Business rates must take recession’s effects on rent into account, valuation committee says

The assessor had issued the 2010 valuation roll for properties in the Mercat shopping centre in Kirkcaldy with rental values based on April 2008 rents, almost double rents as at September 2009 following the effects of the ongoing economic downturn.

The 2010 valuation ignored reduced rental levels established during a “material change of circumstances” appeal to the Land Valuation Appeal Court (LVAC) last year, which had reduced rental values for tenants including Argos and HMV by 45% effective from 1 September 2009. Under the Local Government (Scotland) Act 1975, a material change of circumstances can apply to any court or committee decision that affects the annual rateable value of the property, but does not include a change in the rent.

The businesses will now have their 2009 ‘rateable values’ reinstated from 1 April 2010.

In its decision, a copy of which was seen by Out-Law.com, the local Valuation Appeals Committee (VAC) said that the parties agreed there had been no further material change in the tenants’ circumstances since the LVAC decision. However, not being able to look at the previous fall in value resulted in “absurdities”, it said.

The effect of the 1975 Act was “contrary to common sense and convenience and did not assist in the aim to achieve a correct valuation roll”, the VAC said.

“It seems... that the parliamentary draughtsman did not have in mind the possibility of a material change in circumstances happening between the tone date and the date on which the roll came into force where that material change was dramatic and downward,” it said.

Cassandra Auld, a property law expert with Pinsent Masons, the law firm behind Out-Law.com, said that although a case heard by a VAC would not yet set a precedent, there was “potential” for any later appeal to the LVAC at the Court of Session to have “a far-reaching impact on local authorities and those paying business rates”.

“As a result of changing rents since the recession, rates have been higher than rents in some areas. This is an unusual scenario making arguments for rates revaluations understandable,” she said.

The Fife VAC has a 14-day period in which to lodge an appeal to the LVAC.

BNP Paribas Real Estate, which represented the shopping centre, described the verdict as a “test case” that was the first step to establishing rateable values for properties across Scotland which correctly reflect the current economic conditions.

“If left unchallenged or upheld at the LVAC, the case will result in reduced rates liabilities correctly reflecting depressed rental levels caused by the economic circumstances we find ourselves in and save ratepayers millions over the course of the 2010 rating revaluation," said Billy McCaig, senior rating director at the estate agency’s Edinburgh office. "This will help both landlords and tenants alike in making premises more affordable and potentially stimulating economic activity."

David Melhuish, director of the Scottish Property Federation (SPF), said that the rate reduction in the case could potentially amount to as much as 45%.

“[This] underlines the depth of the recession and seriously brings into question the Scottish Government’s recent decision to increase business rates on large premises for retailers selling alcohol and tobacco as well as on empty business premises,” he said.