A see-saw battle over whether a 1970s office block in Blackpool has a rateable value of only £1 has ended in a split decision at the Supreme Court, where justices ruled that a much higher sum applies.
By a majority of three to two, the Supreme Court found that Mexford House – which was formerly occupied as offices by the Department for Work and Pensions and Her Majesty’s Revenue and Customs, but has been empty since 2009 – has a rateable value (RV) of £370,000.
As RV is a key component in the calculation of business rates, the ruling leaves owner Telereal Trillium potentially facing significant sums in empty property rates.
Roger Cohen, partner at Bryan Cave Leighton Paisner, said that the decision “will disappoint the managers of corporate real estate budgets”.
He said: “The premises here were no longer required by the tenants in the real world. Nor would there have been any takers in a hypothetical letting campaign.
“The presence of general demand for comparable space was sufficient to enable a valuation for rating at a substantive, not a nominal, figure.”
Business rates consultant Blake Penfold added: “The impression is clearly left that both sets of Supreme Court justices might have preferred a position whereby the existence of a ‘saturated market’ – that is to say, more properties than tenants that could be identified for them – should be reflected in a reduced value, rather than a stark choice between full value, and a nominal figure. As Lord Briggs said in his dissenting judgment: ‘Demand for a letting of a particular property is not normally a binary, yes or no, question. The real question is, demand at what rent?’
“The ratepayer will, no doubt, be disappointed by the outcome, and ratepayers of other large vacant properties may point to the suggested ‘unreality’ of an outcome whereby a full value is applied to a property for which no tenant can be identified, and the Valuation Office may be relieved that it will not be faced with a flood of proposals seeking nominal values.
“But, both the majority judgment, and the dissenting one, point to ways in which rating valuations can properly reflect an oversupply of property relative to demand for properties of that type. If this decision does no more than remind valuers of that, then it will serve an important purpose.”
The case raised the key question of how RV should be calculated where the evidence showed, at the relevant time, a general demand in the area for comparable office buildings, but no actual tenant willing to pay a positive price for the building itself.
The initial RV for the 2010 rating list, with effect from 1 April 2010, was assessed by the valuation officer as £490,000, reflecting his view that there were other office buildings in the area of similar age and quality, occupied by public sector tenants at rent of the same order.
However, the Valuation Tribunal for England reduced the RV of Mexford House to £1 because, at the antecedent valuation date (1 April 2008, by which point the government tenants had served notice to vacate), no person in the real would could be identified who would bid for the tenancy.
In light of this, the valuation officer lowered his final assessment of the rateable value to £370,000 and the matter went to the Upper Tribunal (Lands Chamber).
The central issues was whether the “rating hypothesis”, which requires the existence of a hypothetical tenant to be assumed, also requires the RV to be assessed by reference to the “general demand” as evidenced by the occupation of other office properties with similar characteristics. The Upper Tribunal found that it does, allowed the valuation officer’s appeal and fixed the rateable value at £370,000.
The Court of Appeal (unanimously) allowed Telereal Trillium’s appeal and restored the VTE’s assessment of the RV at £1, on the basis that there was no demand in the market for occupation of Mexford House.
Now the Supreme Court has sided with the valuation officer, by the slimmest majority.
Lord Carnwath, giving the main ruling, said: “Whether the hereditament is occupied or unoccupied, or an actual tenant has been identified, at the relevant date is not critical. Even in a ‘saturated’ market the rating hypothesis assumes a willing tenant, and by implication one who is sufficiently interested to enter into negotiations to agree a rent on the statutory basis. As to the level of that rent, there is no reason why, in the absence of other material evidence, it should not be assessed by reference to ‘general demand’ derived from ‘occupation of other office properties with similar characteristics’.”
However, in a dissenting judgment, Lord Briggs, said that it would be a “very rare case indeed” where the evidence really does show that there is no demand at all for the subject property where there are comparables in the locality let at substantial rents.
“But if that is what the evidence shows, or that is what the parties have agreed,” he said, “then the rating hypothesis does not require a departure from that real world conclusion, merely because the subject property is in theory capable of beneficial occupation.”
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