When is a hospital not a hospital?

Introduction

The Supreme Court handed down their decision in the case of Newbigin (Valuation Officer) v SJ & J Monk (a firm) [2017] 1 WLR 851 on 1 March 2017. The issue the Justices were concerned with is of great significance to anyone looking to redevelop commercial premises: does a commercial office 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? Even when the building is clearly incapable of beneficial occupation? Lord Hodge posed an analogous question: 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?

These questions are of general public importance to the law of rating and valuation.

Facts

SJJM owned the freehold of the first floor of a three-storey office building in Sunderland. In 2010 SJJM entered into a contract 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.

On 6 January 2012, which was the relevant date for assessing the facts and applying the statutory assumptions when determining the rateable value of the premises, the premises were vacant. The building had been largely stripped out. The toilet facilities had been removed and although some preliminary steps had been taken in respect of the proposed new communal facilities, they were far from complete. In short, the premises were incapable of beneficial occupation because they were unusable. SJJM wished to reduce its liability to local authority non-domestic rates on the premises, while they were being reconstructed. They made an application to the valuation officer (“the VO”) asking him to alter the description of the premises on the rating list to "building undergoing reconstruction" and proposing that the rateable value should be reduced from £102,000 to £1. The VO did not accept the proposal and referred the matter to the Valuation Tribunal.

Appeal History

The Valuation Tribunal dismissed SJJM's appeal. SJJM appealed to the Upper Tribunal (Lands Chamber) who allowed SJJM's appeal. The Court of Appeal allowed the VO’s appeal. The Supreme Court allowed the further appeal by SJJM.

Issue on appeal

The central issue in the appeal was 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"), required the VO to assume that they were in reasonable repair as "offices and premises" on that date.

The decision

The Supreme Court acknowledged that it was an established principle of rating law that a hereditament is to be valued as it in fact existed on the material day: the so called "reality principle". The 1999 Act, by introducing the assumption of reasonable repair at the outset of the hypothetical tenancy in para 2(1)(b) ("the repair assumption"), was not addressing the question of whether the premises were capable of beneficial occupation, which, in the context of a building undergoing redevelopment, was a logically prior question. The repair assumption  applied 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)).

The interveners, the Rating Surveyors' Association and the British Property Federation, had submitted that, where works were being carried out on an existing building, the correct approach was to proceed in this order:

1. to determine whether a property is capable of rateable occupation at all and thus whether it is a hereditament;
2. if the property is a hereditament, to determine the mode or category of occupation; and then
3. 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 involved the application of the reality principle. At the third stage the valuation officer applies the statutory assumption in para 2(1)(b) that the hereditament is in a reasonable state of repair if the reality is otherwise.

The Supreme Court thought that this was a helpful approach where a building is undergoing redevelopment, subject to the useful practice of reducing the rateable value of a building which was incapable of rateable occupation because of temporary works to a nominal figure rather than removing it from the rating list altogether.

How is the valuation officer to ascertain that premises are undergoing reconstruction rather than simply being in a state of disrepair? He must assess the matter objectively. 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. If the works are objectively assessed as involving redevelopment, there was 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.

Comment

This decision is a welcome one for all developers and will apply even where the use of a building is changed completely. As stated in the introduction above. in paragraph 1, Lord Hodge had asked: 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 answer now is clearly no. Instead, following an application, the rating list may be altered to reflect the reality of the situation and to reduce the listed rateable value to a nominal amount.

One issue that may arise (see para 24 of the decision) is when, in the course of a redevelopment, some part of the developed property becomes capable of beneficial occupation, and thus becomes a separate hereditament. At that point the assumption in para 2(1)(b) might apply to that part. The example Lord Hodge gives is that if, in the course of the conversion of a hospital into offices, a part of the development became capable of beneficial occupation, 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 as Lord Hodge makes clear, 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.

The developer should make an application to alter the rating list as soon as the building is no longer capable of beneficial occupation. There had been no appeal from the decision of the Lands Tribunal in this case (see [2014] UKUT 14 (LC); [2014] RA 195) that where the rateable value was inaccurate by reason of a material change in circumstances which occurred after the day on which the list was compiled, the material date for assessment was the date upon which the application was made, rather than any earlier date.