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Supreme Court rates on redevelopment decision will be welcomed by developers, experts say

Developers will welcome the Supreme Court's decision to reduce the rateable value of unoccupied office space undergoing substantial redevelopment works, according to property law experts at Pinsent Masons, the law firm behind Out-Law.com.06 Mar 2017

However, planning law expert Tom Edwards said that developers seeking to have the rateable value of a property amended pending or during redevelopment work in light of the decision should be aware of the impact this could have on any Community infrastructure Levy (CIL) liability in connection with any planning permission for those redevelopment works.

Last week, the Supreme Court ruled in favour of ratepayers SJ & J Monk (SJJM) in their appeal against a valuation officer's decision to value their office space as 'offices and premises' in a state of reasonable repair. SJJM had proposed that the property should be classed as 'building undergoing reconstruction' with a nominal rateable value of £1 as the space was undergoing conversion into three suits of offices and could not be occupied.

Giving the judgment of the court, Lord Hodge re-stated the application of the long-established 'reality principle', which provides that, for the purposes of ratings law, property should be valued in a way that reflects its actual condition at the relevant date. In doing so, he overturned the Court of Appeal's conclusion that the conversion works were no more than 'reasonable repairs', with the intention of restoring the property to its full rateable value.

The 1988 Local Government Finance Act (1988 Act), as amended by the 1999 Rating (Valuation) Act (1999 Act), requires a valuation officer to assume that the property is "in a state of reasonable repair", excluding any repairs "which a reasonable landlord would consider uneconomic". However, Lord Hodge ruled that the Court of Appeal had gone "too far" when it found that this displaced the reality principle altogether.

"The 1999 Act, by introducing the assumption of reasonable repair at the outset of the hypothetical tenancy … is not addressing the question of whether the premises were capable of beneficial occupation, which, in the context of a building undergoing redevelopment, is a logically prior question," he said.

Although the "subjective intentions" of the ratepayer were irrelevant here, the valuation officer should "have regard to the programme of works which is in fact being undertaken on the property", the judge said. In this case, on the relevant date of 6 January 2012, the premises had been "largely stripped out" and were unsuitable for commercial occupation.

"The premises were incapable of beneficial occupation, because, as an objective fact, they were in the process of redevelopment and no part of them was capable of beneficial use," he said.

"If the works are objectively assessed as involving such redevelopment, there is no basis for applying the assumption [introduced by the 1999 Act] to override the reality principle and to create a hypothetical tenancy of the previously existing premises in a reasonable state of repair. This is both because a building under redevelopment, like a building under construction, is incapable of beneficial occupation and, in any event, the hypothetical landlord of a building undergoing redevelopment would normally not consider it economic to restore it to its prior use," he said.

Property litigation expert Craig Connal QC said that the valuation officer's position in this case had an "air of unreality", and it was unsurprising that the Supreme Court had rejected it.

"Saying that a shell of a building, clearly not capable of occupation, should be treated as if it was quite the opposite is an approach which does have that air of unreality," he said. "However, as is clear, the judgment cannot be taken too far and situations closer to the middle of the spectrum than the extremes will be more common - and will require fine judgement, no doubt informed by expert advice."

On the CIL point, planning law expert Tom Edwards pointed to the tension between the desire to reduce the level of business rates chargeable because a building is incapable of beneficial occupation and the ability to reduce CIL liability during re-development works under the CIL Regulations.

"The CIL Regulations allow floorspace of 'in-use buildings' to be deducted from the overall CIL liability triggered by the grant of planning permission for redevelopment works," he said. "To qualify as an 'in-use building', the relevant building must have been in lawful use for a continuous period of at least six months of the three years preceding the 'time at which planning permission first permits the chargeable development'. A reduction in rating value will likely be treated as conclusive proof that a building is not occupied."

"The main point for developers will be the need to balance the cost advantages of being able to apply to have the valuation list altered against a potential increase in the CIL charge owing to the fact the developer may no longer be able to claim the 'in lawful use' deduction because of the length of time the building has been vacant," he said.