The Valuation Office Agency has amended its practice note on how a property will be assessed for business rates when undergoing refurbishment or redevelopment.

The revised practice note is a consequence of the Supreme Court decision on 1 March 2017 in Newbigin (VO) v. S J & J Monk UKSC 2015/0069. This decision overturned the Court of Appeal and restored the previous common sense approach so that, where a property is stripped out, the presumption of repair will not apply and it will be entered into the list with a nominal valuation to reflect the reality of its condition.

The practice note sets out the three traditional questions that must be asked in determining the RV of stripped out premises:

  1. Is the hereditament in a state of reasonable repair?
  2. If not, can the works which are required to put the property into a state of reasonable repair properly be described as “repairs” ("the repair question")?
  3. Would a reasonable landlord consider the repairs to be uneconomic ("the economic question")?

The practice note goes on to conclude that the Supreme Court decision in Newbigin effectively adds a fourth "logically prior" question: namely, is a programme of reconstruction underway rather than the premises simply being in a state of disrepair? If so, the premises will be incapable of beneficial occupation and only of nominal value.

In Newbigin all sanitary fittings, air-conditioning apparatus, ceiling tiles, suspended floors, light fittings and wiring had been removed. The Court of Appeal looked at each individual item of disrepair rather than taking a schematic approach. This enabled it to conclude that a reasonable landlord would in fact incur the cost of the works in order to put the premises back into a state of reasonable repair i.e. the works were not considered to be uneconomic.

In the intervening case of Barber (VO) v. Cerep III TW Sarl (2015) UKUT 021 (LC) the Upper Tribunal grappled with how to apply this approach in practice. It concluded that a relatively modest repairing cost equivalent to two years' worth of rent was sufficient to be "uneconomic". This provided a degree of reassurance to developers in addressing concerns that only strip-out amounting to virtual demolition would be sufficient to prevent significant business rates from being due while premises are out of action for redevelopment.

The Supreme Court decision and subsequent VOA guidance provides more concrete reassurance on this point and applies a welcome reality check. If the property is, in reality, not capable of beneficial occupation, then it cannot be assumed to be in a state of repair (economic or otherwise). This recognises that potential business rates liability should not be allowed to operate as a deterrent to development.

The practice note emphasises the importance of the reality principle and stresses that what is economic will depend on a factual assessment of the situation in question. For example, what is likely to be economic for a building in one town may not be economic for an identical building in another town where rents are lower. Moreover if part of a property undergoing reconstruction becomes capable of beneficial occupation during the scheme of works, then it is likely to be assumed to be in repair and attract a separate listing. Developers should bear this in mind when considering development timetables and phased completions.

Based on the new guidance, works of conversion or significant improvement are likely to satisfy the objective test of there being a programme of reconstruction. Another example is Newbigin itself in which three distinct units were being created where one previously existed. It is not necessary for the works to be structural in nature. However there is an inevitable broad spectrum of works which fall somewhere between clear improvements/redevelopments and works of a purely cosmetic nature. Some element of sledgehammering will still be required in order to ensure that the works in question pass the test.

To view the amended practice note please click here.