Renovating Property and Business Rates

March 29, 2017

What happens when a landlord decides to renovate a property to increase the rentable value? Who is liable for business rates when the property is empty? Are rates an inevitable cost for the owner during renovation?

Under the Local Government and Finance Act the person liable to pay rates on an empty property is the ‘owner’. – i.e. the person entitled to use the property.  The property itself must be capable of being occupied.

The Valuation Office makes rate valuations based on the assumption that the property is in good condition. This is in order to prevent owners from deliberately allowing property to fall into disrepair in an attempt to drive down the rateable value.

So what happens when the property is empty and gutted for renovation?

The Supreme Court recently considered this point in Newbigin v S J & J Monk (a firm). Monk owned a property which had been stripped back to bare bones in order to renovate and convert to three offices. All the interior fittings had been removed, as had the wiring, toilets and drainage, most of the ceiling tiles and some of the raised floor.

Consequently, the property was not fit for occupation and Monk reasoned it should be given a nominal rateable value; the ‘reality principle’ should be applied to take into account the current state. In other words, when rateable value is calculated it is done on the reality of the property at that time, not what it was and not what it might be.

The Valuation Office argued this was immaterial. Rather than seeing the work as a redevelopment, they argued the property was actually in a state of disrepair and being repaired. That meant the assessed value was for a property capable of occupation and in a good state of repair – so liable at the full business rate.

On appeal, the Supreme Court agreed with the landlord and so provided some certainty for developers; when a building is not capable of occupation at all as a matter of fact, there is no need to consider the state of repair.
However, the Court warned the assumption in the LGFA 1988 was not completely displaced; as parts of a property are made capable of occupation they can be considered as individual hereditaments for valuation.  Further, a deliberate attempt to make a property uninhabitable to avoid paying rates would be caught under anti-avoidance measures.

Ratepayers should take advice when considering a commercial redevelopment to ensure the Court’s guidance is followed and they pay rates only as required.

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