The Supreme Court has allowed an appeal against a much-criticised Court of Appeal decision that could have meant drastic increases in business rates for vacant premises undergoing renovations. The decision has been welcomed as good news for landlords and developers.
The 2015 Court of Appeal ruling sent a shockwave through the industry, challenging the traditional thinking that properties incapable of rateable occupation because they are undergoing extensive refurbishment should be removed from the rating list.
Today’s decision was welcomed by Robert Hayton, national head of the specialist empty rates team at Altus Group, as one which “forces the valuation office to recognise reality”.
The controversial decision came under challenge by the affected ratepayer and also the British Property Federation (BPF) and the Rating Surveyors Association (RSA) – and today they won a unanimous ruling from the Supreme Court, restoring an earlier assessment that the rateable value of the premises at the key date was only £1.
The ratepayer, solicitors SJ & J Monk, argued all along that, at the valuation date of 6 January 2012, the offices – on a single floor of a three-storey block known as Avalon House at Sunderland Enterprise Park – constituted a “building undergoing works of reconstruction”, which involved reconfiguring a single office into three separate units. As a result, it claimed they had no beneficial rateable value and the Upper Tribunal (Lands Chamber) had been correct to assess the rateable value – formerly £102,000 –at the nominal amount.
However, the Court of Appeal found that works being carried out on the premises fall within the definition of “repair”, and that the UT was wrong to rule that the refurbishment went beyond that.
The Supreme Court was asked to decide, where a commercial property has been stripped out for renovation, what physical state it is assumed to be in for the purpose of liability for rates.
Giving the court’s decision today, Lord Hodge said that it was a long-established principle of rating law that property should be valued as it existed at the relevant date – known as “the reality principle”.
He said that the Court of Appeal’s assumption that the property was in a reasonable state of affairs did not address the question of whether the premises were capable of beneficial occupation, adding: “When a building is undergoing redevelopment, that is a question that must be asked first.
“The premises were undergoing reconstruction in January 2012 and the Upper Tribunal was entitled to alter the rating list to reflect that reality.”
Welcoming the ruling, Robert Hayton said that there was “a lot hanging on this case”, which was why the Altus Group and others had financially supported intervention in the case by the RSA and BPF.
He said: “This decision forces the valuation office to recognise reality. Owners investing in the redevelopment of a building cannot receive an income while works continue. That must now be reflected in the property’s value as it appears in the rating list.”
“The valuation office has been seeking settlement of appeals based on the Court of Appeal decision for two years, essentially ignoring the possibility that the Supreme Court would come to a different conclusion on the issue of how to value a property undergoing refurbishment or redevelopment. More concerning for ratepayers is that many valuation officers have used the precedent to resist deletion appeals; essentially extending the assumption of repair to property which has been demolished.
“It is good for the economy that property owners invest to create the spaces that the market wants. This judgment means that they will not be penalised for making this valuable contribution.”
Roger Cohen, a partner at Berwin Leighton Paisner, who proposed the intervention to the BPF and the RSA, said: “The intervention was vindicated. It is pleasing that the Supreme Court has accepted our approach in coming to the outcome for which our clients argued. The Supreme Court’s judgment strikes the right balance between enabling the upgrade of our built environment and the proper collection of revenue. Developers will be relieved with the court’s decision as it provides real clarity as to their financial liabilities during a redevelopment.”
Blake Penfold, business rates consultant at GL Hearn, explained that the ruling did not remove the assumed “reasonable state of repair” when valuing for rating purposes, but would allow a nominal value to be applied in circumstances where substantial works were going on.
He said: “This will be a considerable relief for property owners and developers. It will also help make alteration and refurbishment of properties more affordable by removing empty rate liability that might otherwise have been imposed based on the previous Court of Appeal rules. This is a victory for common sense and for the principle that non-domestic rates should be a tax on the value of occupation of property, not its potential occupation.”
James Souter, partner at Charles Russell Speechlys LLP, said that the Supreme Court had stepped in to provide protection for landowners after parliament had been “apparently unmoved by protestations from the industry”.
He said: “ The unanimous decision of the Court this morning, restoring the status quo in at least this part of the rating system, will bring welcome relief for many owners and developers.”
But he warned of “bigger battles to come” in the world of business rates when the impact of the revaluation starts to bite.
He said: “Unless there is major concession in the forthcoming Budget the next battleground is likely to be an attack on the new limited appeals procedure. It is understood that there is already a significant backlog of appeals in the system and that is only likely to increase.”
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