A bonanza for empty rates schemes?

The Supreme Court has given judgment in the case of Telereal Trillium v Hewitt (VO) [2019] UKSC 23. The latest in a long line of rating cases to be considered by the Supreme Court in recent years, this case indicates that even the most unattractive, seemingly impossible to let, empty property is likely to be found to have more than a nominal rateable value if other properties of a similar nature in the locality remain let. An owner faced with such a building may well be considering redevelopment but may either lack resources to carry out the development quickly or wish to wait to see what development is likely to result in the best return. Despite receiving no actual rent for the premises, until such time as a redevelopment that permits the reduction of the rateable value to a nominal amount takes place, it is likely to have to pay empty rates based on a full rateable value – even if the building has been vacant for some considerable time and it has failed to find any tenant willing to occupy them at any rent.

This post considers the background to and implications of the judgment.

Background

The history of Telereal Trillium v Hewitt is somewhat unusual, although the premise of an old and seemingly unlettable building will be familiar throughout the country.

The case concerned the rateable value that should be attributed to Mexford House, a substantial three storey office building in the north of Blackpool which was built in the early 1970s and occupied continuously as government offices from 1972 until 2009. It was vacant on the date that the 2010 rating list came into effect. Notice of the intention to vacate had been given by the occupiers prior to 1 April 2008, the antecedent valuation date for the 2010 list.

The rateable value in the 2010 list was initially set at £490,000. On appeal to the Valuation Tribunal of England, the rateable value was reduced to £1. The Valuation Officer appealed to the Upper Tribunal. The valuation principle was not in question: paragraph 2 of Schedule 6 of the Local Government Finance Act 1988 provides that the rateable value is to be “an amount equal to the rent at which it is estimated that the hereditament might reasonably be expected to let from year to year”. During the Upper Tribunal hearing, the Valuation Officer admitted under cross examination that there was no person in the real world who would have put in a bid for a tenancy of Mexford House on the basis of the statutory tenancy. In reality, the premises were only likely to be of significant interest to public sector occupiers and the requirements of the public sector bodies who might have occupied the premises had reduced. The lack of demand for Mexford House was not because it was obsolete or lacked merit but because demand for such space had been fulfilled by the other comparable properties.

Following that admission, the parties agreed the facts and informed the Upper Tribunal that the case could be determined “as a matter of law upon an agreed basis of fact”. As such, the Upper Tribunal and the courts above have had a very limited question to consider: does the rating hypothesis require that, even though it is agreed there would have been no tenant willing to take the premises, the rateable value should be assessed on the basis of general demand, evidenced by occupation of other, similar, offices? If the answer was “yes”, it was agreed that the rateable value should be £370,000. If, however, one could consider solely whether there was a real world demand for the premises at anything above a nominal rent, it was agreed that the rateable value should be £1. The Upper Tribunal held that the rateable value should be £370,000; the Court of Appeal reversed that decision and held that the rateable value should be £1.

Supreme court decision

The Supreme Court has, by a margin of three to two, reversed the Court of Appeal’s decision and restored the higher rateable value of £370,000.

Lord Carnwath gave the majority judgment with which Lord Reed and Lord Lloyd-Jones agreed. Lord Carnwath agreed with the distinction drawn in previous Lands Tribunal cases between property that is vacant due to a surplus of similar property in the market and property which has reached the end of its economic life and is obsolete stating that “even in a ‘saturated’ market the rating hypothesis assumes a willing tenant, and by implication one who is sufficiently interested to enter into negotiations to agree a rent on the statutory basis”. Lord Carnwath concluded that, in the absence of other material evidence, evidence of “general demand”, based on other similar offices can be used to assess the rateable value.

Lord Briggs and Lady Black disagreed with the majority judgment but the main point of difference was the interpretation of the meaning and consequences of the “highly artificial” agreement that the parties had entered into during the Upper Tribunal hearing. Lord Briggs concluded that the rating hypothesis requires only that someone would take a yearly tenancy but not that that would necessarily be at more than a nominal rent , although he concluded that the occasions where the evidence (or an agreement, such as in this case) shows that there is no demand for the subject property but also shows comparable properties in the locality being let for substantial rents would be very rare. As the minority judgment, these comments have less weight but are interesting to note nonetheless.

It is also interesting to note that there was a general concern about the agreement as to the facts that had been reached during the Upper Tribunal hearing, in particular whether this hampered any exploration of the issues surrounding it. Lord Briggs commented that the valuer was “hamstrung by an improbable agreement between the parties about the complete absence of demand (at more than nominal rent)”.

Implications for developers

This case has confirmed that even apparently unlettable property is likely to be found to have more than a nominal rateable value. If other comparable buildings remain let, it is unlikely that the building will be found to be obsolete and a rateable value based on those comparable premises is likely regardless of the fact that no real tenant would actually be able to be found for the building. In a less buoyant property market, particularly outside of London, older buildings may prove unattractive to tenants who may, in reality, have alternative, more modern, options available at similarly reduced rents. Where redevelopment is anticipated but not yet underway an owner may find it more difficult to argue that it should not pay empty rates based on a full rateable value. This may well result in more owners with buildings of this nature using schemes to reduce liabilities for empty rates. A number of such schemes have been considered by the courts and deemed acceptable although care must be taken to ensure that any such scheme proposed is legally effective and that tax advice is taken to ensure that its use is actually beneficial in reducing the overall liabilities for the premises.

Once a redevelopment is under way, following the decision in Newbigin v Monk [2017] UKSC 14, the owner can seek to have the rateable value reduced to a nominal amount. The Supreme Court unanimously decided in that case that there was no bar to implementing a proposal to alter the description of a property on the rating list to “building undergoing reconstruction” and, as a result, to reduce the rateable value to a nominal amount if the facts, looked at objectively, support such an alteration.

Author: Frances Edwards, senior associate, real estate dispute resolution, London

For more information please contact:

Frances Edwards
Frances Edwards
Senior associate, real estate dispute resolution, London
+44 20 7466 2279
Matthew Bonye
Matthew Bonye
Partner and head of real estate dispute resolution, London
+44 20 7466 2162

Supreme Court ruling on negligent property valuations: Tiuta International v De Villiers Surveyors [2017] UKSC 77

The Supreme Court judgement in the case of Tiuta International v De Villiers Surveyors was handed down at the end of last month. The case involves surveyors valuing a property development, and a lender granting a loan facility to a developer while relying on the valuation.

The Supreme Court held that where a lender, Tiuta, advanced money on the basis of an initial valuation of property by surveyors De Villiers, then Tiuta refinanced the facility on the basis of a second negligent valuation by De Villiers, the liability of De Villiers was limited to the ‘top up’ element of any additional lending.

This ruling has come at a time when valuation negligence is a hot topic in the courts. There is an increased frequency of claims, often being tied to the financial instability of the late 2000s and its effect on commercial real estate values.  In recent months, other important issues such as the width of the margin for error in valuation, have come under scrutiny.

For more information on this case please click on the link to the HSF insurance blog post, below:

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