Roger Cohen raises the curtain on a keenly awaited Supreme Court appeal and explains why property industry bodies felt the need to intervene
On 4 February 2015 came a warning that something had gone wrong. The Court of Appeal had spent the day hearing a case about business rates. A rating surveyor, observing the proceedings from the public benches, was concerned that the panel might come to an unexpected and, for property owners, an unwelcome outcome.
Why was the rating surveyor in the court that day? The Court of Appeal had to rule on the assessment for rating of a stripped-out floor of an office building. The floor, described in the rating list as “offices and premises” had been vacant since 2006. It was entered in the rating list with a rateable value of £102,000. The lease was only surrendered in 2009. At the time of surrender, the space had raised floors, suspended ceilings, category 2 lighting and comfort cooling. In March 2010, the freeholder, SJ & J Monk (“Monk”), entered into a contract with a contractor to strip out all internal elements, construct new common parts and also three proposed new letting areas. By January 2012 the strip-out had occurred.
The first twist
So far, an unexceptional set of facts. But there was a twist. Monk made a proposal to alter the rating list to show a rateable value of £1 because circumstances affecting the rateable value changed in 2010. What was the change? It was a scheme of works ongoing at 1 April 2010 rendering the premises incapable of beneficial occupation. The proposal became an appeal that was heard and dismissed by the Valuation Tribunal. It was a victory for the valuation officer (“VO”), Mr Newbigin.
Monk appealed to the Upper Tribunal (Lands Chamber) (“the UT”) where the case was heard by one of its surveyor members. The UT considered whether the rateable value ought to be only £1 because the premises were undergoing a scheme of refurbishment that altered the rateable unit or hereditament.
The VO argued that one assumes that the premises had been reinstated from their actual physical state to their former physical state prior to commencement of the strip-out. This follows from an assumption in the rating legislation that the premises are “in a state of reasonable repair, excluding any repairs which a reasonable landlord would consider uneconomic”.
The Valuation Office Agency policy was that:
- Regard should be had to whether the outcome of an ongoing scheme of works would result in a different hereditament. If it would, then the works required to complete the scheme are not works of repair.
- The intention of the particular ratepayer or building owner about the end product of a partly executed scheme or works is a relevant factor.
The policy was under attack. That was the first twist.
The second twist
The UT reached two conclusions. First, it held that the statutory assumption did not require that these premises had been reinstated. Second, it found that the premises were not capable of beneficial occupation as office premises due to their actual physical state.
So the UT allowed the appeal and reduced the rateable value from £102,000 to £1.
The UT ruled against the VO both on the facts and the law. That was the second twist.
The third twist
The VO appealed to the Court of Appeal, which gave judgment on 13 February 2015 – Friday the 13th, or Black Friday, if you will. It held that the replacement of stripped-out, non-structural elements was repair. Therefore, one assumed that Monk’s premises were in repair and they were rateable. The Court of Appeal reinstated the rateable value of £102,000.
The court criticised the policy. The rateable quality of land is not to be determined by what it once was or by what it may become. So a scheme of works is irrelevant, as is the ratepayer’s intention about the end product of the works.
Valuation officers have been making the most of this “Black Friday” judgment. The outcome is a much more expensive regime for owners or developers dealing with repairs, alterations, refurbishment or redevelopment. In practice, developers must now allow for rates to be paid from completion of the strip-out until the development or refurbishment work itself begins. In one case, the developer has a rates liability of an extra £8m, if the Court of Appeal is correct. The viability of some schemes has been compromised.
Still time for a fourth?
Fortunately, Monk applied for permission to appeal to the UK Supreme Court. This gave an opportunity for the British Property Federation (“BPF”) and the Rating Surveyors Association (“RSA”) to support the industry. They applied for and were granted permission to intervene in the appeal to make submissions on the legal issues. They did so as official bodies which could add something to the submissions of the main parties. Interventions are often helpful to the Supreme Court but are infrequently encountered in property disputes. The BPF and the RSA arranged the funding for the intervention from their members.
The Supreme Court hears the appeal next Monday, 7 November. Counsel for the BPF and the RSA will comment on
- the rating context;
- the Court of Appeal’s analysis;
- “repair” in the rating regime;
- the correct approach according to the interveners; and
- the practical implications of what has been decided so far.
This appeal raises matters of fundamental importance regarding the valuation assumptions as to the physical state of properties subject to rating. Owners and developers will be hoping for a judgment that enables, rather than hinders, improvement to the built environment.
Roger Cohen is a real estate sector partner at Berwin Leighton Paisner. He acts for the BPF and the RSA in this appeal
