It is fair to say that the subject of business rates has taken the UK property world by storm in the recent weeks. It would probably be a little far-fetched to say that business rates have captured the imagination of the wider public but the discussion has certainly been opened up, leading to the Chancellor’s recent budget announcing £300m available for business rates relief. It is therefore timely that the case of Newbigin (Valuation Officer) v S J & J Monk (a firm)  UKSC 14 has come along to shed some light on the interaction between business rates and property undergoing redevelopment.
The Court of Appeal had decided in 2015 that if repairs were economic, they would not lead to a reduction in business rates for the developer. This meant that a developer had to rely on the repair being ‘uneconomic’, or even resort to demolishing the whole building in order to gain relief from business rates. This created uncertainty, not least in what economic actually meant. It was held in case law that if the cost of repair was equivalent or greater than two years’ of rent it would be uneconomic, but this case swung on its facts and provided no certainty from which to go forward. A situation was created where repairs had to be arbitrarily expensive before relief from business rates could be obtained.
The Supreme Court has now overturned that decision. The principle to apply is now whether the property is capable of beneficial occupation, rather than if the repairs are economical or not. If the property is in such a state to not be capable of beneficial occupation, then it can be eligible for a business rates reduction. This is certainly an improvement, and reflects the commercial realities of the property market – if a property is not actually capable of being occupied, rates shouldn’t have to be paid, or should at least be reduced.
This should have a positive impact on property developers, who can now list properties as incapable of beneficial occupation. This will allow them to minimise exposure to business rates whilst the property is unable to be occupied. However, it is important to note that the Supreme Court indicated that if part of the property becomes capable of beneficial occupation, then it could be assumed to be in repair and therefore listed separately from the whole of the property. This fact should be taken in mind and if any such area will arise, developers should ensure that a purchaser or tenant is lined up for the space rather than the developer paying full business rates out of their own pocket.
In the meantime, we will wait for cases to follow the decision in Newbigin, as these will apply the new beneficial occupation test and offer further clarity to interested parties. It will be particularly interesting to see what the courts hold as required for commercial property to be capable of occupation, as this will be persuasive to developers deciding what parts of any development they wish to prioritise.