Safe as houses?

The Supreme Court will hear an appeal this summer in the case of Newbigin (Valuation Officer) v SJ & J Monk (a firm) [2015] in which last year, the Court of Appeal decided that premises undergoing a significant refurbishment scheme were in fact capable of beneficial occupation, and therefore subject to business rates liability in the usual way.

This has the potential to deter investors from investing in buildings that are in need of upgrading, which could in turn have a knock-on effect on pricing in that sector of the market.

Prior to the Court of Appeal decision last year, landowners could expect that while their premises were vacant and about to undergo redevelopment, they would be subject to a business rates holiday. This was because it could be argued that the premises were not capable of beneficial occupation.

Following this Court of Appeal decision, that is no longer the case and the premises are likely to be subject to business rates in the usual way.

Substantial refurbishment v repair

The case in question concerned a building that was undergoing substantial works. These works included; stripping out the majority of ceiling tiles and light fittings; removing the comfort cooling system including all internal and external plants; stripping out electrical wiring; removing sanitary fittings, and approximately half of the raised floors.

Arguments were made on the one hand that the offices were not capable of beneficial occupation due to their physical state, and should have business rates at a nominal £1. On the other hand, it was argued that the works were in fact more general repair rather than improvements.

The statutory assumption that must be made for business rates assessment is that 'immediately before the tenancy begins, the hereditament is in a state of reasonable repair, but excluding from this assumption, any repairs which a reasonable landlord would consider uneconomic.'

The Court of Appeal decided in this case that even fairly substantial refurbishment as described above was in fact 'repair' which meant that the valuation office had to assume that the premises were in repair in order to assess its value.

It could be possible in certain areas of the country to make a successful argument in any particular case that repairs would be uneconomical to do. In those circumstances, the statutory assumption would not apply. However, each case would have to be considered on its specific facts and that, again, leads to uncertainty in planning for the costs of a particular upgrade scheme or when considering the value of a property for investment purposes.

One potential consequence of this decision is that a property investor is likely to find it less viable to upgrade its buildings to better quality. With full business rates now still payable, the costs of the scheme as a whole will be higher. This in turn could hamper upgrading of buildings stock in parts of the country which badly need investment.

A watershed moment?

Two industry bodies, the British Property Federation and the Rating Surveyors Association, have been given permission to intervene in that appeal in order to ensure that all points relevant to the wider property investors and developers community are heard.

The fact that these organisations are intervening shows the considered importance of the appeal to the property industry as a whole.

The uncertainty caused by this decision, at least until the Supreme Court makes its ruling one way or the other, adds to the list of issues with the already unpopular business rates system. This is particularly true in certain parts of the country where the business rates payable can outstrip commercial rents payable to landlords, so can form an extremely significant proportion of the costs of investing in property.

Unless and until this decision is reversed, investors may be reluctant to invest in sites with a significant refurbishment or redevelopment angle, as the increased costs will have an impact on the viability of such schemes.

Sarah Morley is a partner at Charles Russell Speechlys