The question of whether business rates are payable while a property is being redeveloped has been determined by the Supreme Court in a decision which will be welcomed by owners and developers. Overturning the Court of Appeal decision in Newbigin (Valuation Officer) v SJ & J Monk, it was held that where a property is undergoing redevelopment and cannot be occupied, the rating list should reflect this reality.

The facts of the case

SJ & J Monk are the owners of the first floor of an office block. The property had previously been occupied by a single tenant but had been vacant since 2006. In 2010 Monk decided to separate the property into three separate offices and instructed contractors to carry out the work.

In 2012 the property was valued for ratings purposes. On the valuation date, it was vacant and was undergoing significant refurbishment: the entire air conditioning system had been removed, together with all electrical wiring, all sanitary fittings and drainage connections and the majority of the ceiling tiles.

However, the property was listed as “offices and premises” with a rateable value of £102,000.

The claim

Monk challenged the rating and argued that, due to the physical state of the property, it should be listed as “building undergoing reconstruction” with a rateable value of a nominal £1.

The Court of Appeal decision

The Valuation Tribunal disagreed but Monk’s challenge was accepted by the Upper Tribunal. However, the Court of Appeal overturned the Upper Tribunal’s decision and found in favour of the Valuation Officer.

The rating legislation states that, where a property is vacant, the rateable value is based on the amount of rent reasonably obtainable for the property, based on the assumption that the property is in a state of reasonable repair (excluding any repairs that the landlord would consider uneconomic), with the assumed tenant having undertaken to bear the cost of these repairs.

The Court of Appeal applied this “repair assumption” and found that the property should be valued as if the necessary works had been carried out.

The Supreme Court decision

The Supreme Court overturned the decision of the Court of Appeal. It held that the “reality principle” must first be applied. This is a 19th century principle of rating law which states that “the rateable value of the land is not to be determined by what it once was or what it may hereafter become”.

The court held that the starting point, where works are being carried out to a property, is to determine whether a property is capable of rateable occupation at all. Only if it is capable of occupation should the repair assumption be applied.

In this case, it found that the property (like a building still under construction) was not capable of occupation for use as offices. As such the rating list should be amended to reflect reality with a rateable value of £1.

Practical advice

This decision clarifies that the reality principle is not displaced by the repair assumption. Where a building is in fact undergoing significant redevelopment so as to render it unfit for occupation, it should be rated accordingly. This clear guidance will be welcomed by developers, though in less clear-cut cases there will continue to be disputes over the factual question of whether a property is being redeveloped and whether this redevelopment prevents occupation.