Rating – Non-domestic rates – Alteration of list – Refurbishment – Hereditament shown in rating list as office and premises – Premises incapable of beneficial occupation while scheme of refurbishment works carried out – Appellant ratepayer making proposal to reduce rateable value of hereditament to £1 – Repair assumption in para 2(1)(b) of Schedule 6 to Local Government Finance Act 1988 – Whether hereditament to be assumed to be in state of reasonable repair at material date – Appeal allowed
The appellant owned a hereditament comprising the first floor of a modern three-storey office block in Sunderland. The premises had formerly been occupied by tenants as a single office suite. In March 2010, the appellant engaged a contractor to carry out renovation works with a view to attracting new tenants; the works included stripping out and remodelling the interior to make it adaptable for use as either a single suite or three separate suites.
The hereditament was listed in the 2010 non-domestic rating list as an “office and premises” at a rateable value of £102,000. In January 2012, the appellant made a proposal, under regulation 4 of the Non-Domestic Rating (Alteration of Lists and Appeals) (England) Regulations 2009, to reduce the rateable value to a nominal figure of £1. It relied on the scheme of refurbishment works as being a material change of circumstances which made the list inaccurate by affecting the rateable value of the hereditament.
The respondent valuation officer rand the Valuation Tribunal for England (VTE) both rejected that proposal. The VTE held that, on the application of the “repair assumption” in para 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988, the hereditament should be assumed to be in a condition of reasonable repair as an office and premises at the material date in January 2012 since the repairs necessary to put it into repair were not uneconomic.
That decision was reversed by Upper Tribunal, which held that the replacement of the major building elements that had been stripped out would go beyond “repair” and that the assumption of repair in para 2(1)(b) did not extend to the replacement of systems that had been completely removed. It held that, since the hereditament was incapable of beneficial occupation as an office and premises on the material day, the list should be altered to show it as a “building undergoing reconstruction” with a rateable value of £1: see [2014] UKUT 14 (LC).
The VTE’s decision was subsequently restored by the Court of Appeal: see [2015] EWCA Civ 78; [2015] EGLR 28. The appellant appealed.
Held: The appeal was allowed.
(1) It was a long-established principle of rating law that a hereditament should be valued as it in fact existed at the material day. That “reality principle” continued to be a fundamental principle of rating and was manifested in Schedule 6 to the 1988 Act, in particular in para 2(6) and (7), which provided that certain matters relating to the property, including matters affecting its physical state and the mode or category of its occupation, should be taken to be as they were assumed on the material day. The Court of Appeal had erroneously interpreted Schedule 6 as entailing a major departure from the reality principle by requiring that the hereditament be assumed to be in a reasonable state of repair for the mode of occupation listed in the rating list, namely as “offices and premises”. That approach was incorrect. The statutory “repair assumption”, namely the assumption of reasonable repair at the outset of a hypothetical tenancy, did not address the question of whether the premises were capable of beneficial occupation, which, in the context of a building undergoing redevelopment, was a logically prior question. The repair assumption applied to matters affecting the physical state of the hereditament, within para 2(7)(a), but not to the mode or category of occupation of the hereditament, within para 2(7)(b).
(2) A valuation officer was not required to disregard the fact that a building was incapable of occupation because it was undergoing reconstruction. Whether premises were being reconstructed, rather than simply being in a state of disrepair, had to be assessed objectively without regard to the subjective intentions of the owner. In carrying out that objective assessment of the physical state of the property on the material day, the valuation officer could have regard to the programme of works that was being undertaken. If the works were objectively assessed as involving redevelopment, there were no grounds for applying the assumption in para 2(1)(b) to override the reality principle and to create a hypothetical tenancy of the previously existing premises in a reasonable state of repair. This was both because a building under redevelopment, like a building under construction, was incapable of beneficial occupation and because, in any event, the hypothetical landlord of a building undergoing redevelopment would normally not consider it economic to restore it to its prior use.
When, in the course of a redevelopment, some part of the developed property became capable of beneficial occupation, and thus became a separate hereditament, the assumption in para 2(1)(b) might apply to that part. However, para 2(1)(b) neither deemed the development to be complete nor assumed that the building in whole or in part was in a state of repair.
(3) There was no statutory bar to an application to alter the rating list to reflect the actual state of a hereditament undergoing redevelopment. Radical alterations, whether or not they were structural, that rendered the hereditament incapable of occupation might justify a proposal to alter the rating list under regulation 4 of the 2009 Regulations on the ground that the rateable value shown in the list was inaccurate by reason of a “material change of circumstances”. A proposal to alter the description of the hereditament on the rating list from “offices and premises” to “building undergoing reconstruction”, and consequently to reduce the listed rateable value to a nominal amount, could be implemented if the facts, objectively assessed, supported that alteration. Nor was there any rule that a building could only be listed as “under construction” once the works had proceeded so far that it was no longer economic to restore the hereditament to its former state by means of repair.
(4) On the facts found by the Upper Tribunal, the appellant’s premises were undergoing reconstruction in January 2012 and the tribunal had been entitled to alter the rating list to reflect that reality.
David Reade QC and Dominic Bayne (instructed by SJ & J Monk) appeared for the appellant; Sarabjit Singh and Matthew Donmall (instructed by the legal department of HM Revenue and Customs) appeared for the respondents; Daniel Kolinsky QC and Luke Wilcox (instructed by Berwin Leighton Paisner LLP) appeared for the interveners, the Rating Surveyors Association and the British Property Federation.
Sally Dobson, barrister
Click here to read a transcript of SJ & J Monk (a firm) v Newbigin (VO).
