Redeveloping a commercial building: the impact of business rates

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Owners of commercial premises can finally heave a sigh of relief on learning the outcome of the long-awaited decision of the Supreme Court in Newbigin v SJ&J Monk, a saga that was first decided by the Valuation Tribunal in October 2012.

The question decided by the Supreme Court on 1 March 2017 was apparently simple: “Does a commercial building which is in the course of redevelopment have to be valued for the purposes of rating as if it were still a useable office?”

The treatment of premises which had been stripped out

Shock waves were felt in the commercial real estate sector when, in February 2015, the Court of Appeal (led by the highly respected Lord Justice Lewison) overturned a decision of the Upper Tribunal. He answered the question raised in this case in terms that meant premises which have been altered and stripped out could be assumed – for rating valuation purposes – to be premises of the kind (for example, office premises) that existed before those works took place – and to be premises of that kind that are in a reasonable state of repair. Shell premises could therefore, for rating valuation purposes, be valued as offices in a good state of repair and non-domestic rates demanded on that basis.

Industry concern

This had not been the industry’s understanding of how non-domestic rates would be applied. Valuation Office Agency guidance was amended to reflect the Court Of Appeal decision, pending an appeal to the Supreme Court. The Rating Surveyors Association and the British Property Federation were given permission to intervene and to make submissions in the appeal proceedings.

In a relatively short leading judgment given in the Supreme Court by Lord Hodge (with whom the four other judges sitting with him all agreed, making the decision unanimous) there is a description of a familiar scenario in which:

• a 1990s office building in Sunderland fell vacant and the landlord eventually accepted a surrender of the lease from its tenant;
• the premises were stripped out by the freeholder’s contractors with a view to providing more flexible space;
• the premises stood empty for some time while they were marketed as available for rent, either as three separate office suites or as a whole;
• a proposal to the Valuation Officer that the description of the premises on the rating list should be altered to “building undergoing reconstruction” with a rateable value of £1 was rejected; and
• the central issue was described as whether the premises should be rated by having regard to their actual physical condition on the relevant date, or whether the legislation required a Valuation Officer to assume that they were in reasonable repair as offices on that date.

The importance of the “reality principle”

Referring to the old-established principle of rating law that premises are valued as they in fact existed on the material day and to the 1953 and 1967 predecessors to the current, 1988, legislation and to its amendment in 1999, Lord Hodge adopted what he regarded as “a helpful intervention” by the RSA and BPF, describing the correct approach as follows:

• Is a property capable of rateable occupation at all? if so, it is a ‘hereditament’.
• If a property is a hereditament, what is the mode or category of occupation?
• Is the property in a state of reasonable repair for use consistent with that mode or category?

The first two stages of this process involve the application of the reality principle. At the third stage the Valuation Officer applies the statutory assumption regarding the state of repair of the premises, if the reality is otherwise.

In ascertaining whether premises are undergoing reconstruction, rather than simply being in a state of disrepair, the subjective intentions of the owner are not relevant; the matter must be assessed objectively – having regard to the programme of works which is in fact being undertaken.

In the Monk case “the premises were incapable of beneficial occupation, because, as an objective fact, they were in the process of redevelopment and no part of them was capable of beneficial use. If the works are objectively assessed as involving such redevelopment, there is no basis for applying the [statutory] assumption... to override the reality principle and to create a hypothetical tenancy of the previously existing premises in a reasonable state of repair.”

For more on rates, see our article, on the revaluation of business rates.