RICS PROFESSIONAL STANDARD

The Contractor’s
Basis of valuation
for rating purposes
Global
2nd edition, August 2017 (amended September 2023)
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The Contractor’s Basis

of valuation for rating
purposes
Professional standard, global
2nd edition, August 2017 (amended September 2023)

Published in association with:

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square, London, SW1P 3AD, UK

www.rics.org

No responsibility for loss or damage caused to any person acting or refraining from
action as a result of the material included in this publication can be accepted by the
authors or RICS.

Produced by RICS in association with the Joint Professional Institutions’ Rating

Valuation Forum, which consists of RICS, the IRRV, LPS NI, the RSA, the SAA and the
VOA.

First edition published 1995

This document was originally published in August 2017 as an RICS guidance note and
reissued in September 2023 as an RICS professional standard.

ISBN 978 1 78321 192 0

© Royal Institution of Chartered Surveyors (RICS) September 2023. Copyright in all

or part of this publication rests with RICS. Save where and to the extent expressly
permitted within this document, no part of this work may be reproduced or used
in any form or by any means including graphic, electronic, or mechanical, including
photocopying, recording, taping or web distribution, without the written permission
of RICS or in line with the rules of an existing licence.

Typeset using Typefi.

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Acknowledgments
Lead author and chair of working group

Philip Glenwright FRICS IRRV (Hons) (Shell Real Estate, Shell International Ltd)

Forum stakeholder organisation signatories

Alan Bronte FRICS IRRV (Hons) (Land & Property Services, Northern Ireland)

Martin Davenport MRICS (Rating Surveyors Association)

Hew Edgar (RICS Scotland)

Mary Hardman FRICS (Valuation Office Agency)

Mark Higgin FRICS (Montagu Evans)

Alasdair MacTaggart FRICS, IRRV (Scottish Assessors Association)

David Magor OBE IRRV (Hons) (Institute of Rating Revenues & Valuation)

With special thanks to Forum representatives

Robert Brown FRICS FIRRV (Rating Surveyors Association)

Philip Glenwright (Chair) FRICS IRRV (Hons) (Shell Real Estate, Shell International Ltd)

Sharon Magee MRICS Dip Rating (Land & Property Services, Northern Ireland)

Roger Messenger FRICS IRRV (Hons) (Institute of Rating Revenues & Valuation)

Ken McCormack MRICS (RICS Scotland)

Walter Smith MRICS IRRV (Hons) (Scottish Assessors Association)

Helen Zammit-Willson MRICS Dip Rating IRRV (Hons) (Valuation Office Agency)

Support was also provided by Fiona Haggett FRICS (RICS UK Valuation Director).

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Contents
Acknowledgments ������������������������������������������������������������������������������������������������� ii
RICS standards framework ����������������������������������������������������������������������������������� 1
Document definitions ����������������������������������������������������������������������������������������������������� 2
The Contractor’s Basis of valuation for rating purposes ���������������������������������� 3
1 Scope and application �������������������������������������������������������������������������������������� 5
2 The approach to valuation ������������������������������������������������������������������������������� 7
3 Stages of the valuation approach ������������������������������������������������������������������� 8
3.1 Stage 1 – Estimated Replacement Cost ����������������������������������������������������������������� 8
3.2 Stage 2 – Adjusted Replacement Cost ����������������������������������������������������������������� 10
3.3 Stage 3 – Value of land ������������������������������������������������������������������������������������������� 11
3.4 Stage 4 – Decapitalisation �������������������������������������������������������������������������������������� 13
3.5 Stage 5 – Review ����������������������������������������������������������������������������������������������������� 13
4 Material change of circumstances ��������������������������������������������������������������� 15
5 Conclusion ������������������������������������������������������������������������������������������������������ 16
Appendix A: Table of prescribed decapitalisation rates �������������������������������� 17
Appendix B: Key upper tribunal and higher court cases in respect of
Contractor’s Basis valuations for rating purposes ������������������������������������ 18

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RICS standards framework

RICS’ standards setting is governed and overseen by the Standards and Regulation Board
(SRB). The SRB’s aims are to operate in the public interest, and to develop the technical
and ethical competence of the profession and its ability to deliver ethical practice to high
standards globally.

The RICS Rules of Conduct set high-level professional requirements for the global chartered
surveying profession. These are supported by more detailed standards and information
relating to professional conduct and technical competency.

The SRB focuses on the conduct and competence of RICS members, to set standards that are
proportionate, in the public interest and based on risk. Its approach is to foster a supportive
atmosphere that encourages a strong, diverse, inclusive, effective and sustainable surveying
profession.

As well as developing its own standards, RICS works collaboratively with other bodies at
a national and international level to develop documents relevant to professional practice,
such as cross-sector guidance, codes and standards. The application of these collaborative
documents by RICS members will be defined either within the document itself or in
associated RICS-published documents.

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Document definitions
Document status Definition
RICS professional Set requirements or expectations for RICS members and regulated
standards firms about how they provide services or the outcomes of their
actions.

RICS professional standards are principles-based and focused on

outcomes and good practice. Any requirements included set a baseline
expectation for competent delivery or ethical behaviour.

They include practices and behaviours intended to protect clients and

other stakeholders, as well as ensuring their reasonable expectations
of ethics, integrity, technical competence and diligence are met.
Members must comply with an RICS professional standard. They may
include:

• mandatory requirements, which use the word ‘must’ and must be

complied with, and/or
• recommended best practice, which uses the word ‘should’. It is
recognised that there may be acceptable alternatives to best practice
that achieve the same or a better outcome.
In regulatory or disciplinary proceedings, RICS will take into account
relevant professional standards when deciding whether an RICS
member or regulated firm acted appropriately and with reasonable
competence. It is also likely that during any legal proceedings a judge,
adjudicator or equivalent will take RICS professional standards into
account.
RICS practice Information to support the practice, knowledge and performance
information of RICS members and regulated firms, and the demand for
professional services.

Practice information includes definitions, processes, toolkits,

checklists, insights, research and technical information or advice. It
also includes documents that aim to provide common benchmarks
or approaches across a sector to help build efficient and consistent
practice.

This information is not mandatory and does not set requirements for
RICS members or make explicit recommendations.

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The Contractor’s Basis of

valuation for rating purposes
This is a republished version of the 2017 guidance in accordance with the new RICS standards
framework. It is otherwise unchanged, except for some minor amendments such as
removing the examples previously contained at 1.3, and revisions to appendices A and B to
include updated decapitalisation rates and case law references respectively. The previous
guidance will remain available from the RICS website.

A Background
A1 This professional standard is intended to be applicable for Contractor’s Basis rating
valuations effective from 1 April 2017 and thereafter. The purpose of this professional
standard is to aid the understanding of the Contractor’s Basis for the general rating
practitioner while providing a common framework of the basis for the more experienced
practitioner.

A2 This professional standard supersedes that published in November 1995, which should
be referred to for the original background and purpose.

A3 Appeal decisions made by the courts and upper tribunals together with other legislative
and regulatory changes have led to the need for an update of the original guidance.

A4 The Joint Professional Institutions’ Rating Valuation Forum (JPIRVF) was reconstituted
for this purpose. It is made up of representatives of the Royal Institution of Chartered
Surveyors (RICS), the Institute of Revenues, Rating and Valuation (IRRV), the Rating Surveyors’
Association (RSA), the Valuation Office Agency (VOA), the Scottish Assessors’ Association
(SAA) and the Land & Property Services Northern Ireland (LPS).

A5 The JPIRVF considers that there is a continuing need to clarify and harmonise the use and
application of the Contractor's Basis.

B The Contractor's Basis – the need for guidance

B1 The overall aim of the Contractor’s Basis is to arrive at the effective capital value (ECV)
that is then converted into annual rental value. The primary method of arriving at ECV is to
consider replacement building costs suitably adjusted.

B2 The traditional explanation of the theory underlying the adoption of the Contractor's
Basis is that the hypothetical tenant, instead of taking the subject property at a rent, has the
option of building a precisely similar property for their own occupation, and that the rental
bid for the subject property will be related to the annual equivalent of the capital cost of
building such a property, including provision of the site.

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B3 While this classic explanation may have received approval in case decisions, closer
examination reveals that it is completely artificial since the hypothesis underlying the
concept of rateable value means that the tenant does not, in reality, have the choice between
renting the property and building an alternative.

B4 Appeal decisions made by the courts and upper tribunals highlighted a need for clearer
guidance around this principle.

B5 The objective of a rating valuation is to determine the rent that would be payable for the
subject property in accordance with the statutory definition; no more, no less.

B6 It has to be assumed that the property is owned by a hypothetical landlord who wishes
to let it and that there is a hypothetical tenant who is willing to pay a rent in order to occupy
it.

B7 Although the parties to this transaction are hypothetical, the property is real and the
valuer’s concern is therefore with ascertaining the rental value of the actual property.

B8 There may be a place for a modern substitute approach within the Contractor’s Basis
valuation process depending on the particular circumstances of the property concerned but
it must be credible, realistic and supported technically or evidentially.

In such circumstances the valuer needs to consider (in the light of appeal decisions by the
courts and upper tribunals relevant to the particular property or class of property) whether
or not an appropriate incorporation or adjustment should be applied at Stage 1, Stage 2 or
Stage 5 of the valuation.

B9 It is the rental value of the actual property that is required and the justification for
adopting the Contractor’s Basis approach is that, when properly applied, it provides a guide
to the rent that may be paid where no other valuation method can be used.

B10 The valuer should not venture into a world of speculation that involves departing too far
from the replacement of the actual property in the particular case. In most cases, the costing
exercise should be related to the notional reinstatement of the actual property that is the
subject of the valuation and the further the valuer strays from reality the less weight can be
attached to the valuation produced.

B11 With regard to plant and machinery, it is the actual plant and machinery forming part
of the property that has to be considered in connection with determining rateability. While
alternatives, some of which might be non-rateable, may be considered in ascertaining the
value of the plant and machinery forming part of the property, they cannot determine the
extent of it.

B12 With the above observations in mind, the JPIRVF has updated this professional standard
and added a schedule of relevant decapitalisation rates (in Appendix A) and a schedule of
relevant cases from upper tribunals and higher courts (in Appendix B).

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1 Scope and application

1.1 This professional standard applies to the valuation of property for rating purposes by
reference to a rental value starting from the capital cost of construction. It is commonly
referred to as the Contractor's Basis of valuation.

1.2 The method is employed in the case of properties that are not normally let out, which
by their nature do not lend themselves to valuation by comparison with other classes
where rental evidence does exist, and which are not of the type where a valuation solely by
reference to the accounts of the undertaking would be appropriate. (Note: assessing bodies
may apply differing interpretations as to the emphasis on, or use of, accounts information
depending upon the jurisdiction).

The sale/purchase price of the property as a going concern, suitably adjusted to exclude non-
rateable plant and other relevant matters may also be relevant as evidence of capital value.
However, it is essential that a proper enquiry and analysis is conducted where this is the case
to establish whether this can be accepted as open market value.

1.3 There is no statutory provision as to the circumstances or the classes to which the
Contractor’s Basis of valuation is to be applied. Professional judgement should be exercised
in the choice of valuation method.

1.4 It may also be appropriate to use the Contractor's Basis for the valuation of part of
a property (e.g. particular items of plant and machinery) otherwise valued on a rental or
comparative basis.

1.5 In rating valuation it has to be assumed that the property is owned by a hypothetical
landlord who wishes to let it and that there is a hypothetical tenant who is willing to pay
a rent in order to occupy it. Although the parties to this transaction are hypothetical, the
property is real and the valuer’s concern is therefore with the rental value of the actual
property.

1.6 While interest on cost as a guide to rental value is the basis of the method, it is not
envisaged that the hypothetical tenant should be considered as constructing an actual
property, but that the rental value of the property concerned is being 'tested' by having
regard to the annualised equivalent of the estimated effective capital value (ECV). It would
be inappropriate to assume that either the hypothetical tenant, or someone else, could
or would actually build an alternative property, or that such a person has already built an
alternative property suitable for occupation by the hypothetical tenant.

1.7 As with all valuations for rating purposes, the subject property has to be valued at the
relevant valuation date having regard, in most cases, to the purpose for which it is used or, in
the case of an empty property, to its mode or category of use.

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1.8 Current legislation allows for the prescription of the relevant valuation date, which is
normally prior to the date the valuation comes into effect. This provides the base date for the
costs to be used in arriving at rental value.

1.9 Although costs are to be taken as at the valuation date, the physical state of the property
must be taken to be as at the date specified in the legislation of the particular jurisdiction.

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2 The approach to valuation

2.1 The recommended approach to valuation comprises the five component Stages listed
below which are dealt with in more detail in Section 3.

Stage 1 – Estimate the replacement cost of the site works, buildings, rateable structures
and rateable plant and machinery.

Stage 2 – Apply any appropriate adjustments and allowances to reflect the difference
between cost and effective capital value (ECV).

Stage 3 – Add the value of the land to arrive at total ECV.

Stage 4 – Apply the appropriate decapitalisation rate to the total ECV.

Stage 5 – Stand back and look at the result of Stage 4 and make any further adjustments
considered appropriate.

2.2 Note that in some cases a sixth stage has been added under the heading ‘negotiations’
to reflect any haggling deemed to take place between the landlord and tenant. However, if
stages 1 to 5 are properly applied then it should not be necessary to have a Stage 6.

2.3 Although the valuation process can usefully be broken down into five stages, it is the
property as a whole that is to be assessed. The valuer should therefore take care to adopt an
integrated approach and not be diverted into regarding each stage in isolation. The valuer
needs to have regard to every intrinsic quality and every intrinsic circumstance that will
affect value.

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3 Stages of the valuation

approach

3.1 Stage 1 – Estimated Replacement Cost

3.1.1 Having identified the extent of the rateable hereditament/lands and heritages, the first
stage of the Contractor's Basis is to estimate what it would cost to construct the property,
including all the buildings, site works, and all rateable structures and rateable plant and
machinery within the property, on an undeveloped site.

3.1.2 Parts of the hereditament/lands and heritages may be domestic or exempt so it

is important to establish how the exclusion of these parts from the valuation should be
correctly achieved. This is due to different legislation in England/Wales, Northern Ireland
and Scotland regarding the definition of hereditament/lands and heritages, and how these
different parts are shown in the relevant list/roll.

3.1.3 The estimated cost of replacement should include all of the elements that would go to
make up an actual cost. Design costs, site works, provision of services and supervision costs
(including fees) should all be included in the estimated replacement cost.

3.1.4 Initially, the valuer needs to decide whether to cost the actual property or a substitute.
In most cases costs will relate to the actual property, but there may be cases where it would
be appropriate to cost a modern, simpler or smaller substitute.

3.1.5 Next, the valuer estimates the replacement cost and this can be achieved either by:

a reference to unit costs derived from analysis of actual costs or

b reference to the actual costs of providing the subject property or

c in the absence of sufficient evidence from (a) and (b), reference to other appropriate and
reliable sources of cost estimates.

Unit costs should be the primary method adopted in order to achieve a consistent approach
and ensure uniformity.

3.1.6 Actual costs of providing the subject property may be considered where, for example:

a full records of actual costs incurred at or around the relevant valuation date (as defined
in 1.8) are available

b it is possible to allocate costs clearly between rateable and non-rateable elements within
the actual cost and

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c the property is unique in nature with significant elements that do not readily lend
themselves to the unit cost approach.

If the valuer is using actual costs, care should be taken to exclude non-rateable items and
un-remunerative expenditure, i.e. that which is not reflected in the value of the premises.
Examples may include cost overruns and delays due to untypical weather conditions or
industrial action.

3.1.7 The costing exercise at Stage 1 requires an assumption to be made that construction
is of the property as a whole, based on competitive rates prevailing at the valuation date.
Therefore, any actual cost information will need to be adjusted to correspond with that basis.

3.1.8 In adjusting actual costs there are different indices for buildings, civils and plant and
machinery, etc. that should be applied. The older the cost information the less reliable this
will be and care needs to be exercised to ensure that an appropriate index is applied.

3.1.9 Actual cost information may come in a variety of forms including variation of price
tender cost, firm price tender cost or final account figures. Valuers should be aware that
different considerations are necessary for indexing each type of contract.

3.1.10 Variation of price tender cost should be adjusted from the tender base date
(normally four to eight weeks prior to the contracted start date) to the valuation date.

3.1.11 Firm price tender costs and design and build tender costs should be adjusted
from the mid­point of the contracted construction period (which may not coincide with the
actual period) to the valuation date. However, such costs are the least reliable since they
incorporate an element of speculation. Care should be taken in adjusting design and build
contracts to avoid double counting as the costs will include an element for the design part of
the contract.

3.1.12 Final account figures being the actual costs should be adjusted from the mid-point
between the tender base date and the date of practical completion, to the valuation date.
This is the most reliable form of cost information subject to the guidance in 3.1.6.

3.1.13 Where the cost of a plant item has been invoiced and charged on the basis of a
foreign currency this should be converted at the time of purchase. The valuer should then
apply an appropriate index to adjust to the relevant date. If a more appropriate index is
not available then for the UK the BCIS Plant and Equipment Indices can provide a useful
alternative.

3.1.14 The valuer should take care to reflect the contract size with costs having to be
adjusted to ensure proper relativity between the scale of the actual property and the
contract(s) that formed the basis of any cost information.

3.1.15 The valuer will also need to adjust for any difference in cost levels between the
location of the property being valued and the source of the cost information. Note that most
items of plant and machinery valued separately do not require adjustment for location.

3.1.16 The total cost to be taken at Stage 1 must include all relevant professional fees.

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3.1.17 As the Contractor’s Basis is a notional exercise, it is not considered appropriate to

add VAT to the costs.

3.1.18 In the event that a modern substitute approach is adopted (see 3.1.4) it should be
remembered that strictly speaking this is a Stage 2 adjustment, considered at Stage 1 for
convenience only. Costs should be estimated on the basis of the substitute being of a design
and specification that enables the use of the actual property to be carried out in a fully
satisfactory manner.

3.1.19 Where the modern substitute approach is adopted because the actual building or
item is larger than required – for example, due to changes in technology (and not for reasons
that are personal to the actual occupier) – then the substitute should be costed on the basis
of a size to reflect modern trade and business practices. In all other circumstances the cost
should be based on the actual size.

3.1.20 Paragraphs 3.1.18 and 3.1.19 above outline the basis for the substitute approach.
Further adjustments required to take account of differences between the actual building and
the substitute can still be reflected at Stage 2, or possibly Stage 5, but the valuer should take
care to ensure that these adjustments (especially those made when determining the size of
the substitute building) are not duplicated by way of allowances at Stage 2 or Stage 5.

3.1.21 No adjustment should normally be made at Stages 1 or 2 for grants, or similar

financial contributions that were either paid or would have been available at the valuation
date, as these do not affect the cost of construction. Grants, or the prospect of them, do
not reduce the contract price. Consequently, it is not in general open to a ratepayer in a
Contractor’s Basis valuation to claim that the availability of a grant would have enabled a
tenant’s alternative to have been constructed at a lower net cost.

3.1.22 However, in some instances it may be appropriate to consider whether the

availability of grant has resulted in a hereditament/land and heritages that is more costly,
either because of size or level of specification, than would actually be required by the
likely hypothetical tenant at the valuation date. If this is so, then a simpler and/or smaller
substitute should be costed at Stage 1 (see 3.1.4).

3.2 Stage 2 – Adjusted Replacement Cost

3.2.1 The costs estimated at Stage 1 relate to the provision of new buildings, structures, plant
and machinery, etc. As it is the actual property that has to be valued, in its existing physical
state, adjustments may properly be considered at this stage to reflect certain deficiencies in
comparing the actual property with the 'new' property costed at Stage 1.

3.2.2 The deficiencies that may be taken into account at Stage 2 can, for convenience, be
grouped under the heading of 'obsolescence' and usefully subdivided into the following:

a 'Physical obsolescence' relates to the deterioration of the buildings or other parts of

the property through the wear and tear of the components. Although age is not in

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itself justification for an allowance, the tenant will reflect the prospect of increased
maintenance costs due to deterioration over time by a reduction in his or her rental bid.

b 'Functional obsolescence' relates to the problems that may be present in the design of
the property, which could be deficient by comparison with current requirements, for
example, excessive ceiling heights, inappropriate layout, inadequate load bearing of
floors, inferior heating and ventilation, etc.

c ‘Technological obsolescence' arises where current technology has changed so that the
actual buildings or plant to be valued have become significantly redundant, economically
outmoded or an alternative use has been adopted. Discussion with the ratepayer may
assist in identifying such technological deficiencies.

3.2.3 While an adjustment for the deficiencies of buildings, site works or plant will be
accounted for as referred to in paragraph 3.2.2 above, valuers should bear in mind the
following points:

a An older building may require some adjustment not because of age per se, but because
the original design, services and facilities are outdated.

b It is unusual for an older property not to have been subject to some refurbishment and/
or renewal throughout its lifespan with works such as re-wiring, new windows, etc. being
common. Where this is the case, any allowances need to be reviewed depending on fact
and degree.

c Any adjustments should be approached with caution, as it is not possible to provide

guidance on the level of adjustment that is appropriate for all types and uses of property.
For example, there may be instances where ‘age’ enhances the value of the property,
or where a specific design has quickly become obsolete, or where an item of plant
and machinery has rapidly deteriorated in value. Adjustments in each case should be
considered on their own merits.

3.2.4 Where a modern substitute has been costed at Stage 1, allowances at Stage 2 should
be restricted to the disadvantages of occupying the actual buildings in comparison with
occupying the costed substitute (e.g. higher maintenance and running costs, etc.) since all
other physical and functional obsolescence will have been reflected in the costing at Stage 1.

3.2.5 In practical terms Stage 2 adjustments may properly be viewed from the perspective of
an owner-occupier as Stages 1 to 3 are concerned with capital sums.

3.3 Stage 3 – Value of land

3.3.1 Two stages are involved in valuing the land element. The first is to find the 'cost' of the
site, which is based on the open market capital value of the land as at the valuation date.
The second is to consider any adjustment for any disadvantageous effects that the actual
buildings or rateable structures may have on the value of the site.

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3.3.2 The value adopted for the land should be on the basis that the site is undeveloped,
with such services as existed at the relevant date available for connection, and with planning
permission for development of the property. This will have regard to the existing use and
should reflect all advantages and disadvantages of the site and its location.

3.3.3 There may be some cases where a property is located in an area of high land
value for historical reasons but derives no enhanced benefit from that location. In these
circumstances it may be appropriate to adopt a lower value derived from comparison with
more appropriate locations.

3.3.4 Evidence as to the value of the land should, where possible, be obtained from market
transactions in sites of a comparable size for use within the same mode or category as the
subject property. Any price paid for the site itself may require adjustment to bring it into
line with the date of valuation, or to exclude any value attributable to development not yet
realised.

3.3.5 Caution should be exercised in using individual site rents within the Contractor’s Basis
of valuation as this may misrepresent the value on the rating hypothesis.

3.3.6 For certain categories of property (e.g. masts), there may be a reasonable body of
reliable market evidence for site rental values. In these cases it may be appropriate to use
this evidence for the site element of the valuation.

3.3.7 It may be difficult to establish the appropriate land value when the property is in a
class of its own, and where there is no evidence of a market in land for the particular use.
While it would not be correct to value the site as if it were available for some other use, in
the absence of more suitable evidence the valuer is not precluded from considering values
relating to land used (or to be used), for other purposes in the vicinity. However, such
an approach can only be used to the extent that it would be considered relevant by the
hypothetical negotiating parties.

3.3.8 While the value of the land should reflect all inherent advantages and disadvantages it
should not include any development potential over and above that required for the buildings
and/or rateable structures within the property. Thus, surplus land within the property that
is reserved for future expansion should be valued as it stands, which may result in only a
nominal value being applied. However, the valuer needs to exercise care in distinguishing
surplus land from that which, while undeveloped with buildings, forms part of the overall
development as open areas of amenity land or safety buffer zones that should properly be
taken into account.

3.3.9 To reflect the fact that the whole site is initially valued as undeveloped it is necessary
to apply the average allowance that was adopted at Stage 2 to those parts of the site
encumbered by buildings, etc. This is commonly referred to as the Ebdon allowance.

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3.4 Stage 4 – Decapitalisation

3.4.1 Stage 4 involves the conversion of the sum of the capital figures arrived at in Stages 2
and 3 into an annual equivalent through the application of the appropriate decapitalisation
rate.

3.4.2 Prior to 1990 the determination of the appropriate rate was a matter for valuer
judgment and increasingly became the subject of dispute and litigation. To address this, since
1990 the decapitalisation rates have been set by statute by the respective UK jurisdictions
following formal consultation processes.

3.4.3 The appropriate statutory decapitalisation rates for different classes within each
jurisdiction are set out in Appendix A.

3.4.4 Where decapitalisation rates are prescribed by legislation, this does not allow any
degree of valuation judgment at this stage of the valuation in respect of the rate or the
classes to which they are applied.

3.5 Stage 5 – Review

3.5.1 This is known as the ‘stand back and look’ stage. It should be used to consider whether
any further adjustments are appropriate. Any such adjustments must be made for specific
reasons and cannot be used to circumvent any prescribed decapitalisation rate. It may be
helpful at this stage to revisit any adjustments made at earlier stages to avoid duplication.

3.5.2 Adjustments at this final stage are to reflect factors that affect the value of the property
as a whole and may include such items as poor access, cramped site conditions, inadequate
layout, etc.

3.5.3 This stage provides an opportunity to consider whether the type or use of the property
is in a class which at the valuation date comprises a 'new venture' where demand has yet
to be established and where a pioneering allowance may be appropriate to reflect the
uncertainties facing the hypothetical tenant.

3.5.4 It may be appropriate at this final stage to reflect the economic state of the subject
industry, business or organisation. Specialised buildings and/or plant will be costly to provide
but if there is little or no demand for the product that they are designed to produce (and no
alternative use exists for the property, or part thereof, within the same mode or category of
use), this is likely to affect the value of the property.

3.5.5 While the above adjustment factors only apply in the more extreme situations, it does
underline the need for the valuer to keep in mind that cost does not necessarily equate with
value and to be aware of the state of the particular trade or industry concerned, so that,
where appropriate, adjustments can be made.

3.5.6 It is not appropriate to adjust the value produced by the Contractor's Basis of a
particular part of the whole so that it equals its separately assessed equivalent. The value to

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be determined should represent the value of the whole property and not just the aggregate
of its component parts.

3.5.7 Ability to pay matters may only be considered to the extent that they are not covered in
the setting of any prescribed decapitalisation rate.

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4 Material change of
circumstances
4.1 Depending on the jurisdiction it may be necessary to revalue the property between
general revaluations due to a material change of circumstances (MCCs) to the property or
affecting the property. These may be of a temporary or permanent nature.

4.2 Valid and value significant MCCs to the actual property should be reflected by a
reworking of the relevant stages depending on the facts.

4.3 Valid and value significant changes due to external factors, particularly of a general
nature affecting the property, may most readily be reflected by an adjustment at Stage 5 of
the valuation.

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5 Conclusion
5.1 It is often said that the Contractor's Basis is a 'method of last resort'. However, if the
Contractor's Basis is properly applied in accordance with this professional standard, by
valuers using appropriate professional judgment, it is an acceptable method of ascertaining
the value of properties that cannot be satisfactorily valued by other means.

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Appendix A: Table of prescribed

decapitalisation rates
Northern
England Wales Scotland
Revaluation Ireland
Higher Lower Higher Lower Higher Lower Higher Lower

2005 5% 3.33% 5% 3.30% 5% 3.33% 5.5% 3.67%

[2003] [2003]

2010 5% 3.33% 4.5% 2.97% 5% 3.33% - -

2015 - - - - - - 4% 2.67%

2017 4.4% 2.6% 3.8% 2.1% 4.6% 2.9% - -

2023 4.4% 2.6% 3.4% 1.9% 4.6% 2.9% 3.4% 2.27%

Notes on the above rates:

1 In England, Wales and Scotland the lower rate applies to qualifying educational,
healthcare and Ministry of Defence (MoD) properties save that for 2017 MoD properties
in Scotland revert to the higher rate.

2 In Wales the lower rate also applies to public conveniences for the purposes of the 2010,
2017 and 2023 rating lists.

3 In Scotland the lower rate also applies to qualifying church properties for the 2005, 2010
and 2017 valuation rolls.

4 In Northern Ireland the lower rate applies only to qualifying church, education and
healthcare properties.

5 The higher rate applies to all other categories of property.

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Appendix B: Key upper tribunal

and higher court cases in
respect of Contractor’s Basis
valuations for rating purposes
Please note that this is not meant to be a comprehensive list of all cases where the
contractor’s basis of valuation was considered, but to be a reference point for practitioners in
respect of some key cases.

Jurisdiction Case title Citation Key issues considered

England Oxford 1902 This case is the first recorded case of

and Wales University v RYDE AND the use of a ‘substitute’ building, due to
Mayor of Oxford KONSTAM’s the fact that the property in question
(No.1) 1894-1904 87 had been built as a result of donations,
bequests, etc. and would not have
been built in the same way without this
funding.

England Liverpool (1912) 1 KB These cases refer to situations where in

and Wales Corporation v 270; (1913) AC the absence of better evidence, the price
Chorley Union 197 paid can be considered to arrive at an
annual value. This is because, had that
Metropolitan (1916) 1 AC
sum been invested, it would have yielded
Water Board 337
an annual income, which has been
v Chertsey
161 forgone.
Assessment
Committee

Scotland Magistrates of (1937) SC 549 This case includes a helpful explanation

Perth v Assessor of the theory that underlies the
for Perth and Contractor’s Basis of valuation.
Kinross

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Jurisdiction Case title Citation Key issues considered

England Robinson (1938) 2 All ER This case primarily concerned a public

and Wales Brothers 79 house and whether the higher rents
(Brewers) Ltd v brewers would bid for the property
Houghton and could be taken into account. However, it
Chester-le-Street includes useful passages in the Court of
Assessment Appeal decision (that was upheld) that
Committee refer to the use of indirect evidence to
arrive at the rateable value – such as
‘capital value or cost of construction’
where no direct evidence is available –
‘either of which can, with appropriate
corrections, be converted into
approximately equivalent terms of annual
value’.

England Chandler (VO) v (1958) 51 R & This case involved the valuation of a
and Wales East Suffolk CC IT 541; (1958) County Hall, where both parties had used
29 DRA 361 the Contractor’s Basis of valuation, but
where there was disagreement as to:

• the correct building cost to use to

reach the effective capital value at
Stage 1
• the correct allowances to use at Stage
2
• whether to add fees and
• the correct addition for site value.

England Dawkins [1961] RVR This case gave the classic explanation of
and Wales (VO) v Royal 291 the rationale for the Contractor’s Basis of
Leamington valuation.
Spa Borough
Council and
Warwickshire
County Council

Scotland James A Silver LVAC (1963) This case considered the method of
v Assessor for RA 377; arriving at effective capital value (ECV).
Dumbartonshire (1964) SLT 74 Sales evidence is an element to be
taken into account but the weight to be
attached depends on the circumstances
of the case and the sales.

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Jurisdiction Case title Citation Key issues considered

Scotland N & N Lockhart v LVAC (1963) This case also considered the method
Assessor for Fife RA 499 of arriving at ECV. Sales evidence was
rejected because sales were not for going
concerns.

England Gilmore (VO) v [1964] 4 RVR This case endorsed the five-stage
and Wales Baker-Carr and 7 approach to the Contractor’s Basis
Others of valuation. It also considered it
inappropriate to take into account the
individual tax position of the landlord.

England Downing, [1968] RA 603 The areas of disagreement in this case

and Wales Newham, were:
Churchill and
• the date at which costs should be
King’s Colleges,
taken
Cambridge v
Cambridge City • the type of replacement material to be
Council and taken
Allsop (VO) • which scale to refer to when making
age and obsolescence deductions
(1956 or 1963)
• the allowances for buildings of three
storeys or more
• the value of the land
• the correct decapitalisation rate and
• whether there should be further end
allowances.

England Coppin (VO) v (1970) RA 503; The areas of disagreement in this case
and Wales East Midlands (1971) RA 449 were:
Airport Joint
• whether the cost of work undertaken
Committee
to allow future expansion of the
airport should be deducted from the
valuation
• where to deduct the value of parts of
the building that were not part of the
hereditament and
• how to convert cost to value and then
capital vale to annual value to cost.

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Jurisdiction Case title Citation Key issues considered

England Cardiff City (1973) RA 46 This case identified the factors that were
and Wales Council v considered in setting the decapitalisation
Williams (VO) rate before it was set by statute.

England Leicester City (1979) RA 299 This case established the appropriateness
and Wales Council v of using the Contractor’s Basis of
Nuffield Nursing valuation, where no clearly established
Homes Trust pattern can be observed from
and Another comparables.

England Imperial College [1984] RA This case concerned the valuation of

and Wales of Science and 213; [1986] a college in South Kensington, and
Technology v RA 233 although the estimated replacement cost
Ebdon (VO) and had been agreed at Stage 1, there were
Westminster substantial differences throughout the
City Council remaining stages.

This is the case that established the

Ebdon allowance on land, and is the one
and only case that refers to a sixth stage.

Scotland Fife Regional LVAC (1989) This case concerned the valuation
Assessor RA 71; (1989) of a whisky warehousing, blending
v Distillers SLT 770 and bottling complex on matters
Co (Bottling of calculating the ECV and the
Services) Ltd decapitalisation rate. It stated that cost
does not necessarily equal value, which
must be an effective one in the sense
that it is value that will be remunerative
or produce rent. When considering value
the positions of both the hypothetical
landlord and the tenant have to be
considered.

England Monsanto plc v (1998) RVR This case (a chemical works in Newport,
and Wales Farris (VO) 107 Wales) considered grant, reviewed the
classic Dawkins rationale, and considered
how to convert cost into capital value,
including the owner-occupier perspective
at Stages 1 to 3. It extended the Ebdon
allowance to siteworks.

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Jurisdiction Case title Citation Key issues considered

Scotland Shell UK LVAC (2000) This case concerned the valuation of

Exploration RA 295 a gas terminal at St Fergus, Peterhead
& Production for the 1995 valuation roll, and covered
v Grampian issues such as:
Assessor
• the ‘modern substitute’
• rateability and value of ‘slugcatchers’
where unit cost approach preferred to
indexed actual cost from 1977
• rateability of fire protection, security
and alarm systems and
• the rateability of ‘knock out drums’.

England Eastbourne (2001) RA 273 This case considered the modern

and Wales Borough Council substitute and ability to pay.
& Wealdon
District Council v
Allen (VO)

England Lavery (2002) RA 165 This case concerned the valuation of a

and Wales (Valuation Magistrate’s Court via the Contractor’s
Officer) v Leeds Basis. The main issue was whether grant
City Council could be taken into consideration, but
also involved the use of a percentage
of construction costs for Stage 3 – land
value.

Scotland UKAEA v LT (2006) RA These cases considered the valuation

Assessor for 153 of a nuclear installation during
Highland and decommissioning. Issues considered
LVAC (2007)
Western Isles included allowances, over-capacity,
RA 65;
Joint Valuation superfluity, costs of care and
(2007) SLT 27
Board maintenance, and onerous security,
affirming LT
safety and regulatory regime.
decision

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Jurisdiction Case title Citation Key issues considered

England Allen (VO) v [2009] RA 289 This case revolved around the issue of
and Wales English Sports whether the rateable value of a property
Council and should be amended when a grant had
another been received to assist in its construction,
and also the extent to which flooding of
(also known
a property should be taken into account.
as the Bisham
It also referred to the ability to pay and
Abbey case)
what is taken into consideration at Stage
4.

England British Car [2014] UKUT This case considered the modern
and Wales Auctions Ltd v 164 (LC) substitute:
Hazell (VO)
‘it is important that the modern
(also known as substitute chosen must reflect the use of
the Blackbushe the actual hereditament that has to be
Airport case) valued. The modern substitute chosen
should be able to do the same basic job
that the actual hereditament does. The
choice of a modern substitute is not the
opportunity to adopt a new business
model.’

England Hardman (VO) [2015] UKUT The case related to the valuation of a gas-
and Wales v British Gas 53 (LC) fired power station. A variety of methods
Trading Ltd of valuation was used by the Valuation
Officer to show that the power station
(also known
was worth more than £1. The decision
as the
stated that where the application of a
Peterborough
particular method of valuation produced
Power Station
a ‘surprising’ result, it would be wise to
case)
step back and consider whether or not
the result should be tested appropriately
by using another method of valuation.

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Jurisdiction Case title Citation Key issues considered

England Stephen G [2017] UKUT The case involved several museums and
and Wales Hughes (VO) v 200 (LC) other related properties in York.
York Museums
Case number: The main issue was the method of
and Gallery
RA/20/2015 valuation for historic buildings used as
Trust
museums and visitor attractions, but
also included unit of assessment and
exemption issues.

While the decision confirmed that in this

case the receipts and expenditure (R&E)
method was to be preferred, there was
some interesting commentary on the
Contractor’s Basis.

It stated that:

1 The fact that a valuation based on R&E

suggested a nominal or nil value was not
a reason for rejecting it and resorting to
the Contractor’s Basis.

2 Where there is no reason to believe

that a building like the subject to be
valued would ever be constructed,
the Contractor’s Basis is detached
from reality, and the existence of the
theoretical relationship between capital
cost/cost of construction and rental value
is difficult to accept in the case of historic
buildings used for cultural purposes.

3 They rejected the use of the ‘Monsanto

scale’ as allowances used for a post-war
chemical works had no relevance to
historic listed buildings used as museums
and art galleries.

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Jurisdiction Case title Citation Key issues considered

4 The buildings in this case are of

the type that are rarely or never let,
and although there was insufficient
transactional or settlement evidence
to enable comparative valuations to
be undertaken, it did strongly suggest
that, for non-profit making museums at
least, the Contractor’s Basis produces
valuations that are manifestly too high.

England Celsa Steel [2017] UKUT This case concerned a steelworks and
and Wales (UK) Limited v 0133 (LC) considered whether an additional end
Stephen Clive allowance should be applied at stage
Case number:
Webb (VO) 5, to reflect the fact that the premises
RA/10/2016
operated in conjunction with a second
hereditament nearby.

England Semlogistics [2018] UKUT This case concerned a tank storage depot
and Wales Milford Haven v 0019 (LC) and jetties formed out of a former oil
Stephen Webb refinery and valued on the Contractor’s
Case number:
(VO) Basis. The decision, which has regard
RA/12/2016
to the unusual character of the
hereditament as a repurposed refinery,
considers the application of the modern
substitute/equivalent approach and the
adoption of adjustments, whether at
stage 2 or stage 5, and particularly with
regards to under-utilisation.

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Jurisdiction Case title Citation Key issues considered

England Cemex UK [2019] UKUT This case concerned the valuation of a

and Wales Operations 0106 (LC) quarry, processing plant and connecting
Limited v conveyor, and considered whether the
Case number:
Thomas rate of extraction of minerals is to be
RA/85/2017
O’Dwyer (VO) fixed by reference to the material day for
the purposes of the Contractor’s Basis
valuation. Additionally, it concerned
whether the 1.6 km conveyor, considered
essential to the functioning of the quarry
and cement works, was of value.

England Stephen G [2020] UKUT This case concerned the valuation of a

and Wales Hughes (VO) 0007 (LC) museum located in a historic building
v Exeter City with a modern extension. While the
Case number:
Council Contractor’s Basis was rejected for this
RA/73/2018
particular hereditament, the decision
includes a detailed appraisal of the use
and application of the Contractor’s Basis
method including:

• consideration of socio-economic
benefits
• whether Contractor’s Basis is to be
used where occupation is not for
profit
• modern substitute building
• function of stage 4 of Contractor’s
Basis
• affordability of rent and
• statutory occupation.

The Contractor’s Basis of valuation for rating purposes

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