In a decision that will be welcomed by developers and property owners, the Supreme Court has held that a commercial property undergoing extensive refurbishment works was effectively exempt from business rates.
The owner of vacant first floor office space (Monk) entered into a contract for renovation works to be carried out in 2010. On 6 January 2012, Monk requested that the local valuation officer alter the description of the premises on the rating list from "offices and premises" to "building undergoing reconstruction", which would result in a rateable value of £1 with effect from 1 April 2010 - Monk argued that the building works rendered the premises incapable of beneficial occupation. The valuation officer disagreed. There followed a series of tribunal and court decisions, with the Court of Appeal finding in favour of the valuation office. Monk appealed to the Supreme Court who found in its favour and set the rateable value of the premises at a nominal £1: Newbigin (Valuation Officer) v SJ&J Monk (A Firm)  UKSC 14.
When valuing premises for rating purposes, the value is based on the amount of annual rent reasonably obtainable. Paragraph 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988 (the 1988 Act) states that the valuation should assume that the premises are in a state of reasonable repair (so that occupiers do not let their premises fall into disrepair deliberately in an attempt to reduce their rates bill) except where a reasonable landlord would consider the repairs to be uneconomic.
The central question in this case was whether the premises should be valued for rating purposes by having regard to their actual physical condition as at the valuation date (a stripped out shell) or whether the valuation officer was required by the 1988 Act to assume that the premises were in reasonable repair as offices and premises (the most recent use of the premises).
The court held that the premises should be valued in their actual state and therefore the ratings valuation was a nominal £1.
- A valuation officer should assess objectively whether a property is undergoing reconstruction rather than simply being in a state of disrepair. In doing so, it can have regard to the programme of works which are being undertaken
- As the works could objectively be assessed as involving redevelopment, the statutory assumption in the 1988 Act should not apply at all - the premises should be assessed in their actual state
- Where a property is being redeveloped and part of it becomes capable of beneficial occupation (and therefore a separate hereditament) the statutory assumption as to the state of repair can apply to that part only, even if the remainder of the works have not been completed
- There is no statutory bar to altering the ratings list to reflect the actual state of a premises undergoing redevelopment. Radical alterations, whether structural or non-structural, which render a premises incapable of occupation may justify an alteration to the rating list
The Supreme Court sounded a word of caution to property owners who might look to avoid rates liability by implementing (and delaying the completion of) spurious works. The court referred to anti-avoidance provisions in the 1988 Act which envisage that regulations can be made to disregard certain changes in the state of a vacant property. So any abuse of the system (for example, deliberately removing essential equipment, such as sanitary facilities or windows, purely in order to claim that the property is incapable of beneficial occupation rather than as part of a proper documented scheme of works) would likely result in anti-avoidance regulations being made. However, this decision is clearly good news for developers and property owners, particularly against a backdrop of potential rates hikes in the most recent rates revaluation which is due to take effect next month.