Arthur Wilson Fox.

The rating of land values; notes upon the proposals to levy rates in respect of site values online

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Secretary to the Royal Commission on Local Taxation.

Revised, with Addenda






If OS'

December i, 1905.

Dear Lord Balfour,

It has been suggested to me on several occasions
that some notes upon the proposal to levy rates in respect
of site values, which I made when I was Secretary to the
Royal Commission on Local Taxation, would, if published,
prove of some use to those who wish to study this subject.

The lamented and untimely death of my friend and
colleague, in the Secretaryship of that Commission,
Theodore Llewelyn Davies, has prompted me to act on
this suggestion, in order that the opportunity may be taken
of associating his name with a subject to which he had
devoted much time, and on which he was a recognised

Some weeks before his death he stated that in reviewing
the work which he had undertaken during his career, none
gave him greater satisfaction than his contributions to
this question.

By his advice these notes were added to in certain
particulars, and he wrote Chapter VIIL himself.

Yours very truly,


To the Lord Balfour of Burleigh, K.T.,

Chairman of the Commission.

4 -I C))^0

The proofs of tills little volume have been
revised fov press by Mr. E. J. E. Craven, whose
services as Chief of the Staff on the Royal Commis-
sion, the Author gratefully achwudedges.




I. — Proposals to rate Land Values i

IL — Methods of selling and leasing- Biiildinfj Land . . . 3
II L — Summary of Arguments advanced for and against the

Rating of Site Values 12

IV. — "Unearned Increment" . 19

V. — How far Lessees and Occupiers take the Rates into con-
sideration when making their Bargains. Incidence of

Rates .......... 26

VI. — The London County Council Scheme . . . -33

VII. — Mr. Fletcher Moulton's Scheme 38

VIII. — Who is the owner of Site Value or in enjoyment of Site

Value ? 40

IX.-^Mr. McKenna's Scheme ....... 43

X. — Existing Contracts ........ 45

XI. — Rating on Capital Value. Municipal Death Duty . . 49
XII. — Possibility and Cost of making a separate Valuation of

Sites 56

XIII. — Rating of Building Land 67


XIV. — Rating of Land Values and Feu Duties . . . .81

XV. — Rating of Building Land 92

I. — Extracts from Reports of Royal Commission on Local

Taxation ......... 97

II. — Housing of the Working Classes Commission (1885).

Extract from Report ....... 123

III. — Extracts from an article by Professor Edgeworth in the
Eco7io)nic Joia-nal^ March, 1906, entitled "Recent
Schemes for Rating Urban Land Values". . . 127
IV. — Summary of Bills for the Rating of Land Values in
England and Scotland, introduced into the House of
Commons since the issue of the Final Report of the
Royal Commission on Local Taxation . . . > '^37


I. — Summary of the Land Values (Scotland) Bill introduced

into the House of Commons in 1907 .... 143

IL — Extracts from the Report of the Select Committee on the
Land Values Taxation, (S:c. (Scotland) Bill, signed by
the Committee on December 13, 1906 .... 146

The Marginal References are to the Reports
of the Royal Commission on Local Taxation, unless
otherwise stated.




I. — Proposals to Rate Land Values.

Proposals to levy a special rate in respect of land values
in urban districts have been before the public in England
and Scotland for several years.

As far as England is concerned, the movement appears to
have largely originated in London, and latterly to have been
especially identified v^ith the London County Council, who
have from time to timeconsidered and discussed the subject.

The proposals necessarily involve a separate valuation Costelloe,
of sites, apart from the buildings upon them, and, in the ^°|^" ^J^ g^
form in which they have been presented, they also involve App. No. XI.,
a system of levying a rate upon ** owners " ^ in respect of p^gt^hej.
site values. This rate upon owners might be in addition Mouiton.
to, or in lieu of part of, the ordinary rates now imposed M^n. of Ev.,
upon occupiers. It is suggested that the " owners" rate ^PP- ^°- ^°'
should be deducted by the lessees from the rent they pay De Bock
to their lessors. There may be a number of "owners" ^"yH'Vr
between the owner of the freehold and the occupying Min. ofEv.,
tenant. App. No. IX.,

par. 7.

The present system is to value, without separation, a Sargant,

building and the land upon which it stands, and then to J^^J; ^(^'gv.,

levy a rate upon the occupier in respect of the annual App. No. XI.,

value of the whole hereditament, leaving the adjustment co'steUoe

of the burden to be determined by contract between the Vol. 11. of

,• ., 1 Ev.,App.No.

parties themselves. XI., par. 3.

The proposals include the levying of a rate upon owners

1 " Owners," according to the definition of the London County

Council, are "persons deriving a revenue, or use equivalent to
revenue, from the value of a site."

R.L.V. B


in respect of unoccupied building land in urban districts,
and on land ripe for building on the outskirts, whether
unoccupied or used for agricultural purposes.

The suggestion to levy a rate in respect of site values
upon all persons in enjoyment of some interest arising
out of site value, is of comparatively recent growth.
The late Mr. Costelloe, when giving evidence before the
Royal Commission on Local Taxation, traced the develop-
ment of the movement among the members of the London
County Council from its first constitution. He said " it
was undoubtedly felt at that time as a grievance, that the
large ground owners of London were in no way contri-
buting to the very great and growing cost of London
administration and improvement, which was being paid
out of the pockets of the occupying ratepayers."

The proposal then before the public for dealing with
this question was usually referred to as " the taxation of
ground rents." Shortl)^ it was a proposal to put a special
tax on the owners of the freehold, with the object of getting
some contribution from them in respect of their rever-
sionary interests. It was a tax on a reserved rent which
had been agreed to be received free of rates and taxes,
which might have no relation to the value of the site at the
time it was created, and might, therefore, be no complete
indication of the whole bargain between the parties, nor a
measure of the value of the reversion. Moreover, this
scheme did not deal with persons other than the free-
holder, having more immediate and, perhaps, larger
interests in site values, and drawing a revenue from them
Costelloe, during the continuance of a lease. But, at that time,
Min. of Ev., Mr. Costelloe pointed out, the question *' had not been
App. No. XI., thought out in all its bearings," and the grievance referred
to "was a kind of object lesson, which directed attention
and stimulated closer inquiry."

Another proposal which had been made for a number of
years in England, with the object of obtaining some direct
contribution from owners, was the division of rates between
owners and occupiers, on the principle existing in Scotland.


But the two proposals — i.e., to rate ground rents, and to
divide rates between owners and occupiers — were made
with somewhat different objects. The former aimed at
securing some present contribution in respect of the
increase in the value of sites, due to the expenditure of
money derived from rates or from other causes, the latter
at throwing upon the lessor some part of the increased
burden of rates, which it is suggested could not have been
in contemplation at the time of the making of the lease.

II. — Methods of Selling and Leasing Building


Before proceeding to deal with the various arguments
which have been put forward in support of and against
the proposal to assess site values to local rates, it will
be convenient to refer shortly to the system of selling
and leasing land for building, and to the method of
developing it.

Generally speaking, landowners have neither the capital, Sargant on
nor the special knowledge required, to erect houses on their H'^^-^"
land, and they, therefore, usually dispose of it to some pp. 7, 27, 28.
other person for this purpose — often a speculator who
builds to sell again.

The principal building systems throughout the country Sargant,

Vol. IV. of

are : —

(i.) The freehold purchase system.

(2.) The freehold rentcharge system.

(3.) The 999 years leasehold system, which is very

prevalent in Lancashire.
(4.) The London, or 99 years system, which is also a

common one in Birmingham and other towns.
In the case of (i) the owner parts with the whole of his Mathews,
estate for a lump sum, or a sum paid in instalments, and 22,049'.
there is consequently no reversion of it, or of any part of Sargant,

., , , . . r . , . Vol. IV. of

it, to him at any luture time. j^in gf ev.,

In the case of (2) the owner parts with the whole of his -'^PP- ^°- ^-^
estate, in consideration of the payment of a rentcharge of

B 2


, of Ev.,


.No. XI.,



Cross, 21,595,

and Vol. IV.

of Min. of








Vol. IV. of
Min. of Ev. ,
par. 17.

De Bock


22, 809-12, and

Vol. IV. of

Min. of Ev.,


par. 4.


Vol. IV. of

Min. of Ev.,


par. 16.

F. W. Hunt,



Vol. IV. of

Min. of Ev.,


par. 2.

F. W. Hunt,


De Bock





and Vol. IV
of Min. of
Ev., App.
No. VI.,
par. 2.

agreed amount, charged on the land and houses, and in
this case there is also no reversion.

In the case of (3) the owner does not part with the
whole of his estate, but creates a tenure for a term of years,
in consideration of a rent, at the end of which term the
land and houses upon it revert to his heirs. This system
is a common one in towns in Lancashire and in other
northern counties. Often a lump sum is paid down and a
small rental, sometimes a peppercorn rent, is charged.
In this case the reversion is so remote that its value is
merely nominal.

In the case of (4) the prospect to the owner of the
acquisition of the reversion is more immediate.^

The process of leasing building land may be shortly
stated, as follows : —

When land is considered by the owner to be ripe for
building, he must either equip it for the builder by
making a road frontage suitable to the situation, and
also sewers, or he must lease it at a lower rent to a
builder or a speculator, who undertakes the development
before commencing to build. When the roads and sewers
are completed to the satisfaction of the Local Authority
(who frequently undertake some of the work themselves,
charging the cost to the owners or lessees), they are taken
over and maintained by them. In the case also of the
freehold purchase system and the freehold rentcharge
system, the owner must either lay out money on the
necessary development, or take a less price for the land.

The cost to the site owner of developing the land for
building, and the accumulation of the interest on the cost
until the whole area is let, are considerable. The interest
on this outlay is said to frequently represent from twenty-
five to thirty per cent, of the ultimate ground rent.

Mr. Mathews, of Birmingham, the well-known surveyor,
and Mr. Harper, the Principal Statistical Officer of the

^ Evidence was given before the Town Holdings Committee in 1887
that a reversionary value begins to make itself felt within 70 or 80
years from the date at which it will fall in.


London County Council, a°^ree that if site values were ff/g^"^T°'-

1 1 1 T • 1 1 • 1 1 1 IV. ofMin.

assessed to local rates, expenditure in developing the land of Ev.. App,
would have to be taken into consideration ; but Mr. Harper ^°^ ^\-\
has expressed the opinion that after a certain number of Wainwright,
years such value " becomes merged in the value of the land." ^^'^, ^''^'


" If," says Mr. Harper, "the expenditure in question took 22.190, and
place within the present generation, or say not more than ^9j^ oTev
thirty years ago, a deduction in the shape of a fair per- App. No. VI.,
centage upon such expenditure should be allowed from the ^^^' ^^'
present annual value of the site before levying a tax upon 22,263-6, and
it. Where, however, the expenditure took place more Y^^- ^X'-^^
than thirty years ago, the difficulty in obtaining accurate App. No,
particulars of the cost, and the fact that the original outlay ^ ^-^y ^^^'
will in all probability have been recouped, render a de- Cross,
duction no longer desirable. A longer period might be
necessary for work of unusual strength and durability,
and the percentage to be deducted should also be elastic
within defined limits."

In the case of manufacturers, the system of leasing Mathews,
building land for a long term of about ninety-nine years ^9^- ^Yp°^
is said to be an advantage to those who wish to employ App. No. v.,
their whole capital at a trade profit, as they can build ^^^' '^'
without tying up any part of it at a lower rate of interest
in the purchase of freehold sites. This system is a common Mathews,
one in London and Birmingham. 22 049'

When the land is equipped, the owner is prepared to
lease it for a long term to a building lessee, creating ground
rents which are secured upon the land, and also upon the
buildings when erected upon it. The amount of the ground
rent is fixed, having regard to the undertaking of the
building lessee to pay all usual tenant's rates and taxes
present and future, during the continuance of the term,
and it is contended by many that it is accordingly reduced
by the estimated amount of such burdens.

By this arrangement the owner secures for himself a
fixed income, incapable of increase during the continuance
of the term, and unlikely to be decreased, for the ground
rent is usually well secured. During the continuance of


the lease he can of course sell the ground rent for a lump
sum. Covenants are often made by the lessee to spend a
minimum sum on buildings of a specified class, built to an
approved plan in a specified time. At the end of the term
the land and the buildings upon it revert to the owner of
the site, who can then grant a fresh lease, having regard
to the new elements, such as the increase, or possibly
the decrease, in the value of the site, the state of the
buildings, and the amount of rates payable in respect of
the property.

In the meantime, however, the building lessee would
have let the premises at a rent calculated to secure him,
in addition to the ground rent, a profit on his capital out-
lay, having due regard to the question of repairs, insurance,
interest and sinking fund, the tenant agreeing to pay all the
usual rates and taxes. The term of this lease is frequently
much shorter than that of the lease of the site. At
the end of the term, the building lessee, or immediate land-
lord, would grant a new lease to the sitting tenant, or to
a new one at an increased rental if the neighbourhood has
improved, or he might charge a premium. In such a case
the building lessee would put in his pocket the profit on
the increased value of the site, and, if his tenant again
sub-let during the term, and obtained a premium or an
increased rental, he would do the same. But the building
De Bock lessee may create improved ground rents and sell them

Vof Yv of separately ; he may sell the property itself, subject to
Min. of Ev., improved ground rents which he retains for himself; or he
pan e! ° ' "^3-y elect to take his profit, not by creating and selling
improved ground rents, but by obtaining a larger price
when selling the leasehold subject to a comparatively
low ground rent.

There may, of course, be a series of sub-lessees who
have parted with their leasehold interests, except for the
reversion of a few days, by obtaining a lump sum down,
or who have secured improved ground rents during the
continuance of the term, larger in amount than those
reserved under their own leases. The last sub-lessee,


namely, the occupying tenant, would have the present
benefit of any increase in the value of the site.

Mr. Sargant gives the following illustration of the Sargant on
development of land under the 99 years, or London Rating, p. 16.
leasehold system : —

" 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 100 houses in all, are to be
built upon the estate. And further, let us 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 12I. — 5/., or yl. — 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 im^provement in the
value of the land which has been caused by the
expenditure and superintendence of B. The leasehold
reversion to which the rent of B. (the intermediary) is
incident is, as a rule, only a nominal term or reversion
of a day or two."


Ibid, p. 20. Mr. Sargant then points out that B., in order to re-

coup himself for his expenditure, may realise the capital
value of his improved ground rents in the following ways: —
(i.) He may sell to a purchaser the improved leasehold
ground rents — that is, the right to receive out of
each house a net rent of yl. for a period of 99 years.
(2.) 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 12I., which C. has agreed to pay, instead of
letting it to him, B., at a rent of 5^.
(3.) 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 pro-
vide for the landowner ; the result being that in
case, say, the first 40 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 the sites of the remaining 60
houses (which he has himself agreed to lease to F.,
G. at rents of 12/. each) at an aggregate rental of
20^. ; of which, perhaps, i/. would be apportioned
on each of the first 20 of these houses, while the
others would be taken by B. at a nominal rent of a
peppercorn. B. would thus in this, the third
case, while making no direct profit on the first
40 houses built, become entitled to improved
leasehold ground rents of ul. on each of
the next 20 houses and of 12I. on each of the last
40 houses, which he may dispose of in any method
he pleases.
Mr. Sargant shows that the general practice is 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.


(4.) Instead of disposing of them to the landowner in
augmentation of the rents to which he would other-
wise 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 12I. 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 il. or
at a nominal rent, Mr. Sargant points out that B.
can sell to the builder the right to take up his lease
at this still lower or even nominal rent, instead of
at the rent of 5/. or 12I.
It is further stated by Mr. Sargant, that it frequently lUd, p. 22.
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 agree-
ment, or under subsequent arrangements, for the builder to
*' improve " his ground rent, that is, to accept leases from
the landowner at higher ground rents than were agreed on,
upon payment by the landowner of a certain number of
years' purchase of the excess of the ground rents actually
reserved over those agreed to be reserved.

It will thus be seen that site value and ground rent are De Bock
not synonymous terms. Owing to the endless variety of y°j*Yy r
circumstance and arrangement, it is not unusual to find a Min. of Ev.,
number of houses of similar rack rent held under leases at ^^^'q °'
ground rents varying greatly in amount. The ground Sargant,
rents actually reserved on particular houses may exceed Min. of Ev.,
the ground rents really agreed to be accepted by the ^PP- ^°- ^^■
landowner, or they may fall short of the ground rents a/so" Urban
agreed to be accepted, and may be merely nominal. 0^23"^'
Sir A. De Bock Porter, Secretary to the Ecclesiastical
Commissioners, has stated that the bulk of the older



22,050-71, and
Vol. IV. of
Min. of Ev.,
App. No. VI.,
par. 5.
and Vol. IV.
of Min. of
Ev., App.
No. v.,
par. 3.
Vol. II. of
Min. of Ev.,
App. No. v.,
par. I.

town property in London is held upon long leases at
ground rents, which range from a nominal rent to a rent
which represents two-thirds, or even three-fourths, of the
rack rent of the premises. In many such cases premiums
have been paid on the grant of the lease in consideration
of a small reserved rent.

The actual methods of leasing building sites are numer-
ous, varying according to the purposes for which they are
required, and to the custom of particular localities. The
following are, however, those which are the most usual : —
(i.) A lessee takes a site for the erection of a house or
trade premises for his own occupation. The lessee
is generally allowed sufficient time for the erection
and equipment of the building before the ground
rent becomes payable.

In this case the ground rent, less the interest on
the capital expense incurred by the owner in the
development, is the real value of the land.

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