The Supreme Court has ruled on the extent of a ratepayer's liability to pay business rates for a property undergoing building works.
This decision is a landmark ruling and comes at a time when business rates are particularly pertinent because to the recent revaluation of business rates taking effect on 1 April 2017. The ruling will be particularly relevant to property owners and developers who are concerned about their business rates liability and are contemplating works which may impact on their ability to occupy a property.
Newbigin v Monk  UKSC 14 concerned an office suite which, as at the valuation date, was in the process of being redeveloped into three separate offices. The ratepayer contended that, while the works to the property were being carried out, the property was incapable of beneficial occupation and should therefore be categorised as a 'building undergoing reconstruction' for rating calculation purposes. As a consequence, the ratepayer argued that the property should be removed from the ratings list or allocated a nominal rateable value.
The Valuation Office disagreed with the ratepayer. It argued that the property was in reasonable repair and the purpose of the works to the property were purely economic in nature. As such, the property should be regarded as being capable of beneficial occupation. It indicated that the property should have a material rateable value in the ratings list.
The Court of Appeal agreed with the Valuation Office. However, upon further appeal by the ratepayer to the Supreme Court, the court focused on the following issues which, formed the crux of its decision:
- whether the property should be valued with regard to the actual condition of the property at the valuation date (i.e. the reality principle); or
- whether an assumption that the property is in a state of reasonable repair should apply. In determining whether the property is in a reasonable state of repair, it is assumed that the property is deemed to be in a reasonable state of repair unless the hypothetical landlord would consider it uneconomic to undertake any repair works that may exist.
On balance, the Supreme Court found in favour of the reality principle and ruled that, where a property is undergoing construction as at the valuation date and cannot be beneficially occupied, it should appear in the ratings list as such and attract a nominal rateable value.
This ruling is perceived by commentators as the court adopting a 'common sense' approach and will be welcomed by occupiers and developers who would otherwise be subject to a substantial rates liability during a period where they are not able to occupy their property.
What does this mean in practice?
Occupiers and developers carrying out substantial repair or improvement works to their property, where such works prevent 'beneficial occupation' of the property, should apply to the Valuation Office to have their liability for business rates corrected to a nominal sum. For the purposes of business rates, beneficial occupation is regarded as having a low threshold and is judged, solely, on whether there is benefit to the occupier.
The period for which any liability for business rates should be reduced is a question of fact. However, the writers consider that this should be reduced for the period that such works are actually being undertaken, and not include any lead-in period while contracts are being negotiated for those works.
Occupiers and developers will continue to be liable to pay business rates at the rate previously assessed while an application to the Valuation Office is being reviewed. In view of this, it is recommended that occupiers and developers make an application to the Valuation Office as soon as they have settled the extent of the works to be undertaken and ascertained the timing for those works. They should also continue to pay business rates to the local council, without prejudice to their contention that the rates payable should be lower than those demanded in order to preserve their claim for a refund.