Hilary
Term
[2017] UKSC 14
On appeal from: [2015] EWCA Civ 78
JUDGMENT
Newbigin (Valuation Officer) (Respondent) v S J
& J Monk (a firm) (Appellant)
before
Lord Neuberger, President
Lord Kerr
Lord Reed
Lord Carnwath
Lord Hodge
JUDGMENT GIVEN ON
1 March 2017
Heard on 7 November 2016
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Appellant
David Reade QC
Dominic Bayne
(Instructed by S J
& J Monk (a firm))
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Respondent
Sarabjit Singh
Matthew Donmall
(Instructed by HMRC
Solicitor’s Office)
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Interveners
(Rating Surveyors Association and British Property Federation)
Daniel Kolinsky QC
Luke Wilcox
(Instructed by
Berwin Leighton Paisner LLP)
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LORD HODGE: (with whom Lord
Neuberger, Lord Kerr, Lord Reed and Lord Carnwath agree)
1.
Does a commercial building which is in the course of redevelopment have
to be valued for the purposes of rating as if it were still a useable office?
That is the question raised in this appeal. An analogous question would arise
if the building were a former hospital which was in the process of conversion
into flats. Should it be valued as if it were still available for occupation as
a hospital? The question is of general public importance to the law of rating
and valuation.
2.
The appellants (“SJJM”) own the freehold of the first floor (“the
premises”) of a three-storey office building built in the 1990s, known as
Avalon House, at St Catherine’s Court, Sunderland Enterprise Park, Sunderland.
In the past the premises were occupied by tenants as a single office suite of
795.73 square metres. In 2006 the tenants vacated the premises and in December
2009 SJJM accepted the surrender of the lease of the premises. On 9 March 2010
SJJM entered into a contract with Jomast Developments Ltd for the renovation
and improvement of the premises with a view to making them more adaptable for
use as either three separate suites of offices or as a single suite, in order
to attract replacement tenants.
3.
The contracted building works involved the removal of all internal
elements, except for the enclosure for the lift and staircase by which people
gained access to other floors. This entailed stripping out the cooling system
including all internal and external plant, the lighting and power
installations, the fire alarm system, the suspended ceiling, all sanitary
fittings and drainage connections, the timber joisted and modular raised
flooring, and existing masonry walls and metal stud partitions. The contract
also provided for the construction of new common parts to the premises and new
communal sanitary facilities, which involved new solid partitioning, a raised
floor, new sanitary fittings, new drainage and plumbing systems, and new
electric lighting, alarm and heating systems. Finally, the contract envisaged
the construction of three new letting areas within the premises with three
self-contained electrical distribution circuits and air conditioning and
heating systems.
4.
After entering into the building contract and until at least 6 January
2012 SJJM had the premises marketed as available for rental either as three
separate office suites or as a whole. On 6 January 2012, which is the relevant
date for assessing the facts and applying the statutory assumptions discussed
below when determining the rateable value of the premises on an application to
alter the rating list (“the material day”), the premises were vacant.
Contractors had removed the majority of the ceiling tiles and the suspended
ceiling grid and light fittings and also 50% of the raised floor. They had also
removed the cooling system and the sanitary fittings, demolished the block
walls of the lavatories and stripped out the electrical wiring. The contractors
had erected and plastered plasterboard partitions to form the outline of the
proposed communal lavatories and had erected and plastered a partition across
the floor at the east side of the premises. They had completed first fix
electrical installations to the lavatory area and had altered the drainage to
accommodate the new location of the lavatories.
5.
SJJM wished to reduce its liability to local authority rates on the
premises while they were being reconstructed. Local authority rates are a tax
on property and the unit of assessment is the “hereditament”. A “hereditament”
is defined as “property which is or may become liable to a rate, being a unit
of such property which is, or would fall to be, shown as a separate item in the
valuation list”: section 64(1) of the Local Government Finance Act 1988 (“the
1988 Act”) which refers to this definition in section 115(1) of the General
Rate Act 1967 (“the 1967 Act”). Each hereditament is separately identified on
the rating list (which formerly was called the valuation list). The premises
were so listed on the 2010 rating list as “offices and premises” with a
rateable value of Ł102,000.
6.
On 6 January 2012 SJJM’s agents proposed to the respondent, who is the
valuation officer for Sunderland (“the VO”), that the description of the
premises on the rating list should be altered with effect from 1 April 2010 to
“building undergoing reconstruction” and that the rateable value should be
reduced to Ł1. The agents justified their proposal on the basis that the
premises were undergoing building works which rendered them incapable of
beneficial occupation on the material day. They explained that the scheme of
building work was “remodelling and refurbishing the floor plate to allow
subdivision into up to three separate offices served by communal W/Cs”. The VO
did not accept the proposal and referred it to the Valuation Tribunal for England
(“the Valuation Tribunal”) as an appeal against his refusal to alter the rating
list.
The relevant legislation
7.
The central issue in this appeal is whether the premises should be rated
by having regard to the physical condition they were in on 6 January 2012 or
whether para 2(1)(b) of Schedule 6 to the 1988 Act as amended by the Rating
(Valuation) Act 1999 (“the 1999 Act”), which I set out below, requires a
valuation officer to assume that they were in reasonable repair as “offices and
premises” on that date.
8.
Schedule 6 to the 1988 Act, which is headed “Non-domestic rating:
valuation”, provides so far as relevant:
“1. This Schedule has effect
to determine the rateable value of non-domestic hereditaments for the purposes
of this Part.
2.(1) The rateable value of a
non-domestic hereditament none of which consists of domestic property and none
of which is exempt from local non-domestic rating shall be taken to be an
amount equal to the rent at which it is estimated the hereditament might
reasonably be expected to let from year to year on these three assumptions -
(a) the first assumption is
that the tenancy begins on the day by reference to which the determination is
to be made;
(b) the second assumption
is that immediately before the tenancy begins the hereditament is in a state of
reasonable repair, but excluding from this assumption any repairs which a
reasonable landlord would consider uneconomic;
(c) the third assumption is
that the tenant undertakes to pay all usual tenant’s rates and taxes and to
bear the cost of the repairs and insurance and the other expenses (if any)
necessary to maintain the hereditament in a state to command the rent mentioned
above.
…
(6) Where the rateable value
is determined with a view to making an alteration to a list which has been
compiled (whether or not it is still in force) the matters mentioned in
sub-paragraph (7) below shall be taken to be as they are assumed to be on the
material day.
…
(7) The matters are -
(a) matters affecting the
physical state or physical enjoyment of the hereditament.
(b) the mode or category of
occupation of the hereditament.
(c) the quantity of
minerals or other substances in or extracted from the hereditament.
(cc) the quantity of refuse
or waste material which is brought onto and permanently deposited on the
hereditament.
(d) matters affecting the
physical state of the locality in which the hereditament is situated or which,
though not affecting the physical state of the locality, are nonetheless
physically manifest there, and
(e) the use or occupation
of other premises situated in the locality of the hereditament.
…
(8A) For the purposes of this
paragraph the state of repair of a hereditament at any time relevant for the
purposes of a list shall be assumed to be the state of repair in which, under
sub-paragraph (1) above, it is assumed to be immediately before the assumed
tenancy begins.”
The prior proceedings
9.
On 19 October 2012 the Valuation Tribunal dismissed SJJM’s appeal. It
identified the material day as 6 January 2012 and concluded that on that day
there was nothing to prevent the economic repair of the premises. It held that
the premises were an office suite in disrepair and were to be rated as if they
were in reasonable repair.
10.
SJJM appealed to the Upper Tribunal (Lands Chamber) (“UT”), which heard
evidence, as the appeal proceeded as a re-hearing. The UT confirmed the
Valuation Tribunal’s finding that the material day was 6 January 2012, and that
decision has not been appealed. Otherwise, the UT allowed SJJM’s appeal,
holding that the premises had been stripped out to such an extent that to
replace its major building elements would go beyond the meaning of repair. The
assumption in para 2(1)(b) of Schedule 6 to the 1988 Act that a hereditament
was in a state of reasonable repair did not extend to the replacement of
systems that had been completely removed. The alterations had rendered the
premises incapable of beneficial occupation as an office and accordingly the
premises were to be rated as a “building undergoing reconstruction”. As a result,
the rateable value of the premises should be reduced to the nominal amount of
Ł1.
11.
The VO appealed to the Court of Appeal, which allowed his appeal and
therefore dismissed SJJM’s underlying appeal. The Court of Appeal reasoned as
follows. It recognised that the principle of reality, which I discuss in para
12 below, could be displaced by contrary statutory instructions. The question
was the extent to which para 2(1)(b) applied to create a counterfactual
assumption. The Court concluded as a matter of statutory construction that the
para did create such an assumption and so displaced the reality principle. The
premises were described in the rating list as “offices and premises”. On the
facts found by the UT, the hereditament so described was not in a reasonable
state of repair. It was not correct to look to the future to see what the
premises might become when works were completed. In applying the statutory
assumption in para 2(1)(b), the court had to compare the hereditament in its
actual state with its previous state as listed, namely as offices and premises.
In order to decide whether the replacement of the stripped out elements could
fairly be described as repairs as distinct from improvements or alterations,
the court should look to the tests applied in the common law of landlord and
tenant: Camden London Borough Council v Langford [1980] R A 369.
Applying those tests, the court concluded that the replacement of the stripped
out elements would amount to repairs. On the facts found by the UT, those
repairs would economically return the premises to their former state. Therefore
the statutory assumption applied and the premises should be valued as if they
were in a state of reasonable repair.
Discussion
12.
For many years and long before Parliament enacted Schedule 6 to the 1988
Act, it had been an established principle of rating law that a hereditament is
to be valued as it in fact existed at the material day. This principle, which
in the past was described by the Latin phrase, rebus sic stantibus (ie as
things stand), and is often referred to as “the principle of reality” or “the reality
principle”, was stated by Lord Buckmaster in Poplar Assessment Committee v
Roberts [1922] 2 AC 93, 103, thus:
“[A]though the tenant is
imaginary, the conditions in which his rent is to be determined cannot be
imaginary. They are the actual conditions affecting the hereditament at the
time when the valuation is made.”
Similarly, in Townley Mill Co (1919) Ltd v Oldham
Assessment Committee [1937] AC 419, 437, Lord Maugham, when explaining the
legal context in which the Rating and Valuation Act 1925 was enacted, said:
“The hypothetical tenant was
assumed to be a tenant from year to year with a reasonable prospect of
continuing in occupation; but the hypothetical rent which the tenant could give
was estimated with reference to the hereditament in its actual physical
condition (rebus sic stantibus), and a continuance of the existing state of
things was prima facie to be presumed.”
13.
In Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366, in
which the House of Lords held that the Lands Tribunal had been correct to take
account of an existing demolition order in assessing the hypothetical rent,
Lord Pearce stated (382):
“one must assume a hypothetical
letting (which in many cases would never in fact occur) in order to do the best
one can to form some estimate of what value should be attributed to a
hereditament on the universal standard, namely a letting ‘from year to year’.
But one only excludes the human realities to a limited and necessary extent,
since it is only the human realities that give any value at all to
hereditaments. They are excluded in so far as they are accidental to the
letting of a hereditament. They are acknowledged in so far as they are
essential to the hereditament itself.”
In the same case, Lord Wilberforce described the reality
principle thus (385-386):
“The principle that the property
must be valued as it exists at the relevant date is an old one … The principle
was mainly devised to meet, and it does deal with, an obvious type of case
where the character or condition of the property either has undergone a change
or is about to do so: thus a house in course of construction cannot be rated:
nor can a building be rated by reference to changes which might be made in it
either as to its structure or its use.”
In this passage Lord Wilberforce referred to each of what
is generally regarded as the two limbs of the reality principle, namely the
physical state of the property and its use.
14.
The reality principle continues to be a fundamental principle of rating
and is manifested in Schedule 6 to the 1988 Act, in particular in para 2(6) and
(7). In Scottish & Newcastle Retail Ltd v Williams (VO) [2001] 1 EGLR 157 the Court of Appeal upheld the decision of the Lands Tribunal that the
reality principle meant that it was assumed that a hereditament was in the same
physical state as upon the material day, save for minor alterations, and could
be occupied only for a purpose within the same mode or category of purpose as
that for which it was occupied on the material day. Thus in that case two
public houses in a shopping centre had to be valued as public houses and not as
retail units.
15.
The decision appealed against interprets Schedule 6 to the 1988 Act as
entailing a major departure from the reality principle by requiring that the
hereditament be assumed to be in a reasonable state of repair for the mode of
occupation listed in the rating list, namely as “offices and premises”. I do
not agree with that approach. In my view, the legislative history shows that
the repairing assumption which para 2(1) of Schedule 6 introduced did not
supplant the reality principle to that degree.
16.
Before the enactment of the 1988 Act the statutory hypothetical tenancy
of non-industrial property required that the landlord bear the cost of repairs.
For example, section 2 of the Valuation for Rating Act 1953 provided that the
hypothetical tenancy of a dwelling house was one in which the “landlord had
undertaken to bear the cost of the repairs and insurance, and the other
expenses, if any, necessary to maintain the hereditament in a state to command
that rent”. In Wexler v Playle (VO) [1960] 1 QB 217 the Court of Appeal
held that the statutory hypothesis was that the reasonable landlord, when
contracting with the tenant for the let of a dwelling house, undertook to put
the property in repair and would do so by removing “readily remediable defects”
(Wilmer LJ 239) or “reparable and temporary defects” (Harman LJ 240). Thus the
existence of such defects in the property did not affect its value for rating
purposes. This reflected what might reasonably be expected in reality (Morris
LJ 235). See also, on the equivalent provisions in section 19(6) of the 1967
Act, the similar view in relation to commercial offices expressed by Eveleigh
LJ in Camden London Borough Council v Langford (VO) in which he
distinguished between repairs needed to make good decay, which fell within the
hypothetical landlord’s repair obligation, and structural work on reinforced
concrete columns and beams to preserve the stability and duration of the
building, which went beyond repair and rendered the building unlettable. Further,
in Saunders v Maltby (VO) (1976) 19 RRC 33 the Court of Appeal held that
the landlord’s repair obligation in the statutory provision did not extend to
uneconomic repairs which were disproportionate to the value of the property;
instead the landlord would let the property at a lower rent.
17.
Case law distinguished between a mere lack of repair, which did not
affect rateable value because of the hypothetical landlord’s obligation to
repair, and redevelopment works which made a building uninhabitable. Thus, for
example, in Paynter (VO) v Buxton [1986] RVR 132, the Lands Tribunal
upheld a nil valuation of two flats on the first and second floors of a
terraced house in London which, along with the third floor flat, were
undergoing a programme of refurbishment works, which were progressing from the
top down. At the relevant time, there were extensive alterations to the third
floor flat, which had been valued at nil and was not the subject of appeal, but
lesser activity in the other flats in which there had been some re-plastering,
some sanitary ware had been removed, some floorboards lifted and skirting boards
and a door had been removed. The Lands Tribunal accepted evidence that a
programme of alterations on the three floors was being carried out on all three
flats and concluded that the works amounted to “alteration and modernisation”
and not repair. Thus the tribunal upheld the nil valuation. See also De
Silva and Another v Davis (VO) [1983] 1 EGLR 211 and Hounslow London
Borough Council v Rent Audio Visual Ltd & Bryant (VO) [1970] RA 535 for
other applications of the distinction.
18.
The 1988 Act ended domestic rating, replacing it with the Community
Charge. It also removed from the hypothetical tenancy the assumption that the
landlord carried the repairing obligation by providing in Schedule 6 that all
non-domestic hereditaments be rated by reference to a hypothetical tenancy in
which the tenant bore the repairing obligation. As originally enacted para 2(1)
of Schedule 6 to the 1988 Act provided:
“The rateable value of a
non-domestic hereditament shall be taken to be an amount equal to the rent at
which it is estimated the hereditament might reasonably be expected to let from
year to year if the tenant undertook to pay all usual tenant’s rates and taxes
and to bear the cost of the repairs and insurance and the other expenses (if
any) necessary to maintain the hereditament in a state to command that rent.”
19.
Following the decision of the Lands Tribunal in Benjamin v Anston
Properties Ltd [1998] 2 EGLR 147 that, because, under the 1988 Act, the
hypothetical tenant bore the obligation to repair, the rental value of the
hereditament would be adversely affected by a state of disrepair, Parliament,
by section 1 of the Rating (Valuation) Act 1999, amended the 1998 Act to
reinstate the prior law as to the assumption that the building was in a state
of repair. It did so (a) by deleting the words in para 2(1) of Schedule 6 (para
18 above) from “if the tenant” to the end and replacing them with the three
assumptions in the current para 2(1) and (b) by introducing para 2(8A). For
both the current para 2(1) and para 2(8A) see para 8 above. As a general rule
those amendments took effect retrospectively on 1 April 1990 (the date on which
Part III of the 1988 Act first required the compilation of rating lists) in
relation to rating lists compiled before the 1999 Act was passed. Paragraph 3
of the 1999 Act’s explanatory notes stated that the Act was designed to put on
a statutory footing the law as it was widely believed to apply before the Benjamin
decision.
20.
The 1999 Act can thus be seen as applying principles analogous to those
in Wexler, Camden London Borough Council and Saunders (para
16 above) to a hypothetical lease in which the tenant bore the obligation to put
the hereditament in repair. In my view the Court of Appeal goes too far in
interpreting the 1999 Act as completely displacing the reality principle in relation
to both the physical state and the mode of occupation of a hereditament which
is undergoing redevelopment. The 1999 Act, by introducing the assumption of
reasonable repair at the outset of the hypothetical tenancy (“the repair
assumption”), 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. Thus the repair
assumption (para 2(1)(b)) applies to matters affecting the physical state of
the hereditament (para 2(7)(a)) but not to the mode or category of occupation
of the hereditament (para 2(7)(b)).
21.
I derive support for this view from the speech of Baroness Farrington,
who identified the mischief which the 1999 Act addresses when she promoted it
as a Bill in the Grand Committee in the House of Lords (Hansard 5 May 1999,
CWH2-3). After referring, with apparent approval, to Wexler v Playle and
Saunders v Maltby she stated:
“the 1988 Act does not contain any express reference
to the hereditament’s state of repair. I am aware that the noble Earl, Lord Lytton,
regards this as a lacuna. I agree with him that this lacuna lies at the heart
of the Lands Tribunal decision in Benjamin v Anston Properties which
determined that valuers should take account of disrepair in rating valuations. It
is this lacuna, and this alone, that the Bill seeks to address.”
She went on to state (CWH6):
“The Bill deals with a single
issue of principle in the field of valuation for rating by way of correcting a
lacuna. The Government are anxious that what is in effect an old principle
governing rating valuation should merely be restated and incorporated with the
minimum of disturbance to the corpus of law and valuation practice, which has
grown up and developed over the passage of time.”
This statement, in my view, negatives a suggestion that
the 1999 Act was addressing any mischief caused by the established distinction
between works to correct a lack of repair on the one hand and what she called
“renewal, refurbishment or improvement” on the other.
22.
In a helpful intervention, the Rating Surveyors’ Association and the
British Property Federation submitted that, where works were being carried out
on an existing building, the correct approach was to proceed in this order: (i)
to determine whether a property is capable of rateable occupation at all and
thus whether it is a hereditament, (ii) if the property is a hereditament, to
determine the mode or category of occupation and then (iii) to consider whether
the property is in a state of reasonable repair for use consistent with that
mode or category. The first two stages of that process involve the application
of the reality principle. At the third stage the valuation officer applies the
statutory assumption in para 2(1)(b) if the reality is otherwise. In my view,
this is a helpful approach where a building is undergoing redevelopment. But it
is subject to the useful practice, which I discuss in para 31 below, of
reducing the rateable value of a building, which is incapable of rateable
occupation because of such temporary works, to a nominal figure rather than
removing it from the rating list altogether.
23.
How does a valuation officer ascertain that premises are undergoing
reconstruction rather than simply being in a state of disrepair? The subjective
intentions of the freehold owner of a property are not relevant to the reality
principle. The matter must be assessed objectively. But, in carrying out that
objective assessment of the physical state of the property on the material day,
the valuation officer can have regard to the programme of works which is in
fact being undertaken on the property. It is clear on the UT’s findings of
fact, which I have summarised in para 4 above, that on 6 January 2012 the
premises had been largely stripped out in the course of a redevelopment and an
outline of the future development (the communal lavatory facilities) had been
created. 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. If the works are objectively assessed as
involving such redevelopment, there is no basis for applying the assumption in
para 2(1)(b) 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.
24.
When in the course of a redevelopment some part of the developed
property becomes capable of beneficial occupation, and thus becomes a separate
hereditament, the assumption in para 2(1)(b) might apply to that part. Thus,
if, in the course of the conversion of a hospital into offices, a part of the
development became capable of beneficial occupation as flatted accommodation,
para 2(1)(b) might apply to deem a hole in the roof of that part to have been
repaired immediately before the beginning of the hypothetical tenancy of that
part. But para 2(1)(b) neither deems the development to be complete nor assumes
that the building in whole or in part is in a state of repair to be let as a
hospital.
25.
It is necessary to examine other statutory provisions and the cases to
which counsel for the VO referred to see whether they contradict this approach.
He referred, first, to the statutory provisions relating to the completion of a
building under structural alteration. Section 46A(5) of the 1988 Act provides
that, where a completion day has been notified, the hereditament which
comprised the existing building is deemed to have ceased to exist on the day of
completion of the new building which results from the structural alteration. The
VO argued that this meant that a building undergoing structural reconstruction
continued to be liable to rates until the new building was completed. There was
thus, he submitted, no scope for an entry in the list as a transitory “building
undergoing reconstruction” either when the reconstruction involved structural
alteration or, by analogy, when it did not. He submitted that this was
supported also by para 2(7)(b) of Schedule 6 to the 1988 Act which required the
identification of “the mode and category of occupation”, which under para 2(6)
was to be taken “as they are assumed to be on the material day”. On SJJM’s
approach, there was and could be no such mode or category of occupation. In the
alternative, the VO argued that, if there were such a thing in the world of
rating as a transitory “building under reconstruction”, a hereditament could
achieve that status only once it had become uneconomic to repair the building
to its former status.
26.
Again, light is shed on the effect of the statutory provisions by
referring to historical developments on the rating regime. Before 1966
liability for occupier’s rates depended upon a building being occupied. A
building undergoing redevelopment was not occupied in the relevant sense by the
carrying out of alterations or by the presence of the workmen who were doing
so: Arbuckle Smith & Co Ltd v Greenock Corpn [1960] AC 813. The
Local Government Act 1966 introduced liability for rates on premises which were
not occupied, if a rating authority so resolved, and its provisions were
repeated in the consolidating General Rate Act 1967 in section 17 and Schedule
1. Paragraph 1 of Schedule 1 to the 1967 Act created the liability of an owner
to be rated in respect of an unoccupied hereditament at one-half of the amount
payable if the hereditament were occupied. Paragraph 8 of that Schedule
empowered a rating authority to serve a completion notice on the owner of a
newly erected or altered building. The notice had the effect that the building
was to be treated for the purpose of the schedule as completed on the date
specified in the notice and the owner thereafter became liable to be rated in
respect of the property. Paragraph 10 of the Schedule contained a precursor of
section 46A(5) of the 1988 Act, deeming a relevant hereditament to have ceased
to exist on the completion of the structural alteration. The paragraph stated
in its concluding words that it was not to be construed as affecting any
liability for rates under para 1 in respect of the hereditament for any period
before that date.
27.
Section 46A of the 1988 Act was thus not a novelty. It was introduced
retrospectively into the 1988 Act by the Local Government and Housing Act 1989
(section 139 and Schedule 5 paras 25 and 79(3)). While section 46A(5) does not
contain the concluding words of para 10 of Schedule 1 to the 1967 Act, I see no
reason to give the section a different interpretation from its precursor in
this respect.
28.
Counsel for the VO sought to support his position by referring to the
judgment of the Divisional Court in Easiwork Homes Ltd v Redbridge London
Borough Council [1970] 2 QB 406. In that case, the owners chose to
modernise a block of flats. During the modernisation works, the flats were
uninhabitable, as the plumbing had been removed and all the essential services
were being renewed. The Council assessed each flat for rates while unoccupied. The
owners did not pay and the Council applied for a distress warrant to enforce
the liability. The Justices decided that the owners were liable to pay rates and
issued a distress warrant. The Divisional Court dismissed the owners’ appeal on
the question whether section 17 of the 1967 Act could apply to premises which
were unoccupiable. The Court held that the statute contemplated that liability
to rates might arise when an owner was carrying out alterations and
improvements which temporarily rendered a property incapable of occupation
because para 10 of Schedule 1 to the 1967 Act provided for the payment of rates
when more radical structural alterations were being carried out. But, in my
view, the case does not assist the VO because the owners had not applied to
have the valuation list altered during the period of the works; they had
challenged their liability only at the stage of enforcement. Indeed, the
Council had contended before the Justices that the owners could have applied
for a reduction of the rateable values for the period when the premises were
unoccupiable.
29.
It is clear that para 10 of Schedule 1 to the 1967 Act and its
successor, section 46A(5) of the 1988 Act, did not and do not bar an
application to alter the rating list to reflect the actual state of a hereditament
undergoing redevelopment. In Ravenseft Properties Ltd v Newham London
Borough Council [1976] QB 464 the Court of Appeal considered an appeal by
the owners of offices, which were in the course of erection, against completion
notices under para 8 of Schedule 1 to the 1967 Act. The court held that the
test for completion of a new building or an existing hereditament undergoing
structural alteration was whether it was ready for occupation. Lord Denning MR
in the course of his judgment said that Easiwork had been correctly
decided because the old valuation list, unless it was altered, continued
to apply (p 474) (emphasis added). Bridge LJ, who had sat in the Easiwork appeal,
was of the same view. He stated (p 479)
“It is clear that in a situation
where an old existing hereditament has a valuation based on its occupiable
value and is undergoing radical structural alterations, it can be the subject
of a proposal for an alteration in the valuation list for, at all events, any
substantial period when by reason of the alteration it is incapable of
occupation. That seems to me to provide the answer to the problem of hardship
to an owner which in the Divisional Court we felt could arise in the Easiwork
case.”
30.
Bridge LJ expressed that view in the context of section 68(4)(b) of the
1967 Act which defined the expression “material change of circumstances” as a
change in value of the hereditament caused by the making of structural
alterations or the total or partial destruction of the building. Now, the
Non-domestic Rating (Alteration of Lists and Appeals) (England) Regulations
2009 list as a ground for making a proposal to alter a rating list that “the
rateable value shown in the list … is inaccurate by reason of a material change
of circumstances” (regulation 4(1)(b)) and define “material change of
circumstances” as “a change in any of the matters mentioned in para 2(7) of
Schedule 6 to the [1988] Act” (regulation 3). I consider, therefore, that
radical alterations, whether or not they are structural, which render the hereditament
unoccupiable, may justify a proposal to alter the rating list.
31.
I also do not accept the point made by counsel for the VO (para 25
above) about paras 2(6) and 2(7)(b) of Schedule 6 to the 1988 Act. The location
of the reality principle in para 2(7) of Schedule 6 does not require a
valuation officer to disregard the fact that a building is incapable of
occupation because it is undergoing reconstruction. In my view the assumption
in para 2(1)(b), which para 2(6) brings into the assessment of the reality in
para 2(7), can operate in the manner set out in para 24 above. But it does not
negate the reality principle to the extent that counsel for the VO contended. Further,
while a building which is undergoing reconstruction may be incapable of
occupation for a time, it has been the practice of the Valuation Office to
treat the property as a hereditament with only a nominal value rather than to
remove the property from the rating list temporarily: see, for example, Hounslow
London Borough Council v Rank Audio Visual Ltd and Paynter v Buxton.
There is no bar to implementing a proposal to alter the description of the
hereditament on the rating list from “offices and premises” to “building
undergoing reconstruction” and consequently to reduce the listed rateable value
to a nominal amount if the facts, objectively assessed, support that
alteration. There is also, for the reasons given above, no basis for the
alternative argument that a building can be listed as being under
reconstruction only once the works have proceeded so far that it is no longer
economic to restore the hereditament to its former state by means of repair.
32.
Does the interpretation advanced by SJJM create a danger of ratepayers
abusing the system, for example, by removing sanitary facilities or windows and
then claiming that the hereditament was incapable of beneficial occupation? The
Court of Appeal saw their approach as preventing such abuse: Lewison LJ para
30. But the Court of Appeal’s interpretation was novel. Prior practice, which
had been reflected in the non-statutory guidance in the Rating Manual produced
by the Valuation Office, had been consistent with the approach which SJJM
advocates. It was not suggested to this Court that the administration of rates
had not been effective in the past. Further, when Parliament in the Rating
(Empty Properties) Act 2007 increased the unoccupied business rate to make
owners of unoccupied property liable for the same rate as those payable on
occupied properties, it also introduced into the 1988 Act, in section 66A, an
anti-avoidance power which enables the Secretary of State and the Welsh
Ministers to make regulations to disregard changes in the state of an
unoccupied hereditament. This power can be used to undermine attempts by owners
to avoid unoccupied rates through causing or allowing the state of their
property to change. To date neither government have used the power: I infer
that the practice before the Court of Appeal’s decision had not caused a
serious problem. In any event, the power can be exercised, if it is needed, for
example to prevent avoidance by the partial implementation of a scheme of works
and its deliberate non-completion.
33.
On the facts found by the UT, which I summarised in paras 2-4 above, I
conclude that the premises were undergoing reconstruction on the material day
and that the UT was entitled to alter the rating list as it did to reflect that
reality.
Conclusion
34.
For these reasons, which differ in some respects from those of the Upper
Tribunal, I would allow the appeal and restore the determination of the Upper
Tribunal set out in paras 88 and 90 of its decision.
