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Lawbite: Business rates: when are refurbishment works not refurbishment works?

  • United Kingdom
  • Real estate litigation

11-03-2015

Newbigin (VO) v SJ and J Monk [2015] EWCA Civ 78

This recent Court of Appeal decision signals a more restrictive approach to the circumstances in which a property under refurbishment is likely to qualify for a rates reduction.

The case concerned an office building that was undergoing extensive refurbishment.  The work included stripping back and replacing internal elements, to include all internal and external plant, the lighting and power installations, the suspended ceilings and floors and sanitary fittings and separating the floors into three new letting areas, together with new common parts.

The rating hypothesis contains an assumption for the purposes of valuing premises that the premises are in repair.  The reason for this is obvious; it prevents rate-payers from engineering a reduction in their rates by simply allowing their property to fall into disrepair.  There is a statutory exception to the assumption: where repair works are considered uneconomical, the property will be valued in its actual condition rather than assumed to be in repair.

Historically, a distinction has been drawn between work of repair and work of improvement.  Under the rating hypothesis, works of repair are irrelevant as the property is deemed to be in repair anyhow.  Where works are considered to go beyond mere repair though and to constitute an improvement, then, to the extent that it is not possible for there to be beneficial occupation whilst the works are being carried out, it has generally been possible to claim a reduction in rates.

In the Monk case, in a departure from usual practice (and contrary to its own guidance), the VOA sought to argue that there is no actual need to distinguish between works of repair and of improvement - the property should be assumed to be in repair and therefore capable of beneficial occupation no matter what works are being carried out to it.

The Court of Appeal rejected this approach but did hold that the works in this particular instance, although clearly extensive, should be categorised as works of repair rather than improvement.  The works were largely considered as necessary to replace older worn out plant and would not result in a building of a different kind.

In reaching its decision the Court of Appeal also stated “the mere fact that the ratepayer intends to produce at some future date a building which will be different in kind from that which exists on the valuation date could not determine whether or not the hereditament can or cannot be put into a state of reasonable repair at economic cost on the valuation date itself”.  Thus it is not the actual plans that the ratepayer has for the building that are relevant but simply an assessment of the condition of the property as at the valuation date and whether it is economically possible to put it into repair as at that date.

Each case will continue to be assessed on its own facts and merits but this decision certainly marks a shift in how premises undergoing refurbishment will be assessed.  We can expect to see many more challenges whilst the boundary between repair works and improvement works is redrawn.  We can also expect to see much more debate around the question of when repair works are and are not considered to be uneconomical and closer focus on what, precisely, that means.  It will also be interesting to see whether the decision ultimately makes it harder for the VOA to increase valuations on completion of refurbishment works if the works to be considered as works of repair rather than improvement – some would argue that to categorise works as repair whilst they are being carried out but then to seek to increase the rateable value of the building once the works are complete would be a case of the VOA ‘having its cake and eating it’.  So for the moment the case raises a number of questions and creates uncertainty.  Until there is further clarity, it is necessary for property owners planning refurbishment works to reconsider what their exposure to rates liability may be whilst the works are being carried out.