for a considerable time, but on investigation are considered to be separate office suite hereditaments.

The ‘Hereditament’ section of the Rating Manual explains that, in England, non-interconnecting yet contiguous properties in the same occupation are treated as one. The guidance is available in Rating Manual: section 3 part 1.

The more recent the effective date, the more likely the relevant circumstances and unit(s) of assessment can be properly established. Where the proposed effective date is more historic it will be important to establish that the current pattern of separate occupations has applied since that date, or to obtain details of former occupations in order to correctly identify the units of assessment and their appropriate effective dates. The operator may be able to provide a comprehensive record of occupations to assist with that task.You may feel you can rely on the billing authority where it can guarantee the effective date of each proposed assessment is reliable. Ultimately, the Valuation Officer must be satisfied that the correct effective date is used for each unit of assessment.

Unless the whole history of occupations can be fully and properly verified, the effective date from which the current pattern of separate occupations commenced should be used for reconstituting the assessment.

Rating Manual section 5a: valuation of all property classes - Offices - Guidance (2024)