Existing use value of a tenanted building in an appraisal

Existing use value of a tenanted building is the number most often wrong in a viability appraisal, and it is wrong in a predictable direction. Appraisals tend to value the building as if it were let at full rental value, to a good covenant, with vacant possession available on request. Real tenanted buildings have passing rents below or above the estimated rental value, terms that run for years, tenants with statutory renewal rights and dilapidations liabilities that cut both ways.

National guidance puts existing use value at the base of the benchmark land value, so an overstated figure inflates the benchmark and makes the scheme look less able to support affordable housing than it is. Reviewers know this and go there first.

Why tenure changes existing use value

Existing use value is the value of the land and buildings in their current use, before any value attributable to the proposed development. For a vacant building that is a capital value derived from comparable transactions. For an income producing building it is an investment value, derived from the income stream and the risk attached to it.

The two can be far apart. A secondary office let at a rent agreed in a stronger market, to a tenant with four years unexpired, is worth considerably more as an investment than the same building empty. Equally, a building let on a short term at a low rent, with a break next year and a tenant in administration, may be worth less than its vacant possession value because the purchaser inherits a problem.

So the first question in the appraisal is not what is this worth. It is what exactly is being valued: the investment, the vacant building, or the land. Say which, and say why, in the Viability Assessment rather than leaving the reader to infer it.

Capitalising the passing rent

The conventional approach capitalises net income at a yield drawn from comparable investment transactions, then deducts purchaser's costs. Each input is contestable.

Where the building is over-rented, the appraisal should separate the term income from the reversion and treat the over-rented element with the shorter horizon it deserves. Where it is under-rented, the reversion has value, and an appraisal that ignores the uplift at review understates existing use value. Both adjustments cut against whoever is making them, which is a good sign that the work is honest.

State whether the valuation is on an investment basis or a vacant possession basis in a single sentence at the top of the section. A reviewer who has to work that out from the arithmetic will assume the less favourable reading.

Vacant possession and what it costs to get

A development appraisal needs the site cleared, which means the leases have to end. For business tenancies with security of tenure under Part II of the Landlord and Tenant Act 1954, that is a process with a timetable and a price.

The landlord opposing renewal on redevelopment grounds relies on ground (f) in section 30(1), which requires an intention to demolish or reconstruct that the landlord must be able to prove. Where possession is obtained on that ground, the tenant is entitled to compensation under section 37, calculated by reference to the rateable value with a higher multiplier where the tenant has been in occupation for 14 years or more.

So the cost of vacant possession has four parts: compensation, the professional costs of the process, the holding cost of the period until possession, and the risk that a tenant resists and the timetable slips. Show each as a line in the appraisal. An appraisal that assumes vacant possession on day one, for a building with three protected tenancies, has the land value and the programme both wrong.

Where leases were contracted out of the 1954 Act, say so and reference the relevant clause, because that single fact changes the analysis and a reviewer will want to verify it.

Lease expiry, breaks and holdover

Build a simple timeline from the rent roll: each lease, the expiry date, any break and its conditions, the notice periods, and whether the lease is contracted out. Then overlay the development programme.

Break clauses are usually conditional. A tenant break requiring vacant possession and payment of all rent due is commonly ineffective if those conditions are not met, and a landlord break may be conditional on service of notice in a precise form. Do not assume a break will be exercised cleanly.

Holdover is the state where a protected tenancy continues after the contractual term pending renewal or termination, and the tenant keeps occupying at the passing rent. It can run for a long time. An interim rent application can increase the income during that period, which is a point in the landlord's favour in the appraisal but needs the procedural step to be taken.

Illustrative example: a 1960s office building has four tenancies, two contracted out and expiring within 18 months, one protected with nine years unexpired at a rent 20 per cent below estimated rental value, and one in holdover. The appraisal values the term income to the earliest practical possession date, adds section 37 compensation for the protected tenancy, and shows an 11 month holding period before site clearance. All figures are illustrative.

Dilapidations and reinstatement

Dilapidations work both ways and most appraisals show neither side.

On expiry, the landlord may have a claim against the tenant for breaches of repairing covenants, which is a receipt. That claim is capped by section 18(1) of the Landlord and Tenant Act 1927 at the diminution in the value of the reversion, and where the building is to be demolished the diminution is usually nil or close to it. An appraisal that shows a large dilapidations receipt on a building due for demolition is not credible.

On the other side, the landlord may owe the cost of reinstating tenant alterations, or may have a liability for disrepair affecting other occupiers. And where tenants are to be relocated within the holding, fit out contributions and rent free periods are real costs.

Treat all of this as a short schedule with a stated basis, and expect it to be queried. Our note on independent review of a viability appraisal sets out how reviewers approach contested inputs.

Where the figure is usually overstated

Five recurring overstatements. Valuing at estimated rental value rather than passing rent. Applying a yield from a stronger asset class. Ignoring the cost and delay of obtaining vacant possession. Showing a dilapidations receipt that section 18(1) would extinguish. And including an element of hope value attributable to the proposed development, which does not belong in existing use value at all.

That last one is the most consequential. Existing use value is the value in the existing use. The premium that reflects the landowner's incentive to sell sits separately in the benchmark land value, and folding development hope into the base figure double counts it. National viability guidance is explicit that the price paid for land is not a justification for a higher benchmark, and the same logic applies to a value derived from development expectations.

The evidence a reviewer will test

Attach the rent roll, redacted if necessary, and the lease summaries showing term, break, review and whether the tenancy is contracted out. Attach the yield evidence as a schedule of comparable investment transactions with dates, prices and unexpired terms. Attach the rateable values used for any compensation calculation.

Then write the assumptions out as a numbered list, each with its source. Reviewers appointed by authorities work to a fee and a deadline, and an appraisal whose inputs are traceable gets fewer challenges than one where the valuer's judgement has to be reconstructed. The format matters as much as the content, which our note on viability appraisal submission format explains, and the specific issues on historic buildings are covered in listed building conversion viability.

Build the lease timeline before the appraisal, not after it. Browse all 66 PlanScope report types to see which documents a viability submission typically sits alongside, and have any draft reviewed before submission.

PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval. This is general guidance, not legal advice, so check the position with your local planning authority or a qualified professional before relying on it.