It has not been rosy in the business rates garden recently. Following the Woolway v. Mazars decision, the vagaries of the business rates revaluation and the complete uncertainty and potentially adverse consequences flowing from Check, Challenge, Appeal, the ratings and property industries would be forgiven for bunkering down under a siege mentality. However, at last there is some relief for those manning the barricades. The Supreme Court has overturned the Court of Appeal decision in Newbigin v. Monk. This will be extremely welcome news to developers keen to ensure that their developments are not assumed to be properties in repair subject to business rates.
The Court of Appeal determined that a property undergoing redevelopment was assumed to be in a state of repair where it was economic to carry out the repairs. It considered that individual items of renewal (e.g. the air-conditioning system) amount to individual items of repair. The consequence of this was that a developer either had to rely on repairs being uneconomic or possibly demolish the whole building so that the assumption on repairing did not apply (i.e. renewal of the whole could not be construed as a "repair").
This created uncertainty as to what was considered "economic" and how a development would be treated where an existing building was stripped back to its shell, but not demolished. In respect of the "economic" argument some first instance guidance emerged from Barber v. Cerep III TW Sarl where it was considered that the cost to repair being equivalent or greater than two years' worth of rent would not be economic. However, this was fact-specific and first instance. It provided at best tentative guidance, but no certainty.
The Supreme Court has decisively overturned the Court of Appeal and applied a welcome reality check. Gone is the uncertainty concerning the repair assumption and whether or not the assumed repair is economic or otherwise. Instead, it is back to basics. The question to ask is whether the property is capable of beneficial occupation. This is an endorsement of the "reality principle" where properties are to be valued for rating purposes based on the state that they are in on the valuation day. If the property is, in reality, not capable of beneficial occupation, then it cannot be assumed to be in a state of repair (economic or otherwise).
Therefore, a property undergoing redevelopment should be listed as such where it is not capable of beneficial occupation. If that is the case, then its RV should be listed at a nominal value. An owner of a property undergoing development should therefore be able to make a proposal to alter the list in order to minimise exposure to business rates whilst the property remains incapable of beneficial occupation.
The Supreme Court did indicate that if part of the property becomes capable of beneficial occupation during the redevelopment, then it separately could be assumed to be in repair and be separately listed. Developers should pay heed to this in order to avoid this situation arising, or else ensure that the area capable of occupation is then quickly occupied by a third party who will be liable for the business rates for that part of the property.
The Newbigin decision is a fundamental one that the development industry will be relieved with. It does, however, only tackle one material issue adversely impacting on the rating and property industries. There are other weeping sores that still need to be addressed.
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