The Supreme Court has handed down a judgment that will be welcomed by all commercial property developers. The Court has reversed the previous Court of Appeal decision and held that only nominal rates have to be paid when a building is being redeveloped.
The case involved a floor of an office building which was stripped out for redevelopment (this included removing sanitary fittings, plant and machinery, electrical wiring and taking up much of the flooring). The end result was that the premises were incapable of beneficial occupation because they were unusable. Accordingly, the ratepayer applied to amend the rate list as the premises were no longer “offices and premises”, but a “building undergoing refurbishment” with a nominal value of £1. His argument was that the premises were not capable of being used as offices and therefore the rating list needed to be amended to reflect that reality.
The legal dispute centred around the Local Government Finance Act 1988 which says that premises are to be rated on the assumption that they are in a state of reasonable repair (“the Repair Assumption”), unless the cost of repair would be uneconomic. The Court of Appeal interpreted this to mean that the office premises should be valued on the basis of an assumption that they were in a reasonable state of repair (given that the cost of reinstating was not uneconomic). But, the Supreme Court pointed out that the Court of Appeal’s approach was “novel”. Instead the Supreme Court approved a three stage approach:
(1) Is the property a hereditament capable of rateable occupation? If so:
(2) What is the category of occupation (e.g. offices or building undergoing refurbishment)? This involves an objective look at the reality of the situation;
(3) Is the property in a state of reasonable repair for that mode or category of occupation. It is at this stage that one applies the “Repair Assumption” (even if the reality is that it is not in a reasonable state of repair).
This is a return to a rating practice as it was before the Court of Appeal intervened. Thus, stripped out offices are not “offices” but a “building undergoing refurbishment”, and valued as such. Likewise, consider the example of a former hospital being converted into flats – should it be valued during construction works as if it was still available as a hospital? The answer is clearly no (and that has never been confirmed by the Supreme Court).
Clearly, a developer should make an application to amend the rating list as soon as the building is no longer capable of beneficial occupation. At the same time, it is worth remembering that there are planned restrictions on challenging rating assessments – it looks likely that future challenges will be restricted to cases where the valuation is outside the scope of “reasonable professional judgement” (whatever that means).