Two years ago the Supreme Court (in the case of Monk¹) specified how to assess the rateable value of a commercial real estate asset in the UK for business rates where the asset is undergoing works.  In a decision published this week, the Upper Tribunal² has given important guidance on how to apply the tests specified by the Supreme Court. 

The guidance is of value to developers and occupiers who are performing works to their corporate real estate.

In the Supreme Court, this firm represented the British Property Federation and the Rating Surveyors’ Association who intervened on the side of the ratepayer. In the Upper Tribunal we represented the ratepayers, Canary Wharf. In both cases, the ratepayers were successful.

In Monk, the Supreme Court concluded that where works are being carried out on an existing building, the correct approach is as follows:

(1)           determine whether the property is capable of a rateable occupation;

(2)           if so, determine the mode or category of occupation; and

(3)           consider whether the property is in a state of reasonable repair for use consistent with that mode or category.

Stages (1) and (2) involve looking at the reality down on the ground. Stage (3) involves the hypothetical assumption that the property being assessed is in reasonable repair.  (There is an exception if the premises are beyond economic repair, which was not an issue in this decision.)

The Canary Wharf case concerned One Canada Square, a multi-storey office tower, that was undergoing a rolling (open-ended) programme of refurbishment and modernisation. As individual floors in the building became vacant upon lease expiry, Canary Wharf stripped them out and marketed them as a shell.  When a new tenant was found for the floor(s), the new fit out works would be agreed with the tenant.

A dispute arose concerning the rateable value of two floors in particular, that Canary Wharf had stripped out to a concrete shell and marketed in that state from February 2011, until May 2014, when a new agreement for lease was entered into in respect of the two floors.

In January 2013, Canary Wharf applied to alter the rateable value of the two floors to reflect the strip out, and the fact that they were incapable of beneficial occupation as offices during that period. Canary Wharf said that, in consequence, the premises should be valued, for rating purposes, at a nominal sum of £1.  Whilst the valuation officer (VO) accepted that the floors were incapable of beneficial occupation during the marketing period (they were merely a concrete shell), once the strip out was complete, he considered that there was no evidence that the floors should be classified as “undergoing reconstruction” because there was no firm programme of works in place to refurbish or fit out the floors after strip out.  As such, according to the VO, during the marketing period, the floors should be valued as offices in repair rather than premises undergoing reconstruction. 

The Upper Tribunal decided that the valuation officer’s acceptance that the floors were not capable of beneficial occupation was the beginning and end of the valuation officer’s appeal.

How should a valuation officer assess whether a property is, objectively, a building is undergoing reconstruction ?

The Upper Tribunal’s guidance includes:

• A programme of works being undertaken can be taken into account, however the absence of a detailed programme does not rule out an assessment that the “mode or category of occupation” has changed.
• The programme of refurbishment may be open ended, with no contract in place at the start showing how and when the floors would be refurbished.
• The existence of an outline on the ground of future development is relevant, but not essential in principle; all known facts must be assessed, including any pattern of behaviour in relation to other similar property by the owner of the property in question or by owners of similar high quality office buildings; the actions of the building owner itself are relevant.
• Whether a building is incapable of beneficial occupation as a result of a programme of refurbishment is a matter of current fact. No hypothetical characters allowed!
• Sometimes, the most cursory investigation by a valuation officer would reveal that refurbishment is inevitable.

The Upper Tribunal criticised the suggestion in the valuation officer’s Rating Manual that for premises to be under reconstruction there must be a single programme of works in which stripping out is followed immediately by a reconstruction project.

The outcome was that the Upper Tribunal decided that for the period in which the building was in a shell state the rateable value would be the nominal and conventional sum of £1.

This is an excellent result for developers. There are many appeals which have been stayed pending the determination of this case. It is to be hoped that valuation officers will now make the alterations to rating lists necessary to reflect this result, consistently and without delay.

[1]       See SJ and J Monk v Newbigin (Valuation Officer) [2017] UKSC 14

[2]       Jackson (VO) v Canary Wharf Limited [2019] UKUT 136 (LC)

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