20 March 2017 #Commercial Real Estate
The Supreme Court recently considered whether commercial premises undergoing substantial redevelopment works had to be valued on the day of valuation for business rates as if they were still a useable office.
Newbegin (Valuation Officer) v S J & J Monk concerned vacant office space which, at the time of valuation for rating purposes, was in the course of being redeveloped to form three separate offices. The premises were not capable of being occupied so the owner requested that the premises be described as a “building undergoing reconstruction” for rates calculation purposes, which would result in a rateable value of £1. The Upper Tribunal found in favour of the owner but this was overturned by the Court of Appeal, which held that the works should be categorised as works of repair rather than improvement, and should therefore not attract a reduction in rates. The owner appealed to the Supreme Court.
The question for the Supreme Court was whether the premises should be valued by having regard to the actual physical condition at the valuation date (“the reality principle”), or whether the statutory assumption contained in para 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988 which states that the premises are assumed to be in a state of reasonable repair and the premises valued for the purposes of business rates as if they were still a useable office should apply.
The Supreme Court decided that the reality principle should override the statutory assumption where the property is in the process of being redeveloped/reconstructed. A three-stage approach was put forward which will assist valuers in coming to decisions where works are being carried out on an existing building:
Accordingly, the test to be applied by valuers is an objective one. The intentions of the owner are irrelevant. However, in carrying out the objective assessment of the physical state of the premises on the material day, the valuation officer can consider the programme of works which is being undertaken. In Monk it was of relevance that the premises had been largely stripped out and an outline of the future development had been created. Given that the premises were not capable of material occupation at the relevant time, the Supreme Court held that business rates should not be payable.
Developers and property owners will be relieved that rates liability will be reduced whilst premises are being developed.
Property owners who allow their properties to fall into disrepair or start a scheme of works for deliberate non-completion will not be able to avoid business rates. The Supreme Court highlighted s.664A of the 1988 Act, which gives power to the Secretary of State to make regulations to disregard changes in the state of unoccupied property and may be used to undermine attempts by owners to avoid rates.