UK: The Problem With Business Rates In The Real World

Last Updated: 12 July 2019
Article by Bryan Johnston and Ross Wilson

Legal practitioners have been spoilt in recent years by a wealth of important cases concerning business rates. This has helped understanding in respect of key areas such as valuation of contiguous hereditaments, whether ATM machines are separately rated and whether a stripped-out building should be assumed to be in repair when considering its rateable value. Whilst great news for lawyers, it is frustrating for business and property owners that the rating system continues to throw up uncertainty in its operation. There are two recent cases worthy of note.

Telereal Trillium

In Telereal Trillium v Hewill (Valuation Officer) [2019] UKSC 23, the Supreme Court had to determine whether or not a property for which there was no market in the real world should be assumed to have a market on the basis of the rating hypothesis. The property was situated in Blackpool and had been continuously used as government offices since 1972. The property had been vacant since the start of the 2010 rating list. At trial, the parties agreed that, at the relevant valuation date, there was no real world market for the property. They agreed that a hypothetical tenant was to be assumed but that the issue for determination was whether or not a general demand should also be assumed as evidenced by the occupation of other office properties with similar characteristics. If so, then the rateable value was to be £370,000. If not, then it would be £1 – a significant and substantial difference.

Unsatisfactorily, the result ping ponged between the Valuation Tribunal, the Upper Tribunal and the Court of Appeal before it reached the Supreme Court. The Supreme Court in a majority (not unanimous) verdict held that a general demand was to be assumed and the value was £370,000. The court drew a distinction between a property at the end of its economic life and one that happened to exist in a saturated market. The former would attract a nominal rateable value whereas the latter would and should not. Therefore, the rating hypothesis is to assume a willing tenant sufficiently interested to enter negotiations to agree a rent on a statutory basis. This is the case even if the property is unoccupied and there is no market for it in the real world. Valuation evidence is to be assessed by reference to the "general demand" derived from occupation of other properties with similar characteristics.

This decision is of concern. It moves away from real world realities – the position adopted by the Court of Appeal and the minority in the Supreme Court. Property owners left with un-let properties that are economically within their lifespan now face the prospect of rating liability for property they cannot let following any relief period being used up. This is particularly damaging as the property owner will not be deriving rental income at this time. Instead, it is left with an unwelcome rating liability for its undesired property. Savvy landowners will no doubt try to offset their exposure either by setting up an avoidance scheme (such as a "Makro" scheme where a property is occupied for a period of six weeks, triggering a subsequent ability to claim empty rates relief) or by seeking to put the property into a condition that would not be assumed to be in economic repair and thus not be liable for business rates. Neither approach is particularly satisfactory from either perspective, but that is the consequence of ignoring the real world in the statutory hypothesis.

Canary Wharf

Jackson (Valuation Officer) v Canary Wharf [2019] UKUT 136 (LC) is an Upper Tribunal case concerning the valuation of property that is not capable of beneficial occupation as a result of the property undergoing redevelopment. This issue had previously been considered by the Supreme Court in Newbigin (Valuation Officer) v. SJ & J Monk [2017] UKSC 14. In Monk, the court held that, where the property is incapable of beneficial occupation because it is undergoing redevelopment, the property should not be assumed to be in repair for valuation purposes (as it would be uneconomic for the landowner to put the property back into repair). In other words, in Monk, the reality principle trumped the hypothetical tenancy arising from the assumed state of repair of the property. This was clearly a good result for property owners and developers undertaking works to their properties.

Canary Wharf gives them further cause for celebration. In this case, the owner stripped various floors in 1 Canada Square back to shell. In respect of two floors, the owner sought to amend the rating list to reflect a nominal value for the floors following the stripping back. The valuation officer accepted that the floors were incapable of beneficial occupation. However, the officer took the view that, in the absence of any further works, the property was not undergoing redevelopment and therefore the floors should be assumed to be in repair for valuation purposes. 

The Valuation Tribunal rejected the Valuation Office's position. The Upper Tribunal more firmly rejected it, holding that the property being incapable of beneficial occupation was the "beginning and the end of the appeal". Therefore, whether a building is incapable of beneficial occupation as a result of refurbishment is a matter of fact. There is no absolute requirement to have a defined scheme of works, or an outline for future development. The lack of end date for works is not fatal either. There is also no need for a programme of works that includes refurbishment immediately following a strip-out. 

In summary, the Upper Tribunal's decision is an excellent result for landowners and developers. Undertaking works making a property incapable of beneficial occupation will result in a nominal rateable value. Where appropriate, redevelopment works can be a tool to limit rates exposure, though clearly commercial and market factors will be highly relevant to any such decision to carry out works.

The two cases concern the application of different hypotheticals and both deliver different outcomes – one that embraces reality and one that remains in the hypothetical world. Whilst the ratepayer benefits in one case, it loses out in the other. More widely, the cases expose frustrations with the operation and application of the rating system. There is presently an ongoing Treasury Select Committee inquiry into business rates. The inquiry is expected to report on its findings in autumn 2019. What happens from then remains to be seen but, in the meantime, business rates will continue to cause problems for landowners in the real world.

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