Reality rules – business rates on development property

Property owners and occupiers who are developing vacant commercial premises will be delighted with a recent decision of the Supreme Court.

Up to now there has been some confusion over how commercial premises undergoing development should be valued for rating purposes. There were two possible bases of valuation; the repair assumption or the reality principle.

Normally when the rateable value of a property is assessed, the repair assumption is used. This means that the rateable value of the property is based on the amount of annual rent reasonably obtainable for the property assuming that it is in a state of reasonable repair, excluding any repairs that a reasonable landlord would consider to be uneconomic. Where repairs would not be economic, valuation is based on the annual rent reasonably obtainable for the property in its unrepaired state.

The reality principle means that a property is to be valued based on how it exists on the relevant valuation date, and not by what it once was, or what it may become in future. The principle was created to deal with circumstances where the character or condition of a property is, or is about to be, significantly changed.

The Supreme Court decision involved a case where the first floor of an office building had been vacant since 2006. In 2010 the owners entered into a construction agreement to convert the floor into three separate offices to make it more attractive to potential tenants. The nature of the construction works were extensive, including the removal of the air conditioning system, electrical wiring, sanitary fittings and drainage connections, and removal of ceiling tiles. The rateable value of the property prior to the works was £102,000. The owners argued that the property should be listed as a building undergoing reconstruction, and the rateable value should be assessed at a nominal £1 amount – a substantial saving.

The court held that on the material valuation date, the property was in the process of redevelopment and no part of the property was capable of being occupied or used. In this instance, therefore, the repair assumption did not replace the presumption of reality, and the rating list valuation should be altered to reflect reality. It will be a matter of objective fact in each case whether a property is simply in disrepair (and therefore the repair assumption should be used by the valuation officer) or whether a property is undergoing redevelopment and should be valued using the reality principle. The valuation officer will have regard to the physical state of the property on the relevant day and also any programme of works being undertaken.

Speak to our commercial property team for legal advice on anything property-related.