Beyond the headlines: business rates and building works

Introduction

Business rates made headline news in the first quarter of this year. Revised rates took effect on 01 April 2017 and, while liabilities fell in some parts of the country, many businesses in London and South East England are now paying much more.

Rates are calculated by reference to the rental value of a company’s premises. The latest adjustments are driven by significant changes in those rental values since the last rating revaluation in 2010.

Click here for a recent Real Estate Breakfast Briefing at which Simmons & Simmons partner Deian Rhys and guest speakers from Jones Lang LaSalle discussed the key legal and commercial issues arising from the changes to business rates.

In this article, we focus on the recent Supreme Court decision in Newbigin (Valuation Officer) v S J & J Monk (a firm) [2017] UKSC 14. Rates are the responsibility of the owner of a commercial property where there is no tenant in place, and the question before the Supreme Court was whether a building undergoing redevelopment ought to be valued for rating purposes as if it were useable space.

Background

The premises in question, the first floor of an office building in Sunderland, had been vacant since 2006. In 2010, the owner, S J & J Monk, employed a contractor to strip the premises back to shell and carry out works to create three self-contained offices that could be let separately.

The works were ongoing on 06 January 2012, the material date for valuation purposes, and major elements of the building were still absent, including the air conditioning system, electrical wiring, sanitary fittings and most of the ceiling tiles.

The premises were described on the 2010 rating list as “offices and premises” and were given a rateable value of £102,000. The owner challenged the rating and argued before the Valuation Tribunal that, owing to the physical state of the premises:

• the description on the 2010 rating list ought to be “building undergoing reconstruction”, and
• the rateable value ought to be a nominal amount of £1.

The Valuation Tribunal disagreed but the owner succeeded on appeal to the Upper Tribunal. That decision was later overturned by the Court of Appeal and the owner appealed to the Supreme Court.

Decision

The Supreme Court considered two concepts:

• the reality principle: it has long been established in rating law that premises must be valued based on how they exist on the relevant valuation date, and the principle is captured in Schedule 6 to the Local Government Finance Act 1988 (the “1988 Act”), and
• the repair assumption: the 1988 Act provides that, where non-domestic premises are vacant, the rateable value of the premises is based on the annual rent reasonably obtainable for the property assuming that, before the tenancy begins (and regardless of their actual state), the premises are in reasonable repair, excluding any repairs that a reasonable landlord would consider to be uneconomic.

The key question before the Court was whether:

• the reality principle applies, so that the rateable value is based on physical condition on the material date, or
• the repair assumption overrides the reality principle, so that the Valuation Officer must proceed on the basis that, on the material date, the premises were “offices and premises” in a reasonable state of repair.

The Supreme Court preferred position A and overturned the Court of Appeal's decision. The Court found that, where a property is undergoing redevelopment on the material date and cannot be occupied as a result, the repair assumption does not override the reality principle. It held that the rating list ought to be amended in this instance and the rateable value reduced to £1.

Conclusions

The Supreme Court recognised the importance of the decision in the context of rating law. The decision clearly has significance for owners and developers of vacant commercial premises too, particularly in view of the recent increases in business rates, which can add significant cost to any project and act as a disincentive to development.

Ratepayers can now conclude the following:

1. Rateable value is based on physical condition on the material date. Major alterations, structural or otherwise, may therefore justify a change to the rating list if they rule out occupation of the premises.

2. Where premises are being redeveloped, the first question is whether they are capable of occupation. If they are not, there is no need to consider the state of repair of the premises. However, there may still be a dispute as to:

   1. whether or not works amount to redevelopment, and
   2. prevent occupation, so a ratepayer embarking on a programme of works should still take advice as to the application of the principles set out in the Supreme Court decision.

3. The intentions of the owner of the premises are irrelevant when assessing whether a property is being redeveloped or is simply in disrepair. The Valuation Officer must approach the question objectively on the material day but can take into account the programme of works being undertaken.

4. If, as redevelopment works progress, a part of the premises becomes capable of occupation and, as a result, a separate property for rating purposes, the repair assumption may apply to that part.

5. The anti-avoidance provisions embedded in the 1988 Act apply. The Supreme Court relied on the existence of these measures in dismissing fears that the decision would see ratepayers attempting to abuse the system by removing building services and claiming that premises are incapable of occupation as a result.