Property owners and developers should be aware of the Supreme Court decision in the case of Newbigin (Valuation Officer) v SJ & J Monk and its impact on business rates. In this case the Supreme Court had to decide whether a commercial building in the process of redevelopment should be valued for business rates as if it was still usable. In giving primacy to the longstanding “reality principle” the Supreme Court decided that it should not.
The facts of the case
SJ & J Monk is the owner of the first floor of a commercial building in Sunderland. The property had previously been let to a single tenant, but after standing vacant for four years, in 2010 the owner decided to undertake works to divide the first floor office into three separate offices.
The rateable value for the first floor office had been £102,000. However, by 6 January 2012 the property was in shell condition and the owner applied to alter the rating list. The owner proposed a nominal value of £1 on the basis that the property was a “building undergoing reconstruction” and not capable of rateable occupation i.e. it was not a hereditament.
The Valuation Officer disagreed with the owner’s challenge, however the nominal value was confirmed by the Upper Tribunal. The Valuation Office Agency appealed to the Court of Appeal, who found in favour of the Valuation Officer. Paragraph 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988 (as amended by the Rating (Valuation) Act 1999) provides that the rateable value of vacant property is based on the rent reasonably obtainable for the property, on the assumption (amongst other matters) that the property is in a state of reasonable repair and that the tenant bears the cost of the repairs. This principle is known as the “repairing assumption”. The Court of Appeal acknowledged the existence of the “reality principle” but found that such a principle could be displaced by the statutory assumption and therefore the property’s rateable value should be calculated on the basis that the necessary works had been carried out.
The Supreme Court
The Supreme Court overturned the decision of the Court of Appeal. The court unanimously ruled the reconstruction of the property must be taken into consideration, and that the rateable value should be reduced to a nominal figure during those works.
The court held that rating law was underpinned by the “reality principle”, a 19th century principle which states that a property should be valued as it was on the material date. Properly applied, the “reality principle” had to be considered first before the application of the “repairing assumption”.
This decision essentially changes the starting point for assessing the rateable value of a property. Valuation Officers must now first consider whether the property in question is actually capable of occupation at all. If not then the property cannot be assumed to be in a state of repair and the rating value should be nominal in value.
This decision will certainly be welcomed by property owners and developers. The alteration and refurbishment of properties will be made more affordable by not imposing rates on empty premises, and additionally by giving greater clarity as to the costs involved in redevelopment at the outset.
However, property owners and developers must be careful not to assume that they are free to develop their property as they please and avoid business rates. The following point should be borne in mind:
- There will inevitably be further disputes as to whether a property is being ‘redeveloped’ and whether this redevelopment prevents occupation.
- The Supreme Court acknowledged concerns about the possibility of developers commencing works, but not completing them in order to avoid rates.
- Comments in the Supreme Court judgment hypothesise that where a redevelopment is done on a part-by-part basis, then when a part of the property becomes capable of occupation, then that part could be valued for business rates.
Following the decision in Newbigin (Valuation Officer) v SJ & J Monk it seems logical to ask whether there will be further change to the rating system. The most recent revaluation came into effect in England and Wales on 1 April 2017 but has received widespread criticism. There have been suggestions that the government should pursue a wholesale review of the system, so that, for example, rates are based on an occupier’s profits rather than an assessment of the property’s value.
23 August 2017
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
For any further information on the above please contact Tim Barwick on 020 7003 8104 or email firstname.lastname@example.org