Rateable Value on ‘Unlettable’ Properties

How is the rateable value on unoccupied property calculated when the property is unlettable and there is no real prospect of finding willing tenants at a positive rent?

Business rates are calculated based on the rateable open market value of the property. A reduction may be applied if the property is eligible for business rates relief. Exempted properties do not attract business rates, such as properties which have been empty for three months. Extended empty property relief is also available on, for example, industrial premises which are empty for another three months.

In some cases, there is an exemption from business rates but strict conditions apply for an exemption to be granted.

If extended relief on empty business premises is not available, the full business rates are payable after three months. But what if you are a commercial landlord who cannot find a willing tenant for the property after the three month-period – even if the premises are not in fact ‘lettable’?

Bad news for landlords

A recent ruling has brought unwelcome news for many landlords owning commercial premises which remain empty and unlettable because a tenant cannot be secured. The Supreme Court has ruled that commercial property may still be given a rateable value that assumes a willing tenant can be found, even if it is ‘unlettable’.

In Telereal Trillium v Hewitt [2019] UKSC 23, the government had used a substantial three-storey office block in Blackpool continually since 1972. The property had been vacant since March 2009. The date on which the non-domestic rating list for Blackpool first came into force under section 41(2) of the Local Government Finance Act 1988 was April 2010. When a valuation was made for the purposes of the new rating list the rateable value had to be determined by reference to the “antecedent valuation date” two years earlier. This was initially entered by the valuation officer as at April 2010 as £490,000, reflecting his view that similar office buildings were being rented by public sector tenants.

The Valuation Tribunal for England reduced the rateable value to £1 and the valuation officer appealed. The Supreme Court confirmed that the underlying principle is not in doubt: the valuation must be based on an estimate of the rent at which the property might reasonably be expected to let from year to year. Essentially, the valuer must imagine a hypothetical negotiation between a willing landlord and a willing tenant and arrive at the rent which best represents the resulting compromise.

The court relied on very old authority1 that “You must assume a landlord willing to let, and a tenant willing to take by the year; and having done so, you must get in the best way you can at the rent which, under an agreement brought about by the compromise of the conflicting interests of the man who wants to receive as much as he can and the man who wants to pay as little as he can, would be arrived at under such circumstances”.


The question for the court in this case was: how are these principles to be applied in a case where there is no evidence of actual demand for the particular property?

The main issue in the appeal was narrowly constrained by the “limited” terms of the parties’ Joint Position Statement in which they both agreed nobody in the real world would be prepared to occupy the property or to pay or bid a positive price; but that the “rating hypothesis” requires “the existence of a hypothetical tenant to be assumed”. The question was whether the same hypothesis requires the rateable value to be assessed by reference to the ‘general demand’ shown by the occupation of similar office properties. If so, the correct rateable value was £370,000; and if not, then it was £1.

What was the outcome?

The Supreme Court allowed the valuation officer’s appeal. Giving the lead judgment, Lord Carnwath said whether or not the building is occupied or an actual tenant identified at the relevant date is not critical. Even in a saturated market, the rating hypothesis assumes a willing tenant who is sufficiently interested to enter negotiations to agree a rent on the statutory basis.

He said the parties’ agreement that no-one would be prepared to rent the property for a positive price says nothing about the reasons for that position. He noted that the valuation officer’s view was that the lack of demand was simply down to “all public sector demands” being met by other properties. There was no reason why, without other material evidence, the level of that rent should not be assessed by reference to “general demand” derived from “occupation of other office properties with similar characteristics”.

So even if the property is unlettable and the market saturated it should be valued assuming a willing tenant can be found. The rateable value was ordered to be set at £370,000.

What are the implications?

The result is that even in circumstances where a landlord has very little prospect of finding a tenant because the property is unlettable, the rateable value could still be set by reference to rents paid for other, similar properties in the area.

While the ruling does not reflect the commercial realities for many commercial landlords and for businesses needing to rent premises which are suitable and fit for purpose at a positive price – it at least gives a measure of clarity as to how the law is being applied in practice. Unfortunately, the reality is that hypotheticals do not always reflect the real world.

There could be alternatives to trying to find a willing tenant for unlettable commercial premises, perhaps repairing or refurbishing the property to attract tenants or selling the property. If the alternatives cannot be explored, or they are unsuccessful, there could be an argument that the premises have become genuinely obsolete because, for example, they are unsafe – in which case they may qualify for an exemption from business rates.

1Smith v The Churchwardens and Overseers of the Poor of the Parish of Birmingham (1888) 22 QBD 211

 

 

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