Business rates have dominated the news in recent weeks and many commercial property owners have been in uproar at the impending revaluation due to take place next month. However, amidst a backdrop of uncertainty, the Supreme Court has issued a decision which will be applauded by both property owners and developers.
Newbigin (Valuation Officer) v. S J & J Monk concerned vacant first floor office space which, at the time of valuation, was in the course of being redeveloped to form three separate offices. Given that the premises were incapable of beneficial occupation, 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 Monk, however 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. Monk then appealed to the Supreme Court.
The key 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 should apply – that the premises are in a state of reasonable repair and therefore the rates can be valued on a hypothetical lease.
In his judgment, Lord Hodge decided that the reality principle should override the statutory assumption where the property is in the process of being redeveloped/reconstructed. Helpfully, he put forward a three-stage approach which will assist valuers in coming to decisions:
- Consider whether the premises were actually capable of occupation in the state they existed on the assessment date
- If the premises were capable of occupation, consideration should be given as to the mode or category of the occupation
- If any parts of the development are complete and capable of occupation, the statutory assumption should be applied in calculating the rates
Therefore, 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, 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 (the communal lavatory facilities) had been created. Given that the premises were not capable of material occupation at the relevant time, the Supreme Court adopted the common sense approach and held that rates should not be payable.
This is a welcome decision which accords with commercial common sense and developers will be relieved that their rates liability will be reduced whilst their premises are being developed.
However, property owners would be mistaken to think that they can simply allow their properties to fall into disrepair or start a scheme of works for deliberate non-completion. Lord Hodge issued a word of caution by highlighting s.66A 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.
Although the 1988 Act is English law, we think that similar principles are likely to apply in Scotland, particularly since Lord Hodge is a Scottish Judge.
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