The Supreme Court decided that a commercial building in the course of redevelopment does not have to be valued for business rates as if it were still a usable office. On the day that mattered, the first floor of Avalon House in Sunderland had been stripped out and was incapable of beneficial occupation. The statutory assumption of reasonable repair did not require that reality to be ignored, and a nominal rateable value of £1 was restored.
The property and the rating dispute
S J & J Monk owned the freehold of the first floor of Avalon House, a 1990s office building at Sunderland Enterprise Park. The floor, measuring 795.73 square metres, had been occupied by tenants as one office suite. The tenants left in 2006. In December 2009 the firm accepted a surrender of the lease.
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On 9 March 2010 the firm contracted with Jomast Developments Ltd to renovate the floor so that it could be let either as three suites or as one. The contract involved removing almost all internal elements, apart from the enclosure for the lift and staircase. That included the cooling system, lighting and power, fire alarm, suspended ceiling, sanitary fittings and drainage, raised flooring, and internal walls and partitions. New common parts, communal lavatories and three letting areas were then to be constructed.
Business rates are a tax on property. The unit assessed is the hereditament: property which is, or may become, liable to a rate and which is, or would be, shown separately in the rating list. This floor was entered on the 2010 list as “offices and premises”, with a rateable value of £102,000. Rateable value is the yearly rent the property might reasonably be expected to command on the statutory assumptions.
The firm asked for the description to be changed, with effect from 1 April 2010, to “building undergoing reconstruction”, and for the rateable value to be reduced to £1. It said the works had made the floor incapable of beneficial occupation. The valuation officer refused. The question was whether the floor had to be valued in its actual condition, or whether paragraph 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988 required an assumption that it was still an office in reasonable repair.
The condition on the material day
The facts had to be assessed on 6 January 2012, called the material day. The floor was vacant. Contractors had removed most of the ceiling tiles, the suspended ceiling grid and light fittings, half of the raised floor, the cooling system and the sanitary fittings. They had demolished the lavatory walls, stripped out the electrical wiring, formed plastered partitions outlining the proposed communal lavatories and a partition at the east side, completed first-fix electrics to the lavatory area, and altered the drainage. Until at least that day, the firm had been marketing the premises for letting as three suites or as a whole.
The earlier decisions
On 19 October 2012 the Valuation Tribunal dismissed the firm’s appeal. It treated the floor as an office suite in disrepair and held that nothing prevented economic repair, so it was to be rated as if reasonably repaired.
The Upper Tribunal reheard the evidence. It confirmed that 6 January 2012 was the material day, and that finding was not appealed. Otherwise it allowed the appeal. Replacing major elements that had been completely removed would go beyond repair, and the repair assumption did not treat those systems as still present. The alterations had made the floor incapable of beneficial occupation as an office. It was to be rated as a building undergoing reconstruction, with a nominal rateable value of £1.
The Court of Appeal allowed the valuation officer’s appeal. It accepted that the established reality principle — property is valued as it actually exists — can be displaced by statute, and held that the repair assumption did so here. The listed description was “offices and premises”. Comparing the stripped-out building with that former state, and using landlord-and-tenant tests of what counts as repair, the court held that replacing the removed elements would be repair rather than improvement or alteration, and that the repairs would economically restore the former state. The floor was therefore to be valued as if in reasonable repair. The court was not to look ahead to what the premises might become when the works were finished.
Why the repair assumption did not override reality
Lord Hodge, with whom Lord Neuberger, Lord Kerr, Lord Reed and Lord Carnwath agreed, rejected that approach. A hereditament has long been valued as it existed on the material day. The principle, sometimes expressed as rebus sic stantibus, covers both physical condition and use. A house still under construction is not rated, and a building is not rated by reference to structural or use changes that might be made to it. Schedule 6 itself requires matters such as physical state and mode of occupation to be taken as they are on the material day, subject to the statutory assumptions.
The repair assumption was a narrower correction. Before the 1988 Act, the hypothetical landlord was generally treated as bearing repair costs, so readily remediable defects did not reduce rateable value, while uneconomic repairs did not have to be assumed. The courts distinguished that kind of disrepair from redevelopment which made a building uninhabitable. The 1988 Act put the repairing obligation on the hypothetical tenant. After Benjamin v Anston Properties Ltd held that disrepair then reduced rental value, the Rating (Valuation) Act 1999 restored an assumption that, immediately before the hypothetical tenancy begins, the hereditament is in reasonable repair, excluding repairs a reasonable landlord would consider uneconomic.
Lord Hodge held that this assumption does not decide the logically prior question of whether the premises are capable of beneficial occupation. It applies to the physical state of a hereditament, not to its mode or category of occupation. It does not require a building undergoing redevelopment to be imagined as the office previously shown on the list. He drew support from the minister’s explanation of the 1999 Act: it was intended only to close the gap exposed by Benjamin and to restate the old principle with minimum disturbance, not to remove the distinction between repair and renewal, refurbishment or improvement.
He regarded as helpful the order suggested by the intervening Rating Surveyors’ Association and British Property Federation. First ask whether the property is capable of rateable occupation and is therefore a hereditament. If it is, identify the mode or category of occupation. Only then ask whether it is in reasonable repair for that use. Reality governs the first two stages; the statutory assumption applies at the third if the reality is otherwise. Where temporary works make occupation impossible, the established practice has been to leave the property on the list at a nominal value rather than remove it altogether.
Reconstruction is assessed objectively. The owner’s subjective intentions do not matter, but the programme of works actually under way may be considered. On the Upper Tribunal’s findings, the floor had been largely stripped out and the outline of the new lavatories had been created. No part was capable of beneficial use. A building under redevelopment, like one under construction, is incapable of beneficial occupation. In any event, its hypothetical landlord would not normally consider it economic to restore the former use. There was therefore no basis for assuming a tenancy of the former offices in reasonable repair.
The assumption can matter once part of a development becomes capable of occupation and becomes a separate hereditament. Lord Hodge’s example was a former hospital being converted: if part became occupiable flats, a hole in the roof of that part might be assumed to have been repaired. The assumption would not deem the development complete, or treat the building as still available for letting as a hospital.
The valuation officer’s other arguments
The valuation officer argued that provisions about completion of structurally altered buildings meant a property remained rateable in its existing form until the new building was completed, leaving no room for a temporary “building undergoing reconstruction” entry. Alternatively, he said that description could be used only once restoration by repair had become uneconomic.
Lord Hodge rejected both arguments. Completion notices and the related deeming provisions did not prevent a proposal to alter the list while radical works, structural or not, made a hereditament incapable of occupation. The location of the reality principle in Schedule 6 did not require the valuation officer to ignore that incapacity. There was no bar to changing the description from “offices and premises” to “building undergoing reconstruction” and reducing the value to a nominal amount where the facts, objectively assessed, supported it.
Lord Hodge also addressed the fear that owners might remove windows or sanitary fittings merely to claim that a property could not be occupied. The Court of Appeal had seen its interpretation as preventing such abuse, but that interpretation was novel. Earlier practice, reflected in the Valuation Office Rating Manual, had been consistent with the firm’s approach, and it was not suggested that rates had previously been ineffectively administered. Ministers also have a statutory power to make regulations disregarding changes in the state of an unoccupied hereditament. It had not been used, from which Lord Hodge inferred that the earlier practice had not caused a serious problem. The power remained available if needed, including against a scheme of works deliberately left unfinished.
Verdict: The Court unanimously allowed the owner’s appeal and restored the Upper Tribunal’s determination. On the material day the premises were a building undergoing reconstruction and carried a nominal rateable value of £1.
