On 1 March, the Supreme Court overturned the previous judgment by the Court of Appeal in the case of Newbigin v Monk. This will be welcome news to developers who are either in the process of redeveloping, or who have recently redeveloped, an office building which was not capable of occupation. The ruling means that those affected are encouraged to take advice from rating surveyors.
Extensive refurbishment meant office could not be occupied
In the case ofNewbigin v. Monkthe developers owned the freehold of the first floor of a three-storey office building. In the past the premises had been occupied by tenants as a single office suite. In December 2009, the owners accepted a surrender of the lease and in March 2010 entered into a contract for the renovation and improvement of the premises with a view to adapting them for use either as three separate suites of offices or as a single suite. The refurbishment works were extensive, involving all internal elements, which meant that premises could not be occupied. The relevant date for assessing the ratings value was 6 January 2012. As of that date, the premises were vacant and the refurbishment was already underway. The appellant wanted to reduce its liability to the local authority on the basis that with effect from April 2010 the premises should be listed as a “building undergoing reconstruction”.
Court of Appeal ruling
However, the Court of Appeal did not accept this argument and decided that a vacant property which was undergoing redevelopment should be assumed to be in a state of repair where it was economic to carry out repairs, and not automatically be listed with a nominal rateable value. It preferred the approach that rateable value should be based on the amount of annual rent which may reasonably be expected to be obtained on the assumption that the building was in reasonable repair.
The decision left considerable room for uncertainty regarding which repairs could and should be viewed as “economic” and whether it was preferable to demolish a building rather than strip it back to a shell. The owner appealed.
Supreme Court ruled building not capable of occupation
The Supreme Court overturned the Court of Appeal’s decision and applied a different approach. The court asked itself – does a commercial building which is in the course of redevelopment have to be valued for the purpose of rating as if it were still a useable office? In answering this question, the Supreme Court confirmed that it is vital to ascertain whether the property is capable of beneficial occupation.This requires the property to be assessed and valued for rating purposes on the valuation day in the state and condition it is in on that day. If it is not possible, in reality, to beneficially occupy the building, then it is not to be assumed to be in a state of repair and therefore should be listed with nominal rateable value.
The Supreme Court found on the evidence that as an objective fact, on the date of valuation, no part of the premises was capable of beneficial occupation or use because they were in the process of redevelopment. On that basis, the Court did not consider that it was necessary to apply any further test which involved an assumption of a hypothetical tenancy of the previously existing premises in a reasonable state of repair.
Business rates could be reduced while property cannot be occupied
The decision has provided some much needed clarity and an occupier of a property undergoing redevelopment is advised to apply to the ratings office to change the ratings list in order to reduce or remove exposure to business rates whilst the property remains incapable of beneficial occupation.
That said, if part of the property becomes capable of beneficial occupation during the redevelopment, then it could become separately listed and a liability to pay business rates will arise. Developers should seek to avoid this situation arising, or make sure that the area capable of occupation is quickly sold or leased a third party who will be liable for the business rates for that part of the property.