Newbigin (Valuation Officer) v S J & J Monk (a firm) [2017] UKSC 14
A recent Supreme Court decision has provided a boost to property developers who have been charged business rates on buildings that are undergoing redevelopment or renovation.
Background
Business rates legislation states that where non-domestic premises are not occupied, the rateable value is based on the market rent obtainable for the premises on the assumption that prior to the tenancy starting, the building is in a reasonable state of repair, excluding any repairs that a landlord might reasonably consider uneconomic. The assumption of the building being in repair applies regardless of the state of the property in reality. However, there is also an established “reality principle” in rating law, which means that the rateable value is to be determined by what a property actually is at the valuation date, as opposed to what it was or might become.
This case focuses on S J & J Monk (“Monk”), a property developer from the north east of England. The business owns the freehold of the first floor of a three-storey office building, which underwent a major renovation and refurbishment project so as to attract new tenants.
On the 6 January 2012, the date for determining the rateable value of the property, the premises were empty and stripped to shell condition. The property was undergoing major internal works which included the removal of the electrical wiring, the removal of air-conditioning system and plant, removing most of the ceiling tiles and removing the sanitary fittings and drainage connections.
As a result of the condition of the building at the valuation date, Monk proposed to the valuation officer that the property description should be altered to ‘building undergoing reconstruction’ and the rateable value should accordingly be reduced to the nominal amount of £1, on the basis the property could not be occupied due to the building works. In the previous rating list in 2010, the property had been listed as ‘offices and premises’ with a £102,000 rateable value.
Monk originally challenged rateable value of the property with the Valuation Office and before the Valuation Tribunal. Monk lost in the Valuation Tribunal, and appealed to the Upper Tribunal. Monk’s argument was accepted by the Upper Tribunal, but the Court of Appeal then overturned that decision, meaning the higher rateable value of £102,000 stood.
Monk appealed to the Supreme Court. The question for the Supreme Court to determine was which of the following was correct:
- the presumption of repair set out in the ratings legislation applied to the building at the relevant date, with the effect that the property had to be assumed to be ain a reasonable state of repair as “offices and premises”; or
- the “reality principle” applied, so that the fact the property was not capable of occupation at the relevant date was taken in to account when assessing he rateable value.
The Court’s Decision
The Supreme Court upheld Monk’s argument that the reality principle applied. The Court declared that S J & J Monk should not have been charged business rates on a property as if it were fully usable when it was undergoing refurbishment and not capable of occupation.
The Court decided that the repair assumption in the legislation did not displace the presumption of reality and, accordingly, the rating list ought to be amended to reflect that reality.
The decision overturns an earlier Court of Appeal decision in 2015 and will not only mean a reduced rates bill for the company, it is expected to reduce business rates bills for other property developers in the same situation.
Practice points
This is an important test case and will no doubt be welcomed by property developers from across the UK. Property developers will no doubt wish to try and recover business rates that have been paid in respect of premises undergoing redevelopment or refurbishment and incapable of occupation.
It is important to note that the fact the property in this case was objectively assessed as undergoing extensive refurbishment, as opposed to simply being in disrepair, was key to the decision. Developers simply removing facilities from a building with a view to taking advantage of the fact it becomes incapable of occupation should beware, as such tactics are still likely to be caught by the anti-avoidance provisions in the ratings legislation.
Published: 25 March 2017
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