Property analysis: Roger Cohen, partner and co-head, real estate disputes, Berwin Leighton Paisner LLP, considers the implications of the Court of Appeal’s recent decision in Newbigin (Valuation Officer) v Monk.
Newbigin (Valuation Officer) v Monk  EWCA Civ 78
What were the issues considered by the Court of Appeal in this case?
The property in question was a floor in an office building which had been vacant for some time. The owners had entered into a contract with a construction company for works to be carried out to the property and that work was in progress at the material date for the rating valuation which was 6 January 2012. The valuation officer, Mr Newbigin, argued that the property was assumed to be in a state of reasonable repair, was therefore capable of beneficial occupation as offices and could be rated. On appeal, the Valuation Tribunal agreed with him but the Upper Tribunal found in favour of the ratepayer. The Upper Tribunal held that the rateable value should be assessed at a nominal £1. Now the Court of Appeal has allowed the appeal of the valuation officer. The rating of non-domestic properties is governed by the Local Government Finance Act 1988 (LGFA 1988). The court had to interpret LGFA 1988, Sch 6, para 2(1)(b). Paragraph 2 states that the rateable value of the property will be taken to be an amount equal to the rent at which it might be expected to be let on three assumptions:
first, that the tenancy begins on the date on which the determination is to be made
second, that immediately before the tenancy begins the property is in a state of reasonable repair (excluding any repairs that a reasonable landlord would consider to be uneconomic), and
third, the tenant undertakes to pay the usual tenant’s rates and taxes and will bear the cost of the repairs and other expenses to keep the property in a state to command that rent Sub-paragraph (1)(b) contains the second of the above three assumptions.
The issue in this case really concerned the assumed state of repair of the property and how the second assumption operated. Thus sub-para (1)(b) was the battleground between the parties. Lewison LJ framed the issue as what physical state is the property assumed to be in for the purpose of liability for rates? What happens when a landlord is left with empty space, the lease is at an end and works are in progress? The question was what value was to be placed on the property given what you have in situ on the material date and how did para 2(1)(b) apply in the circumstances? The nature of repairs, and the common law on that subject, had to be considered by the court.
How did the court reach its decision? What were the main principles of valuation on which it relied?
Under LGFA 1988, Sch 6, para 2(1), a rateable value is the rental value under a notional or hypothetical letting. But landlords and tenants are in the real world. That can produce some tensions. The court found that the right approach was to start with the relevant or material date and look at the rateable unit on that date. Here the first floor had been stripped out; ceiling tiles, some of the flooring, the toilets and so on, had been removed. To rate the property you have to assume it is in a condition of reasonable repair. But what does that mean? Excluded from the assumption that the property was in reasonable repair, under para 2(1)(b), were repairs which a reasonable landlord would consider uneconomic. The court found that you should not ask what the ratepayer in question was going to do. Rather you should ask what the hypothetical owner could do with this property. The Valuation Tribunal found that the property could be put back into its former state economically. On the facts found by the Upper Tribunal, the works were not excluded on economic grounds but they found the necessary works could not be classified as repairs as some elements of the property had been removed entirely. The court considered whether any work would be classed as an improvement rather than a repair. Lewison LJ rejected a submission for the valuation officer that under para 2(1)(b), it is not necessary to distinguish between repairs and improvements, or repairs and alterations. Once the valuation officer decides that the property is not in a state of reasonable repair, then by definition, all works required to put it into that state are repairs. The valuation officer or the Valuation Tribunal on appeal must decide what repairs (as opposed to improvements) must be assumed. Lewison LJ noted also that just because certain fittings are removed from the property does not mean that the property is beyond repair. Such an approach is capable of manipulation by owners, as they could remove certain facilities then claim the property was not capable of beneficial occupation. There was no suggestion in this case that putting the property back into a state of repair would be uneconomic. Before the strip out, it had been valued and could be occupied. He found that, following the test set down in para 2(1)(b) you should only disregard work that needed to be carried out if it would be uneconomic to do. Here, it was found that the property could be put back into a state of reasonable repair at an economic cost.
Were there any precedents that the court found particularly useful?
The court took into consideration some of the classic cases on repair includingLurcott v Wakely and Wheeler  1 KB 905, [1911-13] All ER Rep 41 andProudfoot v Hart (1890) 25 QBD 42, [1886-90] All ER Rep 782. Another wasMcDougall v Easington District Council  1 EGLR 93, in which the court considered the effect of ‘alterations’ either as improvements or repairs. There the court said there were three different tests which could be applied separately or concurrently.
How does this case add to or clarify the law regarding valuations and rating assessments?
Valuation principle is not changed by Monk but the Court of Appeal has clarified how the principle applies. Lewison LJ set out what he called the principle of reality and how it should apply: that is, that one starts by identifying the property as it stands at the date which is material for the valuation. Then you make the potentially counter-factual assumption that the property is in reasonable repair, excepting uneconomic work as stipulated in para 2(1)(b). One of sources looked at by the court was the Valuation Office Rating Manual which valuation officers use. Lewison LJ said parts of the manual suggested that regard should be had to whether the outcome of an ongoing scheme of works would result in a different hereditament. If it would, then the works required to complete the scheme are not works of repair and the assumption does not apply. This violated the long-standing principle that the rateable quality of land is not to be determined by what it once was, or by what it may hereafter become. The manual also suggested that there is a sharp distinction between repairs and improvements. The judge said, quoting from Denning LJ inMorcom v Campbell-Johnson  1 QB 106,  3 All ER 264, that sometimes the distinction between what is a repair and an improvement is (to paraphrase in current terms) somewhat more nuanced. What the valuation officer here had to do was apply the common law on the subject of the nature of repairs.
What should practitioners and their clients bear in mind as a result of this decision?
Lewison LJ is a highly experienced property lawyer and hence this judgment is a worthwhile read for a landlord and tenant lawyer, giving an overview of the principles of law on the concepts of repair, improvements and alterations and the principle of valuation. Some lawyers who act for owners and landlords may be disheartened by the decision as it will make it harder for them to come up with a scheme of works that will allow them to mitigate the liability for rates. But the decision puts the focus on what is economic and what is not in terms of repairs to a property. In future, landlords and owners will have to scrutinise very carefully what works may need to be carried out on a property and whether they would be economic or not. If you do not want the property to be rated you will have to focus on whether you can present a persuasive case that the repairs or most them would be uneconomic.
Interviewed by Diana Bentley.
This article was first published on Lexis®PSL Property and Lexis®Library on 20 February 2015.