Urban rating : being an inquiry into the incidence of local taxation in towns with special reference to current proposals for change

Front matter

BOUGHT WITH THE INCOME

FROM THE

SAGE ENDOWMENT FUND

Chapter I. — The Oeiqin and Natuee op Geound- Eents 7

„ II. — The Deteemination op Geound-Rent ... 25

,, III. — Have GEOUND-RENTSAiiEEADY PAID Eates? 36

„ IV. — The Peoposals to eate Geound-Rents 55

,, V. — Eating as betwb;bn Building-Ownee and

OCCUPIBE 71

„ VI. — Rating between Building-Ownees and

OwNEES OP Fixed Rents ... ... 90

,, VII. — Eating between Building-Ownees and

THE OwNEES OP EbVEESIONS 110

„ Vin. — The Eating op Vacant Building Land 127

Appendix 159

[Note. — The references in the margin are, except when otherwise stated, to the evidence given before the Select Committee on Town Holdings during the Sessions of 1886, ] 887, and 1888, which is a mine of wealth on all questions connected with building land.]

UEBAN EATING.

CHAPTER I.

THE ORIGIN AND NATURE OF GROUND -RENTS.

To the lawyer, surveyor, or land agent, or to any other person having a professional acquaintance with building land, it will appear a waste of time to inquire into the origin or characteristics of ground-rents. But in a layman, however well informed on most subjects, it is extremely rnrc to find anything like an accurate knowledge of the subject; and without an accurate knowledge of what a ground-rent really is and how it has originated, it is quite impossible to enter into any profitable discussion of how it should be treated from the point of view of taxation. While, therefore, it will be open to all professional readers to pass by this chapter unread, for almost all others it will be advisable to give their closest attention to its contents.

When suburban land gradually comes into the Position of building market it is very rarely indied that the ^^^I landowner possesses the capital and the special land, knowledge required for the erection of houses ; and, this being so, he is in general comoelled to dispose of it to some other person for the purpose. On this disposition the consideration received by the landowner may take either of two distinct forms. He may either sell his land, or such part of it as is from

H URBAN KATING.

time to time required, for a lump sum or a succession of lump sums payable either immediately or by instalments. Or he may take his price in the shape of periodical payments of the nature of interest on the capital value of the land, such payments being in fi^eneral calculated annually and made at half-yearly or quarterly intervals. The first of these two methods of paj'-ment constitutes what is conveniently called the " freehold purchase system " of building, and is perhaps the most widely prevalent of all the systems of building in vogue in England. The second method, which is also extensively adopted, especially where the value of land is high and it would be difficult for the builder to provide its capital value, is practised in several different forms, of which the most important are (a) the " freehold rent-charge systemi," which is practically equivalent to the Scotch system of "feu" rents, (b) the 999 years system, and (c) the 99 years system. About these three different methods some words of explanation must be given.

Methods It is obvious that a landowner who is hiring out

out bSd- ^i^ la.T^d for a periodical payment may so hire it out ing land, either (1 ) for the whole duration of his own estate, that is for ever, if he is the owner of the fee simple, or (2) for a term of years practically, though not theoretically, equivalent to a fee simple, such as the ordinary term of 999 years,* or (3) tor a term of years bearing some relation to the probable duration of the buildings to be erected, such as the terras of 200 and 150 vears usual in Dublin or the ordinary London term of 99

* Instances were mentioned before the Select Committee on Town Holdings of leases, or 10,000 and 20,000 years in Ireland and for 5,000 years at Truro.

years. Now, according to the law of England, a landowner who disposes of his land for the whole duration of his estate is unable to create any tenure between himself and the person who deals with him, and is unable therefore to reserve any rent strictly so called, since rent is only one of the incidents of tenure. Rent can only be reserved if the landowner parts with something less in point of duration than his whole estate in the land, so that he has left what is called a reversion — that is, some period of time of whatever length at the commencement of which the land will revert or come back to him on the expiration of the lesser estate which he ,lias granted away.*

Whenever then an English landowner is minded The freein accordance with a custom in the locality, or for charge*" " any other reason, to grant land for ever for building system, purposes in consideration of a periodical payment, he does not attempt to reserve a rent, but limits to himself a rent-charge of the agreed amount, with special provisions (now given by statute) for securing its payment. And from this time forth he is considered in law not as having any estate whatever in the land (which would be the case if he had granted a lease for however long a period, short of the

* It may be well to note here that when a landowner has once made a grant of a lesser estate than his own, reserving a rent, this rent at once becomes incident to and follows the reversion. Laymen often fall into the mistake of talking of the ground-rent reserved on a building lease and the reversion expectant on its termination as two different and separable things. For the purposes of calculation it may often be advisable to separate the two, since, as will be seen later on, the rent payable during the currency of a lease is often no measure whatever of the value of the reversion. But as a matter of fact the two form one inseparable whole and are always conveyed together. A " freehold ground-rent " includes the reversion in fee simple on the termination of the lease. A " leasehold ground-rent " also includes a reversion, though generally only a nominal reversion of a day or two.

10 UKBAN RATING.

duration of his own estate), but as merely entitled to a rent-cliarge issuing out of the land. And this system of payment, or development for building purposes, is conveniently known as the " freehold rent-charge system," while the rent-charges created under it are often (though inaccurately) known in Manchester and other places where the system is prevalent as " chief-rmfe." In Scotland a difference of law allows landowners, while granting away their land for ever, to create a tenure between themselves and the grantees and to reserve a perpetual periodical payment of the nature of rent. These payments are generally known as " fe^i-duties " and the system as that of " feuing."

The build- Qn the other hand, should the custom of the system. locality be to grant land for building purposes for 999 years (as in many of the principal Lancashire towns), or for 99 years (as in London and Birmingham), the landowner leases the land to the builder for the agreed number of years, reserving' to himself a rent of the required amount, and having obviously left in himself a reversion in the land (to which the rent is incident) after the expiration of the term of years which he hai granted. And whether the term so granted be 999 years or 99 years, or indeed whether it be 10,000 yoars or 1 year, the landowner is alike considered in law as having the immediate freehold estate in the land, subject only to the lease. It is, however, obvious that, although in all its legal incidents the 999 years system is precisely analogous to the 99 years system, yet for the practical purposes of valuation it far more closely resembles the freehold rent-charge or Scotch feuing system. For a reversion to occur at the end of 999 years is absolutely worthless, and the interest of the

laTidowner therefore practica'ly only consists in a

perpetual annual payment, as under either of the two

last-mentioned systems. But a reversion to occur at

the end of 99 years, if it has no actual present value,

is at any rate within a " measurable distance " of Tewson

acquiring such a value in the future, the evidence of 3,058. '

experts being that the reversionary value will begin ['figyj

to make itself felt in some 20 or 30 years. TjZSi.

Such, then, are the four principal methods by General

rsviBW of which in England land is covered with houses, building

namely, (1) the freehold-purchase system, under ^^^ ®°^^- which the builder buys the land out and out for a lump sum or a succession of lump sums ; (2) the freehold rent-charge system (nearly equivalent to the Scotch system of ffeuing), under which the builder buys the land for a recurring annual payment which is charged on the land and house as a yearly rent-charge ; (3) the 999 5''ears or long leasehold system, under which the builder pays for the land by a periodical annual payment called rent, and takes a lease of land and house at this rent for a long and practically inexhaustible term of years ; and (4) the 99 years or London leasehold system, under which the builder also obtains only a lease of the land and house, and that for a comparatively short or measurable period, and at a rent which is in fact slightly lower than under either of the two last-mentioned systems, on account of the smaller estate obtained by the builder, and the reversionary value which wUl soon begin to belong to the landowner. It is no part of the scope of this work to treat of any less usual systems of building, such as that of leases for lives or for terms of years dependent on lives, nor to enter into any comparison of the relative advantages and disadvantages of the four more usual methods. Indeed, if a landowner always dealt with a wealthy builder for a single site fronting on a high road properly made and sewered, a sufficient account for the purposes of these pages would already have been given of the methods under which houses are built and paid for and ground-rents and annual payments of the like nature are created. But, as a matter of fact, no one of these three conditions is generally present. As a rule, builders need to raise all the capital they can procure. Considerable areas of land, or at any rate sites for several houses,, are comprised in each transaction by the landowner, and roads and sewers have to be made for purposes of access and drainage ; and thus considerable complications are introduced into what would otherwise be a simple and readily intelligible transaction. The free- A typical instance of the actual development of chase building land on the freehold purchase system was work!" ''^ brought before the Select Committee on Town Holdings from an estate at Newcastle- on- Tyne. The witness (Mr. Spain) says, that whenever any portion rfsss) of the estate is required for building, the land is laid 8,736 ei out by the vendor according to a ground-plan which is submitted to and approved by the sanitary authority ; that builders apply for blocks or for individual sites; that in the case of large blocks they are sold to the builder or purchaser of the houses as the case may be, and he undertakes to pay for the roads and sewers, which are constructed in accordance with plans previously agreed on ; that the builder also agrees to build a certain specified class of house of a specified maximum value ; that on seq.

taking up his agreement in the case of larger blocks he pays 10 per cent, of the purchase-money, and agrees to pay the balance and complete his purchase by a day named, and failing that to pay interest at 4 per cent, for, say, the first two years, and 5 per cent, thereafter ; and that the small builders pay no deposit, but in lieu of deposit pay at so much per yard super., the price thus paid being larger than the wholesale price paid by the purchasers for larger blocks. In other cases, as at Nottingham and Wolverhampton, •'i'^^^°" the landowner is paid at once, and the necessary 12,737! capital, or the bulk of it, is provided by some financial (ig*^), agent or mortgagee. The important points to be i>846-7. noticed are that even under the freehold-purchase system a large proportion of the price has to be provided by the landowner or some third party, and that the roads and sewers are directly or indirectly paid for by the landowner, not by the public.

The actual method of development under the The freefreehold rent-charge system, as practised at Bristol, charge has been described by Mr. Josiah Thomas, the city ^^'r™ ^* surveyor. The owner first makes the roads and sewers in accordance with the requirements of the Josiah local authority, and then lets the plots on these per- (iggg)^ petual rent-charges. The builder cannot in general 3,116-22. afford to pay a lump sum for the purchase of the land, and in order to get money for his buildings he is usually financed by or through the agency of the landowner ; while to further facilitate his operations the rent- charge does not begm to grow payable till from some six to eighteen months after he has begun to build. Here again it is clear that the roads and sewers are provided by the landowner, and that, although the builder has not to borrow for the purchase of his land, since that is provided for him at an annual payment, he has nevertheless to be helped by postponing the period when this annual payment first begins to accrue. Under this system also, as practised in Manchester and some other towns, a considerable tract will sometimes be taken by a land speculator at one entire rent-charge, and he will then, alter forming roads and sewers, let off smaller plots at separate rent-charges, Tvhich in the aggregate exceed the amount of the first rent-charge. His profit will then be derived from the sale of the difference between the rent-charges he has to receive and that which he has to pay, such differences being popularly described as " second chief-rents." These second chief- rents obviously represent not any original land value, but simply and solely expenditure upon land ; and in this and other respects they are analogous to the "improved" or "leasehold" ground-rents, which will be dealt with shortly.

Tiie An exactly similar process seems to take place

f^P^^^i under the Scotch system of feuing, and a rather system at complicated transaction of the kind is described in the following passage from a pamphlet entitled " Should Feu-Duties be Taxed?" *

" We shall suppose that A, the proprietor " of a building estate, feus five acres of that " estate to B for an annual feu-duty of £150, " being at the rate of £B0 per acre. B prepares " a feuing or building plan of the ground, and " marks out roads and streets. B then sub-feus " to C one acre of the ground thus laid out for

* By "Vindex." Edinbiirgh : David Douglas; Glasgow: James Maclehose & Son ; London : Hamilton, Adams & Co. The whole pamphlet is lucidly written, and will well repay a careful study.

ORIGIN AND NATUEE OF GEOUND- RENTS. 15

" building, at a feti-duty of £40. C erects five " villas, each on one-fifth of an acre, and sells " the villas, each with its one-fifth of an acre of " ground, imposing upon each a feu-dutj'^of £10 " in addition to the cash price paid for the villas. " The purchasers from C, viz., D, E, F, Gr, and " H, are then each the proprietor of one-fifth " of an acre of ground, with the villa thereon, " subject to an annual payment of £10 to C. " We shall further assume that the remaining " four acres have been sub-feued and treated in " a similar way, but it will only be necessary " here to follow the history of the one acre we " have noticed. A, in respect of that one acre, " receives £30 a year from B. B, in respect of " the same ground, receives £40 from C. and " hands £30 to A, the difference of £10 per " annum being B's profit on the transaction, " and representing payment for his trouble in " superintending the laying out of the ground. " In the case we have put, the expense of making " roads and drains is borne by the builder, C. " Had B constructed the roads and drains he " would have imposed a larger feu-duty on the " ground when conveying it to C, in order to " recoup his outlay, and the case would have " been rendered more complex by that con- " sideration. We shall take the simple case " where C has borne the cost of roads and " drains, and added the amount to the price of " the villas. C, in selling his houses, endeavours " to get a price that will repay his whole out- " lay and leave him a profit. Part of the price " is paid in the shape of a feu-duty, but by

" mucli the larger part is paid down. In the " case stated the feu-duty imposed by C upon " each of the five villa properties is £10, making " £50 for the five, and as C only pays a feu- " duty of £40, he has an annual profit of £10."'

The 999 No detailed separate account need be given of the

system covering of land with houses under the 999 years system, inasmuch as it is in substantial accordance with the process under the 99 years system, which will be described at some length in the succeeding paragraphs. The building is generally regulated by a preliminary agreement, which defines the character of the houses to be built, and entitles the builder, on their completion, to take up leases of thehouses at the stipulated rent or rents. As under the other systems, the roads and sewers are either directly constructed by the landowner or undertaken by his lessees under arrangements made with him. And in this case also the expenditure of an original lessee upon development may be represented by the excess of the derivative rents which he can charge sublessees from him over the original rent which he has agreed to pay the proprietor of the fee simple. The 99 A more careful examination must be made of the

system at development of land under the 99 years or London T^ork. leasehold system. The general nature of the transaction appears to be accurately described in the following paragraph* from the draft report submitted for adoption to the Select Coijimittee on Town Holdings by Mr. Knowles : —

" Accounts of the development of land under

* Paragraph 28, page 105 of the Report of the Select Committee, 1889.

" the building-lease or London leasehold system

" are given as to London by Mr. Ryde, Mr.

" Gregory, and Mr. Garrard, and as to Birming-

" ham by Mr. Mathews. It appears that the

" general practice is to enter into a preliminary

" agreement for the erection by the builder of

" one or more houses, and for the grant to him,

" when such erection is completed to the satis-

" faction of the landowner's surveyor, of a lease

" or leases at a total agreed ground-rent. When

" a small plot is let the roads have generally

" been previously made by the landowner ; but

" in the case of larger pieces of land the lessee

" often agrees to maljce the roads and sewers,

" paying in that case a much smaller ground-

" rent. The total ground-rent is apportioned

" separately on the houses as they are built,

" the custom often being to secure on the houses

" first built more than their proportionate

" ground-rent, so that towards the conclusion

" of the operations the lessee will often be

" entitled to take up leases of the houses last built

" at a peppercorn or other nominal ground-rent.

" During the process of building the builder is

" accommodated by being charged only a pepper-

" corn rent, or in the case of considerable blocks

" of land a gradually increasing rent as houses

" are expected to be built and let. In the case

" of a large operation the original lessee who

" deals with the landowner may not himself

" build, but may, after forming the roads and

" sewers, agree to sub-let portions at higher

"rents than he himself is paying, and in this

" way there may be one or more intermediaries

B

UEBAN RATIXG.

between the landowner and the actual builder. The profits of these intermediaries consist in the excess during the term which the leases have to run of the rents which they are entitled to receive over the rents which they have to pay, and it seems that they may realise their profits in at least the three following ways, viz. : — (1) By selling this difference of rental to the general public, in which case the propertj'^ sold is obviously a terminable annuity, having the same number of years to run as the leases, and is sometimes therefore spoken of as an improved leasehold ground-rent ; or (2) by selling the difference of rental to the landowner, in which case this difference is added to and increases the freehold ground-rent which he was otherwise entitled to receive ; or (3) by allowing the landowner to take this difference of rental as before, in addition to and by way of increase of his ground-rent, on the terms that the whole of this increased ground-rent is to be considered part of the total rent payable by the intermediary to the landlord, with the result that the intermediary is the sooner entitled to leases of the remainder of the estate at a nominal rent."

Illustration of 99 years system.

The general terms in which the above account is couched may be rendered plainer by a concrete illustration. Let us assume that A, a landowner, agrees to grant 99 years leases to B, an intermediary, of a building estate of 20 acres at a rent of £25 per acre, or £500 in all ; and that five houses per acre, or one hundred houses in all, are to be built upon

ORIGIM AND NATURE OF GKOUND-KENTS. 1 9

the estate. And let us further assume that B, after making- the roads and sewers and developing the estate generally, is enabled to let off the estate to the

actual builders C, D, E, F in small portions

and for the residue of the term of 99 years (less one day) at rents which, after allowing for the portions of land occupied by roads, amount to £60 per acre, or £1,200 in all.* On the working out of the contracts by the erection of the houses, and assuming that the ground-rents are evenly distributed over all the houses, B will become entitled to take up 100 separate leases each of one house for 99 years at a ground-rent of £5, and will be bound to grant to

C, D, E, F 100 separate leases of the same

houses for terms of 99 years less one day, and at a rent of £12 for each house. The beneficial interest which B will therefore acquire in return for his expenditure and risk will consist of 100 separate net annual rents of £12 — £5, or £7, lasting for a term of 99 years and no longer. These terminable annuities are currently known as " leasehold ground- rents," or " improved leasehold ground-rents," the word " leasehold " denoting that B's reversionary interest is of a terminable or leasehold character, and the word " improved " denoting that the rents are not derived from the original value of the land, but are due to the improvement in the value of the land which has been caused by the expenditure and superintendence

* B leases for 99 years less one day in order to preserve a reversion of one day, to which, as explained above, his rent wiU be incident. The increase of rent from £500 to £1,200 may appear large, but so great are the expenses and risks in transactions of this kind that a current rule of thumb in London is, that the margin of profit of the intermediary only begins when he obtains a rent from the actual builders at least double that which he has contracted to pay to the landowner.

B 2

20 UKBAN KATING.

of B. The leasehold reversion to which the rent of B (the intermeiiary) is incident is, as a rule, only a nominal term or reversion of a day or two ; but sometimes (as in the case of many of the houses built under the late Mr. Cubitt on the Duke of Westminster's Pimlico estate) the intermediary may persuade builders to take a term of years (such as 85 years) several years shorter than that to which he is himself to become entitled, and in that case he will get his improved rents of £1 for the first 85 years, and the rack-rentals of the houses for the remaining 14 years.

Eealis- It now remains for B, in the instance above stated,

profit of to realise the capital value of his- improved leasehold ment°^" ground-rents in order to recoup himself for the capital expenditure incurred ; and this he may, according to Mr. Knowles' draft report, eflFect in any one of at least tljree ways. He may in the first place sell to a purchaser the improved leasehold ground-rents — that is, the right to receive out of each house a net rent of £1 for a period of 9'J years. Or, secondly, he may sell to the landowner for a lump sum the right to let a house direct to the builder, C, at the rent of £12 which C has agreed to pay, instead of letting it to him, B, at a rent of £5. Or, thirdly, while allowing the landowner to let to C direct at £12, he may stipulate that this extra rent shall not be paid for in cash, but shall be taken into account against the total rent of £500 which B has to provide for the landowner ; the result being that in case, say, the first forty houses were so let by the landowner. A, to the builders, C, D, and E, at a total ground-rent of £480, the intermediary would be entitled to leases of

OEIGIN AND NATURE OF GROUND-RENTS, 21

the sites of the remaining sixty houses (which he has himself agreed to lease to F, Gr. . . . at rents of £12 each) at an aggregate rental of £20; of which perhaps £1 would be apportioned on each of the first twenty of these houses, while the others would be taken by B at a nominal rent of a peppercorn. And B would thus in this third case, while making no direct profit on the first forty houses built, become entitled to improved leasehold ground-rents of £11 on each of the next twenty houses and of £12 on each of the last forty houses, which he may dispose of in any method he pleases. The practice is in fact very general to secure the total ground-rent payable to the landowner, or the bulk of it, as early as possible on the houses first built ; and thus to leave only small or nominal ground-rents on the sites of the houses last built, which are called " remainder-plots," and to which the intermediary looks to secure his profit.

But there is yet another method (not noticed in Addithe passage cited from Mr. Knowles' draft report) in ^g^^g^ which B may realise his leasehold ground-rents. In- of realisastead of disposing of them to the landowner in augmentation of the rents to which he would otherwise be entitled, he may sell them to the builders, C, D, E, F, in reduction of the rents which they would otherwise have to pay, thus entitling them to take up leases from the landowner at the £5 ground-rent at which he had agreed to let to B, instead of at the £12 ground-rent at which B had agreed to let to C, D, E, F. And if this process takes place with regard to a " remainder-plot " to a lease of which B has become entitled at a rent of £1 or at a nominal rent, B can sell to the builder the right to take up his

URBAN RATING.

Existing ground-rents do not represent real rent.

lease at this still lower or even nominal rent, instead of at the rent of £5 or £12.'

And there is at least one other way in which the ground-rents actually reserved on building-leases are very far from representing the actual rent for the site. It frequently happens that the rental value of the houses when built would be sufficient to adequately secure larger ground-rents than have been agreed to be reserved on the leases under which they are to be held ; and in such cases it is not unusual, either under a clause in the building agreement or under arrangements subsequently made, for the builder to " improve " his ground -rent — that is, to accept leases