The Court of Appeal's decision in Newbigin (VO) v SJ & J Monk (2015) EWCA Civ 78 has provided some limited guidance on how to value a building for rating purposes when it is being refurbished. The result is that it is now more difficult to avoid empty property rates.
The property was the first floor of a 1990's built office block in Sunderland. In 2010, the property (or hereditament, as it is referred to in the relevant legislation as set out below) had been entered into the 2010 non-domestic rating list at a rateable value of £102,000. The freeholder ("Monk") applied to alter the list by an application made on 6 January 2012 on the basis that at that date, which was the material date for valuation purposes, the property was undergoing a scheme of refurbishment, which meant the property was not capable of beneficial occupation as offices due to its physical state.
In 2010 Monk had, in fact, contracted to carry out significant renovation works to the property for a contract price in excess of £300,000. Those works included: stripping out all internal elements including lighting and power installations and the existing cooling system (but excluding the lift and staircase); removal of the suspended ceilings and all sanitary fittings and drainage connections; stripping out the raised flooring and existing masonry walls and metal stud partitions, whilst also constructing new common parts and sanitary accommodation.
It was common ground that, on 6 January 2012 when Monk applied to amend the rating list, the property was vacant. In addition, the contracted works had reached a stage where the majority of ceiling tiles and suspended ceiling light fittings and light fittings had been removed together with 50% of the raised floor. The cooling system (including internal and external plant), sanitary fittings and electric wiring had also been removed.
These facts are pertinent as, when determining the rateable value of non-domestic property, paragraph 2 of Schedule 6 to the Local Government Finance Act 1988 (as amended) provides that:
"(1) the rateable value of a non-domestic hereditament...shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year on these three assumptions...(b) the second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic"
The Upper Tribunal (Lands Chamber) had held the property was not capable of beneficial occupation as offices due to its actual physical state and the rateable value should therefore be listed at a nominal £1. Good news for Monk.
The Court of Appeal disagreed and allowed the appeal. Lord Justice Lewison, giving the majority judgment, ruled that what was or was not 'repair' must be decided according to well-known common law principles. Accordingly, the test to be applied is whether the property in its actual state is in such a condition as to make it reasonably fit for the occupation of a reasonably minded tenant of a class that is likely to take it. LJ Lewison made clear the intention of the particular property owner was irrelevant, since valuation is to be objectively assessed, so whether repairs could be undertaken 'economically' was also to be assessed on the basis of what a reasonable landlord would do.
Furthermore, prior to making the statutory assumption it was necessary to decide whether the works were "repairs" by making a comparison between the property in its actual state with its previous state. If what has been stripped out (such as the light fittings and ceiling tiles etc in this case) would not result in a building, when considered as a whole, being different to what existed before, then they are to be characterised as repairs.
The Court of Appeal therefore found that it was not uneconomic to reinstate the property and allowed the appeal so that the rating of Monk's property was to be assumed on its state of repair ignoring any strip out. Bad news for Monk and landlords/investors who will now have to consider carefully whether the works they are undertaking are sufficient to fall within the statutory exemption and avoid rates liability.
It will be necessary to demonstrate that a reasonable landlord would consider the repairs uneconomic. That will involve a consideration of the building as a whole, the works that are to be undertaken and the resulting building that will remain after the work is undertaken. However, as the case gave no assistance on the issue of when refurbishment works will exceed repair, the law in this area remains far from certain.