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On the 14th July 2016, the Supreme Court will consider the assumed physical state of a vacant, non-domestic property where it has been stripped out for renovation for the purposes of assessing liability for business rates under the Local Government Finance Act 1988, Schedule 6, paragraph 2(1)(b).

Background Facts

Messrs Monk (M) are the freehold owners of a first floor Sunderland office building vacant since 2006. In 2010 they entered into an agreement with a construction company for various internal refurbishment works. Mr Newbigin is a Valuation Officer who assessed the property for entry on to the non–domestic ratings list. On the date of the valuation in question, the property was undergoing internal refurbishment which included the removal of the air conditioning system, stripping out of electrical wiring and complete removal of the majority of ceiling tiles and sanitary fittings.

M and the Valuation Officer disagreed as to state of repair of the property, which has a direct bearing on the rateable value of the property.

First Instance Decision (Valuation Tribunal)

M argued before the Valuation Tribunal that the physical state of the property was “beyond repairs” and therefore rateable value should be assessed at nominal value (£1). The property was therefore not to be, for the purposes of LGFA 1988, paragraph 2(1)(b), assumed to be in “reasonable repair”.

The Valuation Tribunal disagreed with M, holding that the premises were an “office suite in disrepair” capable of being put back into its former state economically and thus liable to pay business rates under the Act.

M appealed to the upper tribunal.

Upper Tribunal Decision

The Upper Tribunal overruled the Valuation Tribunal and held that due to the physical state of the property at the time, namely the extensive stripping out and replacement of major building elements went beyond the meaning of “repair”. The property was not capable of beneficial occupation and thus fell outside of the “repair assumption” in paragraph 2(1)b). The property was therefore eligible for nominal rates listing (£1).

The property was statutorily assumed to be in a state of reasonable repair. However, the Upper Tribunal held that this assumption did not extend to the replacement of those systems in the premises that had been completely removed (such as the air conditioning system). A hypothetical tenant would not pay any more than nominal rent in its “assumed state” under paragraph 2(1)(b).  The property, determined to be a “building undergoing construction”, was therefore only liable for nominal rates.

The Valuation Officer appealed.

Issues considered by the Court of Appeal:

The court, led by Lewison LJ, with whom Arden LJ and Davis LJ agreed, allowed the appeal of the Valuation Officer.

1. Was the property in a state of “reasonable repair” for the purpose of liability for rates?

Lewison LJ held that traditionally “whether property is in a state of reasonable repair is described as whether such repair, having regard to the age, character and locality of the property, would make it reasonably fit for the occupation of a reasonably minded tenant of the class who would be likely to take it” (Proudfoot v Hart (1890) 25 QBD 42). The class of tenant in this case was defined as “offices and premises”.

Although the property was plainly not in a state of repair befitting occupation, the paragraph 2(1)(b) assumption required it to be assumed to be in such a state, save for where works were “uneconomic”. Davis LJ agreed on this point, adding that repairs are indeed any works required to put the hereditament into reasonable repair, providing that they are not “uneconomic” (the “uneconomic exception” in paragraph 2(1)(b).

2. What counts as “repairs” for the purposes of paragraph 2(1)?

Lewison LJ considered that “repairs” describe the hypothetical tenant’s obligation under the hypothetical tenancy, which he thought could only mean “repairs” as traditionally defined under the law of landlord and tenant. Although paragraph 2(1) excludes certain works from the assumption of repairs, it would be extraordinary if works amounting to uneconomic repairs were to be excluded but uneconomic works going beyond repairs were not (as submitted by counsel for M).

Only work that could be assumed to be carried out was “repair work”. Lewison LJ clarified that there is no distinction between “repair” / “improvements” and “repairs” / “alterations”, rejecting the argument of the Valuation Officer.

3. Were the works “works of repair”?

In order to ascertain whether the works constituted “works of repair”, it was necessary to compare the property in its actual state with its previous state (Quick v Taff Ely Borough Council [1985] EWCA Civ 1). Lewison LJ held that on the material date the property was indeed an “office suite in disrepair”, with the stripping out putting the property in a worse state than it was before (value being assessed objectively, rather than with reference to the subjective intentions of the owner).

Applying the test of Buckley LJ in Lurcott v Wakely [1911] 1 KB 905, Lewison LJ held that the replacement of the stripped out elements (e.g. the electrical wiring) could be described as “repair”, given that none of the elements were structural and could be described as “replacemet of subsidiary parts of the whole”. In this sense, the Valuation Office Agency’s Rating Manual relied upon by M, was described by Lewison LJ (with whom Davis LJ agreed) as a “misapplication” of the relevant case law.

After dismissing the “uneconomic” exception contained in paragraph 2(1)(b), Lewison LJ concluded that the statutory assumption did apply and therefore allowed the appeal of the Valuation Officer. The property was therefore liable to a rates assessment, as a business premises in reasonable repair.

S J & J Monk have been granted permission to appeal to the Supreme Court.

Implications

For owners of vacant non-domestic premises undergoing substantial refurbishment, it should not be automatically assumed that a nominal rates assessment follows. If the Court of Appeal decision is upheld by the Supreme Court, it may become harder for property owners to argue that their properties should be exempt from business rates liability, especially where the works are non–structural and costs are not “uneconomic”. We may see an considerable increase in so called “empty rates” liabilities.

As explicitly recognised by Lewison LJ and Davis LJ, the Court of Appeal decision renders elements of the Valuation Office Agency’s Rating Manual “misleading”. The consequent uncertainty for Valuation Officers and owners of non–domestic properties flowing from this decision warrants urgent clarification by the UKSC.