The construction industry has never been a stranger to insolvency. There are many factors for insolvency practitioners appointed over a part complete site to consider – security issues, engaging with contractors, creditors and suppliers at the earliest opportunity, not to mention the potential health and safety exposure. The insolvency practitioner will also need to make a decision as to whether to complete a development over which they are appointed or sell the site in whatever unfinished state it is in. In making this decision, the cost of any build out versus the realisations that could be achieved on a part complete site, as opposed to a completed development, will be a huge consideration for any insolvency practitioner. The recent Supreme Court decision of Newbigin (Valuation Officer) v S J & J Monk may offer some assistance in the insolvency practitioner’s deliberations.
This case involved first floor offices of a three storey building, which the owners, S J & J Monk (“SJJM”) marketed to let in March 2010. Two years later however, the property was still vacant and substantial construction works had been undertaken. 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 the other floors.
On 6 January 2012, being the “material date” for valuation purposes, the property remained vacant and was still being redeveloped. The property was listed on the 2010 rating list as “offices and premises” with a rateable value of £102,000.
It is worth noting here that where non-domestic property is vacant, the rateable value of the property is based on the amount of annual rent reasonably obtainable for the property on the assumptions that:
- the tenancy commences on the relevant valuation date;
- before the tenancy commences the property is in a state of reasonable repair but excluding any repairs that a reasonable landlord would consider to be uneconomic and
- the tenant undertakes to bear the cost of the repairs
The assumptions apply regardless of the actual state of the property (this being the “repair assumption”).
Given the substantial construction works underway in this case, SJJM wanted to reduce its empty property rates liability and challenged the rating with the Valuation Officer. SJJM argued that, due to the physical state of the property:
- the rating list should be altered with effect from 1 April 2010 to “building undergoing reconstruction” and
- the rateable value should be assessed at the nominal amount of £1.
The Valuation Tribunal disagreed with SJJM. On appeal to the Upper Tribunal, SJJM’s argument was accepted but the decision was then overturned by the Court of Appeal. SJJM therefore appealed to the Supreme Court.
The central issue before the Supreme Court was whether the premises should be rated by having regard to the physical condition they were in on 6 January 2012 (being the long established ratings law “reality principle”) or whether the repair assumption displaces the reality principle, so that the Valuation Officer should assume that the premises were in a reasonable state of repair as “offices and premises” on that date.
The Supreme Court reversed the decision of the Court of Appeal and effectively restored the decision of the Upper Tribunal. It was held that works of alteration cannot be ignored.
The court held that where a property is undergoing redevelopment and is incapable of occupation, the assumption of repair did not displace or overtake the reality principle. In this instance, the repair assumption did not address the question of whether the property was actually capable of occupation. The reality was that the property was not capable of occupation due to the redevelopment works and as such, the rating list was entitled to be amended.
This is a significant decision, which will be welcomed by those owning and developing vacant commercial premises. For insolvency practitioners appointed over part complete developments, this decision could be a useful tool in reducing the potential expenses of a build out, if this was deemed to be the most viable option. Whether or not completing a part-finished site is viable will be very much dependent on the different valuations of part or fully completed developments, the relationship the insolvent developer has with its incumbent funder and their appetite to continue to support.
It is also worth noting that this case could unlock a significant quantum of business rate refunds. Any developers who might be affected, particularly those in financial distress, should seek specialist advice from a professional ratings consultant as to whether or not an adverse historic ratings assessment is capable of challenge.