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, nor the special knowledge required, to erect houses on their land, and they, therefore, usually dispose of it to some other person for this purpose - often a speculator who builds to sell again.
The principal building systems throughout the country are: (1.) 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 (1) the owner parts with the whole of his estate for a lump sum, or a sum paid in instalments, and there is consequently no reversion of it, or of any part of it, to him at any future time.
In the case of (2) the owner parts with the whole of his estate, in consideration of the payment of a rentcharge of agreed amount, charged on the land and houses, and in this case there is also no reversion.
Rating, pp. 7, 27, 28.
Sargant, Vol. IV. of Min. of Ev., App.No. XI., par. 2.
Cross, 21,595, and Vol. IV. of Min. of Ev., App. No. IV., par. 16. Mathews, 22,029, 22,049.
Sargant, Vol. IV. of Min. of Ev., App. No. X., par. 3 (d).
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.1
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
Cross, Vol. IV. of Min. of Ev., App. No. IV., par. 17.
De Bock Porter, 22,809-12,and Vol. IV. of Min. of Ev., App. No. IX., par. 4. Cross, Vol. IV. of Min. of Ev., App. No. IV., par. 16. F. W. Hunt, 22,586. Mathews, Vol. IV. of Min. of Ev., App. No. VI., par. 2. F. W. Hunt, 22,593-5. De Bock Porter, 22,809-11. Mathews, 22,190-2, and Vol. IV of Min. of Ev., App. No. VI., par. 2.
1 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, agree that if site values were assessed to local rates, expenditure in developing the land would have to be taken into consideration; but Mr. Harper has expressed the opinion that after a certain number of years such value "becomes merged in the value of the land."
"If," says Mr. Harper, "the expenditure in question took place within the present generation, or say not more than thirty years ago, a deduction in the shape of a fair percentage upon such expenditure should be allowed from the present annual value of the site before levying a tax upon it. Where, however, the expenditure took place more than thirty years ago, the difficulty in obtaining accurate particulars of the cost, and the fact that the original outlay will in all probability have been recouped, render a deduction 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 building land for a long term of about ninety-nine years is said to be an advantage to those who wish to employ 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 one in London and Birmingham.
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.