[2024] UKUT 356 (LC)

Non-domestic rates are a tax on property and the unit of property which is the subject of tax is the ‘hereditament’. Section 64(1) of the Local Government Finance Act 1988 (the 1988 Act), defines a hereditament by reference to the definition in section 115(1) of the General Rate Act 1967, which provided that:

An important consideration in determining whether a unit of property is liable to be shown as a separate item in the valuation list, and is therefore a hereditament, is whether it is capable of beneficial occupation. As Lord Sumption JSC noted at the start of his judgment in Woolway v Mazars [2015] UKSC 53, historically, local authority rates were payable in respect of the rateable occupation of hereditaments, and that continues to shape the law in this area even though non-domestic rates are also now imposed on unoccupied hereditaments.

Schedule 6 of the 1988 Act contains provisions about valuation for the purposes of non-domestic rating. Paragraph 2(1) provides that the rateable value of a hereditament is taken to be equal to the rent at which it might reasonably be expected to let from year to year if let on the material day on certain assumptions. The second assumption, in paragraph 2(1)(b), is that “immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic”. The third assumption, in paragraph 2(1)(c), is that the tenant undertakes to pay all usual tenant's rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command the agreed rent.

In SJ & J Monk v Newbigin, which we mentioned at the start of this decision and to which we will now refer simply as Monk, Lord Hodge considered the relationship between the repairing assumption in paragraph 2(1)(b) of Schedule 6, 1988 Act, and the two limbs of the reality principle i.e. the fundamental principle that a hereditament is to be valued as it in fact existed at the material day, both as to its physical state and its use. To illuminate that relationship he first reviewed the legislative history of the repairing assumption, at paragraphs [16] to [22].

We were taken through many of the same cases in the course of argument but, in view of the way in which the appellant’s case narrowed it is not necessary for us to refer to them in any detail. In summary, before the enactment of the 1988 Act the assessment of rateable value was undertaken on an assumption that the hypothetical landlord would bear the cost of repairs. Case law interpreted this assumption as entailing that the landlord must be taken first to have put the premises into repair at the start of the notional new letting. In making that assumption, the cases distinguished between a mere lack of repair, which did not affect rateable value because of the hypothetical landlord’s obligation to repair, and redevelopment works which made a building uninhabitable.

That settled state of the law was disrupted by paragraph 2(1) of Schedule 6 to the 1988 Act, in its original form, which reversed the previous assumption and required that the hypothetical tenant be taken to undertake to bear the cost of repairs. In view of this change, the Lands Tribunal determined in Benjamin v Anston Properties Ltd [1998] 2 EGLR 147 that it could no longer be assumed that the landlord would remedy any existing disrepair before letting the premises to a new tenant, with the result that the rateable value would fall to be determined on the basis that the hereditament was in its actual condition on the material day, and not in any different assumed state of repair.

Paragraph 2(1) of Schedule 6 to the 1988 Act was amended by section 1 of the Rating (Valuation) Act 1999 to reinstate the previous assumption that the hereditament was in a state of repair at the commencement of the notional letting. As Lord Hodge pointed out, the amended repair assumption is concerned only with the physical state of the hereditament and does not address the second limb of the reality principle, which requires that the hereditament be valued in its current mode of occupation. He explained, at paragraph [20]:

“The 1999 Act, by introducing the assumption of reasonable repair at the outset of the hypothetical tenancy (“the repair assumption”), is not addressing the question of whether the premises were capable of beneficial occupation, which, in the context of a building undergoing redevelopment, is a logically prior question. Thus the repair assumption (para 2(1)(b)) applies 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)).”

At paragraph [21] Lord Hodge derived support for his view of the relationship between the repair assumption and the reality principle from the speech of the promoter of the 1999 Act who had explained to Parliament that the sole purpose of the legislation was to reverse the effect of Benjamin v Anston Properties and to reinstate the former principle. Lord Hodge then observed:

“This statement, in my view, negatives a suggestion that the 1999 Act was addressing any mischief caused by the established distinction between works to correct a lack of repair on the one hand and what she called “renewal, refurbishment or improvement” on the other.”

At paragraph [22], Lord Hodge then referred to an approach suggested in submissions received from the Rating Surveyors’ Association and the British Property Federation, which he considered helpful, namely:

“[T]hat, where works were being carried out on an existing building, the correct approach was to proceed in this order: (i) to determine whether a property is capable of rateable occupation at all and thus whether it is a hereditament, (ii) if the property is a hereditament, to determine the mode or category of occupation and then (iii) 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 involve the application of the reality principle. At the third stage the valuation officer applies the statutory assumption in para 2(1)(b) if the reality is otherwise. In my view, this is a helpful approach where a building is undergoing redevelopment.”

In order to distinguish between premises “undergoing reconstruction rather than simply being in a state of disrepair” the subjective intentions of the person undertaking the works were not relevant and the physical state of the premises must be assessed objectively. If, as was the case in Monk, “the premises were in the process of redevelopment and no part of them was capable of beneficial use”, the repair assumption could not be applied to override the reality principle and to create a hypothetical tenancy of the previously existing premises in a reasonable state of repair. As Lord Hodge explained, at paragraph [23]:

“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.”

Despite the clarity of the reasoning in Monk, a question mark may remain over the relationship between the reality principle and the repair assumption where premises are rendered incapable of beneficial occupation for reasons other than a programme of radical alterations. The appellant’s case before the VTE was supported by representations settled by Mr Ormondroyd which asserted, on the basis of the analysis at paragraph [23] of Monk, that if the property is not capable of rateable occupation it is not a hereditament and thus there can be no question of applying the repairing assumption. Support for that broad proposition could be found in Ryde on Rating, in which, at paragraph [297], the learned author suggests that, following Monk:

“It now appears that, where works are being carried out on an existing building, a series of tests need to be applied. First, taking the property rebus sic stantibus, one has to assess whether it is capable of rateable occupation. If it is not, then it is not a hereditament, and the second assumption of paragraph 2(1) of Schedule 6 is not engaged.”

Lord Hodge’s reasoning was anchored in the facts of Monk as is clear from paragraph [20] where he considered the scope of the repair assumption “in the context of a building undergoing redevelopment”, and at paragraph [22] where he recorded the interveners’ submission as applying “where works were being carried out on an existing building” but qualified his approval of it by saying that “this is a helpful approach where a building is undergoing redevelopment”. The passage from Ryde quoted above appears to adopt the interveners’ submission in its original form, without Lord Hodge’s apparent limitation to buildings undergoing redevelopment.

The only case to which we were referred in which Monk has been applied was the Tribunal’s decision in Jackson (VO) v Canary Wharf Ltd [2019] UKUT 136 (LC), which concerned office premises undergoing reconstruction which had been stripped back to a shell condition and which were awaiting agreement with a new tenant before they would be fitted out. There was no doubt that, by reason of their undergoing redevelopment, the premises were incapable of beneficial occupation, and that was enough to dispose of the appeal on the basis that they were not a hereditament. But that case goes no further than Monk and does not assist when considering the role of the repair assumption where premises are incapable of occupation because they are in disrepair.

It should also be noted that, before 1988, the well-established distinction between a building undergoing alteration and modernisation and a building in need of repair appears to have been maintained irrespective of the effect which the disrepair had on the capacity of the building for beneficial occupation. One of the cases to which Lord Hodge referred as an illustration of that distinction was De Silva and Another v Davis (VO) [1983] 1 EGLR 211, which concerned a maisonette on two floors in a state of serious disrepair such that the accommodation was not capable of occupation. Although the owner intended to convert the maisonette either into offices or into a number of flats, no work had yet been undertaken. The owner proposed that the rateable value should be reduced to a nominal sum, but the Lands Tribunal applied the repair assumption and valued the premises as a maisonette.

In the event, the question whether, after Monk, premises rendered incapable of beneficial occupation by reason of disrepair should not appear in the rating list at all because they are not a hereditament, is not one which we have been asked to determine in this case. Mr Ormondroyd’s submission was a more limited one, which assumed that, in principle, the repair assumption applied to the appeal premises and focused on whether the remedial work required to render them capable of occupation was repair within the meaning of paragraph 2(1)(b) of Schedule 6.

As Lewison LJ observed in giving the leading judgment in the Court of Appeal in SJ &J Monk v Newbigin [2015] 1 WLR 4817, at paragraph [17]: “… what is or is not repair is to be decided according to the common law that applies as between landlord and tenant”. In support of that proposition he referred to Camden LBC v Civil Aviation Authority [1980] RA 369 in which the Court of Appeal applied conventional common law principles in upholding a decision of the Lands Tribunal that extensive remedial work required to strengthen the structure of a building containing high alumina cement was not work of repair and so could not be assumed to have been carried out by the hypothetical landlord before the material day.

For an up to date summary of the common law principles on the meaning of an obligation to repair, reference can be made to London Borough of Hounslow v Waaler [2017] EWCA Civ 45 at paragraph [14], where Lewison LJ identified a number of propositions about the meaning of “repair” as it applies between landlord and tenant:

“14.

I do not believe that the following propositions are controversial in the context of contractual liability:

i)

The concept of repair takes as its starting point the proposition that that which is to be repaired is in a physical condition worse than that in which it was at some earlier time: Quick v Taff-Ely BC [1986] QB 809.

ii)

Where the deterioration is the product of an inherent defect in the design or construction of the building the carrying out of works to eradicate that defect may be repair: Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1980] QB 12.

iii)

Prophylactic measures taken to avoid the recurrence of the deterioration may also be repair: Ravenseft Properties Ltd v Davstone (Holdings) Ltd at 22, McDougall v Easington DC (1989) 58 P & CR 201, 206.

iv)

In principle where there is a choice of methods of carrying out repair, the choice is that of the covenantor provided that the choice is a reasonable one: Plough Investments Ltd v Manchester CC [1989] 1 EGLR 244.

v)

At common law there is no bright line division between what is a repair and what is an improvement: McDougall v Easington DC at 207.

vi)

The use of better materials or the carrying out of additional work required by building regulations or in order to conform with good practice does not preclude works from being works of repair: Postel Properties Ltd v Boots the Chemist [1996] 2 EGLR 60.

vii)

Where a defect in a building needs to be rectified, the scheme of works carried out to rectify it may be partly repair and partly improvement: Wates v Rowland [1952] 2 QB 12.”

A particularly relevant illustration of Lewison LJ’s first proposition is provided by Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055, the facts of which are close to those of this case. An office building was let to a tenant which covenanted to keep it “in good and substantial repair and condition”. The building had a basement which was originally dry but which later became wet after the water table in the locality rose. The water entered the basement and lay ankle deep on the floor as a result of a defectively constructed kicker joint between the walls and the floor. The joint was found to be in the same condition as it had been when it was constructed, and there was no evidence that the presence of the water had resulted in any damage to any part of the building. At first instance the Judge had determined the case by considering whether, as a matter of degree, any of the schemes of work to remedy the water penetration were repair, as contrasted with work of alteration. The Court of Appeal decided that that was the wrong starting point. Ralph Gibson LJ said:

“I see no escape from the conclusion that if, on the evidence, the premises demised are and at all times have been in the same physical condition … as they were when constructed, no want of repair has been proved for which the tenants could be liable under the covenant.”

Slade LJ agreed, adding: “a state of disrepair, in my judgment, connotes a deterioration from some previous physical condition.”

In his judgment in the Court of Appeal in Monk, at paragraph [26], Lewison LJ cited Post Office v Aquarius as authority for the further proposition that: “If it is shown that property is worse than it was at some earlier time, it does not matter whether the deterioration resulted from error in design, or in workmanship, or from deliberate parsimony or any other cause.” In applying the repair assumption to the facts of Monk it therefore did not matter that the hereditament had come to be in a worse condition than before because of a deliberate decision to strip out the interior.

The critical question in Monk was the extent to which the repair assumption displaced the reality principle. In this appeal the critical question is whether the consequence of applying the repair assumption is that the defective joint must be assumed to have been remedied and the basement to have been dry on the material day. That requires that remedying the defect must involve “repair” and not some different activity.

One other aspect of Lewison LJ’s first proposition in Hounslow v Waaler should be noted. As already explained, an inherent defect in design or workmanship, such as the defective kicker joint in Post Office v Aquarius, does not require “repair” until the defect results in damage. But not every instance of damage will be sufficient to trigger an obligation to repair. As Lewison LJ explained, it is necessary for “that which is to be repaired” to be in a physical condition worse than it was at some earlier time. In other words, in the context of a covenant to repair in a lease, the subject of the covenant (that which is to be repaired, and not some other thing) must be in a state of disrepair before the repairing obligation will be engaged. That can be illustrated by the decision in Quick v Taff-Ely BC [1986] QB 809.

In Quick a local authority landlord was bound by the statutory repairing covenant in section 11, Landlord and Tenant Act 1985, to keep the structure and exterior of a house in repair. Although the house had been built in compliance with the building standards of the time, uninsulated concrete window lintels, single glazed metal frame windows and an inadequate central heating system caused severe condensation on the walls, windows and metal surfaces in all of the rooms. The condensation caused fungus and mould and an offensive smell of damp; it also caused some plaster to crumble and damaged some woodwork, particularly inside and behind fitted kitchen cupboards but also some of the wooden surrounds into which the metal windows frames were set. There was no damage to the frames themselves, or to the lintels.

The County Court judge ordered the landlord to remedy the condensation problem by replacing the window frames with wooden or PVC frames and by insulating or replacing the concrete lintels. The landlord appealed to the Court of Appeal and the appeal succeeded on the basis that there was no damage to the subject matter of the covenant (the structure and exterior of the house) which required such extensive works. Dillon LJ said this:

“In my judgment, the key factor in the present case is that disrepair is related to the physical condition of whatever has to be repaired and not to questions of lack of amenity or inefficiency. … Where decorative repair is in question one must look for damage to the decorations, but where, as here, the obligation is merely to keep the structure and exterior of the house in repair, the covenant will come into operation only where there has been damage to the structure and exterior which requires to be made good.”

Lawton LJ said that the trial judge should first have identified the parts of the exterior and structure of the house which were out of repair and then have gone on to decide whether, to remedy those defects, it was “reasonably necessary” to replace the concrete lintels and the single-glazed metal windows, which were probably the major causes of excessive condensation in the house. Neill LJ recognised that the only damage to the structure and exterior was to some of the wooden surrounds and to some of the plaster but considered that “a realistic way of effecting those repairs” did not require the replacement of the metal window frames with wooden or PVC frames.

Under the statutory rating hypothesis, the repair assumption applies to the whole of the hereditament, not simply to the structure and exterior. It follows that if, as a result of defective design or poor workmanship or some other latent defect, any part of the hereditament has become damaged, and the only realistic way of remedying that damage is to carry out additional work which goes further than putting it back into its original condition, (and assuming it is not work which a reasonable landlord would consider uneconomic) the repair assumption requires that the rateable value of the hereditament be determined on the basis that those works have been carried out at the material day.

Finally, it is relevant to mention one point of tribunal procedure. Appeals to the Tribunal in rating cases proceed as re-hearings, as they formerly did before the Tribunal’s statutory predecessor, the Lands Tribunal. As the Tribunal (Sir Keith Lindblom, Chamber President and Mr A.J. Trott F.R.I.C.S.) explained in Johnson (VO) v H&B Foods Ltd [2013] UKUT 539 (LC), at paragraph [64], when it considers an appeal by way of a rehearing, the Tribunal does not disregard the decision of the tribunal below, in this case, the VTE. The appellant is required to satisfy the Tribunal that the decision appealed against was wrong (see the decision of the Court of Appeal in Sole v Henning (V.O.) [1959] 3 All. E.R. 398 at 399H, and the decisions of the Lands Tribunal in Sinclair Gardens Investments (Kensington) Ltd. v Franks (1998) 76 P. & C.R. 230, at pp.234-5, and Wellcome Trust Ltd. v Romines [1999] 3 E.G.L.R. 229, at pp.230-3). The practical consequence of this rule is that, on the re-hearing, the burden of proving matters of fact falls on the appellant.