Newbigin (Valuation Officer) v SJ & J Monk (a firm) [2017] UKSC 14

SJJM owned offices undergoing extensive redevelopment on the material day. They sought to reduce the rateable value to £1. The Supreme Court held the reality principle applied: premises under genuine redevelopment should be rated as such, not as if in reasonable repair as offices.

Facts

SJJM owned the freehold of the first floor of Avalon House, Sunderland, previously occupied as a single office suite of 795.73 square metres. After the tenants vacated and surrendered the lease in December 2009, SJJM contracted with Jomast Developments Ltd in March 2010 to renovate and improve the premises to make them adaptable as either three separate office suites or a single suite.

The works involved the removal of nearly all internal elements (cooling systems, lighting, power, fire alarms, ceilings, sanitary fittings, drainage, flooring, partitions) and the construction of new common parts, communal sanitary facilities, and three new letting areas. On the material day (6 January 2012), contractors had stripped out most ceilings, 50% of the raised floor, the cooling and electrical systems, demolished lavatory walls, and erected new plasterboard partitions outlining the future communal lavatories.

The premises were listed as ‘offices and premises’ with a rateable value of £102,000. SJJM proposed an alteration to ‘building undergoing reconstruction’ with a rateable value of £1. The Valuation Officer refused. The Valuation Tribunal dismissed SJJM’s appeal; the Upper Tribunal allowed it; the Court of Appeal reversed, holding that the statutory repair assumption in para 2(1)(b) of Schedule 6 to the Local Government Finance Act 1988 required the premises to be assumed in reasonable repair as offices.

Issues

The central issue was whether premises undergoing redevelopment must be valued by reference to their actual physical condition on the material day, or whether para 2(1)(b) of Schedule 6 to the 1988 Act (as amended by the Rating (Valuation) Act 1999) required the valuation officer to assume the premises were in a state of reasonable repair as ‘offices and premises’.

Arguments

The Valuation Officer

The VO argued that para 2(1)(b) created a counterfactual assumption of reasonable repair that displaced the reality principle. He relied on section 46A(5) of the 1988 Act concerning completion notices, contending that a building undergoing structural reconstruction remained rateable until completion, leaving no scope for an entry as a transitory ‘building undergoing reconstruction’. He further submitted that para 2(7)(b) required identification of a mode or category of occupation. In the alternative, he argued that a building could attain such transitory status only once repair to its former state had become uneconomic. He invoked Easiwork Homes Ltd v Redbridge London Borough Council [1970] 2 QB 406 in support.

SJJM and Interveners

SJJM contended that the premises, being objectively in the course of redevelopment, were incapable of beneficial occupation and should be rated as a building undergoing reconstruction at a nominal value. The Rating Surveyors’ Association and British Property Federation submitted a three-stage approach: (i) determine whether the property is capable of rateable occupation; (ii) if so, identify the mode or category of occupation; (iii) only then apply the repair assumption.

Judgment

Lord Hodge (with whom Lord Neuberger, Lord Kerr, Lord Reed and Lord Carnwath agreed) allowed the appeal and restored the Upper Tribunal’s determination.

The Court reaffirmed the longstanding ‘reality principle’ (formerly rebus sic stantibus), citing Lord Buckmaster in Poplar Assessment Committee v Roberts [1922] 2 AC 93, Lord Maugham in Townley Mill Co (1919) Ltd v Oldham Assessment Committee [1937] AC 419, and Lords Pearce and Wilberforce in Dawkins (VO) v Ash Brothers and Heaton Ltd [1969] 2 AC 366. The principle has two limbs: the physical state of the property and its use.

[A]lthough 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.

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.

Examining the legislative history, Lord Hodge held that the 1999 Act amendments were a narrow correction of the lacuna identified in Benjamin v Anston Properties Ltd [1998] 2 EGLR 147, not a wholesale displacement of the reality principle. Baroness Farrington’s statements in Parliament confirmed this limited purpose:

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.

The Court endorsed the interveners’ three-stage approach: capability of rateable occupation and mode of occupation engage the reality principle, while the statutory repair assumption in para 2(1)(b) operates only at the third stage. The repair assumption does not address the logically prior question of whether premises are capable of beneficial occupation.

Whether premises are undergoing reconstruction rather than merely being in disrepair is determined objectively, disregarding the owner’s subjective intentions, but having regard to the programme of works actually being undertaken. On the UT’s findings, the premises had been largely stripped out as part of redevelopment, were incapable of beneficial occupation, and no part was capable of beneficial use.

The Court rejected the VO’s arguments based on section 46A(5) and Easiwork Homes, noting that para 10 of Schedule 1 to the 1967 Act and its successor did not bar applications to alter the rating list during redevelopment, as confirmed in Ravenseft Properties Ltd v Newham London Borough Council [1976] QB 464. The Court also rejected the alternative argument that ‘building under reconstruction’ status only arose once repair had become uneconomic.

Concerns about abuse were addressed by reference to section 66A of the 1988 Act (inserted by the Rating (Empty Properties) Act 2007), which provides an anti-avoidance power, and by noting the historic effectiveness of the prior practice reflected in the Valuation Office’s Rating Manual.

Implications

The decision restores and clarifies the orthodox position that a building objectively undergoing redevelopment is to be valued in its actual state, typically at a nominal rateable value, rather than as if it were in reasonable repair for its former use. The statutory repair assumption in para 2(1)(b) of Schedule 6 to the 1988 Act addresses disrepair but does not deem incomplete redevelopments complete, nor convert redevelopment works into mere repair.

The judgment endorses a structured approach: (i) is the property capable of rateable occupation at all? (ii) if so, what is its mode or category of occupation? (iii) only then apply the repair assumption. The repair assumption applies to physical state (para 2(7)(a)) but not to mode or category of occupation (para 2(7)(b)).

The case is significant for property owners, developers, and rating practitioners. It confirms that during a genuine redevelopment, an owner may properly apply to alter the rating list so that the property is described as a ‘building undergoing reconstruction’ with a nominal value, regardless of whether the works are structural and regardless of whether the repair would still have been economic. The objective assessment requirement, together with the existing statutory anti-avoidance power, addresses concerns about manipulation.

The Court left open the application of para 2(1)(b) to discrete parts of a development that become separately capable of beneficial occupation during the course of works (for example, completed flats in a converted hospital). Subjective intentions of owners remain irrelevant; the assessment depends on objective facts on the material day, including the actual programme of works.

Verdict: Appeal allowed. The Supreme Court restored the Upper Tribunal’s determination that the premises were undergoing reconstruction on the material day and that the rating list should be altered to describe them as a ‘building undergoing reconstruction’ with a rateable value reduced to a nominal £1.

Source: Newbigin (Valuation Officer) v SJ & J Monk (a firm) [2017] UKSC 14