A rateable value based on a pre-recession tone date has recently been allowed despite earlier rates appeal cases being based on post-recession levels. Two decisions have been handed down by the Inner House of the Court of Session (the highest civil court outwith the Supreme Court) and are therefore not only binding on Scotland, but “persuasive” under English law as well. This may have a significant impact on rates paid.

The tone date chosen (1 April 2008) reflects a very different economic market, and due to the global financial crisis that has occurred since then, the values for most commercial properties in Scotland are now actually lower than they were in 2008. By way of example, if the market value of a commercial property as at 1 April 2008 was £100,000, and presently stands at £50,000 due to the downturn in the market, the building occupier may still be charged the commercial rates calculated on the £100,000 valuation. This will squeeze profit margins for commercial building owners or occupiers in an already difficult economic climate.

Mechanics of the Valuation Roll and Tone Dates

The Valuation Roll is used by local authorities to calculate market values for non-domestic property and their rateable values, and it is derived from the net annual value, established every five years at a revaluation, the most recent being on 1 April 2010.

A “tone date” is used for the revaluation. The “tone of the roll” is a measurement provision which ensures that the revaluation rate and the valuations made during the currency of the Roll share a common base. During the currency of the Roll, the valuations should not exceed the value ascribed in the tone date. The tone date is therefore crucial, as it sets a ceiling for rateable values for the next five years. The tone date chosen for the 2010-2015 roll was 1 April 2008.

The Cases

The two cases are (1) The Assessor for Tayside Valuation Joint Board v Land Securities PLC and Others [2012] CSIH 68 and (2) The Assessor for Fife v Mercat Kirkcaldy Ltd and Others [2012] CSIH 67. This Law-Now reports on the first of the cases, the second one has a similar decision.

The point of contention in Tayside v Land Sec was the rate per square metre applied in the Overgate Centre, Dundee. During the previous Valuation Roll (2005-2010), the global financial downturn was accepted as a material change in circumstances and new lettings rates for 2009 - 2010 were negotiated at a lower value than those negotiated between 2005 and 2008.

So when the tone date for 2010-2015 was set at 1 April 2008, this reflected pre-recession rates, whilst rates agreed in the preceding calendar year had been negotiated at post-recession rates. The difference in value is considerable. Zone A rates were reduced from £1050 psm in 2005 to £700 psm in 2009. The value as at 1 April 2008 was £875 psm. The Lord President, Lord Gill noted that the successful appeals made during the previous roll had no bearing on the Assessor’s ability to set the tone date for the current roll.

The material change in circumstance (the downturn in 2009) occurred before the 2010-2015 Roll came into force and, as such, could not be regarded as a material change in circumstance for the new Roll. The Lord President agreed with the Assessors that in setting the tone date as at 1 April 2008, they had performed their duty, and that the appeals against higher rates during the previous roll had no bearing on setting the tone date for the current Roll (Belhaven Brewery Group plc v Glasgow City Ass, 2003 SC 395 applied). The Assessors’ appeal was therefore allowed, and the tone date remains as at 1 April 2008.

Empty Property Relief

Meanwhile, the Local Government Finance (Unoccupied Properties etc.) (Scotland) Bill is due to start Stage 2 consideration on 25 September 2012. This would seek to remove the 50% reduction on rates applicable to empty properties, instead introducing a three month 100% relief period, followed by 10% relief thereafter. The passage of the bill through the Scottish Parliament is by no means certain, as it faces opposition from the Scottish Conservatives and the Scottish Parliament Finance Committee, together with industry groups such as the Scottish Property Federation, CBI Scotland and the Federation of Small Businesses.

Crisis – what crisis?

With the 2010-2015 Roll starting in a recession, it is hard to envisage how and where a material change in circumstance could help ratepayers before 2015. If the proposed reforms to empty property relief also gain approval then commercial ratepayers are faced with a situation where rates are valued at a high level, thus reducing their attractiveness to potential tenants and sub-tenants, with no additional rate relief available if they are unable to find tenants or sub-tenants.

Ironically, with a c230% increase in the number of empty publicly-owned buildings in Scotland between 2009 and now, the big losers could be Local Authorities – a double whammy of paying 90% rates on empty buildings (instead of 50%) and where the calculation is based on an increased rateable value.