[2025] UKUT 104 (LC)

In Monk the Supreme Court addressed the question which arises again in this appeal of whether a commercial building which is in the course of redevelopment should be valued for rating purposes as if it were still usable in the manner for which it was constructed.

Monk concerned an office building in Sunderland undergoing refurbishment prior to reletting. As Lord Hodge JSC recorded, at [4], at the material day:

“…. the premises were vacant. Contractors had removed the majority of the ceiling tiles and the suspended ceiling grid and light fittings and also 50% of the raised floor. They had also removed the cooling system and the sanitary fittings, demolished the block walls of the lavatories and stripped out the electrical wiring. The contractors had erected and plastered plasterboard partitions to form the outline of the proposed communal lavatories and had erected and plastered a partition across the floor at the east side of the premises. They had completed first fix electrical installations to the lavatory area and had altered the drainage to accommodate the new location of the lavatories.”

The contractors had entered into the refurbishment contract almost two years before the material day and between those two dates had proceeded with the required works.

Lord Hodge noted, at [12], that prior to the enactment of Schedule 6 of the 1988 Act:

“…it was an established principle of rating law that a hereditament is to be valued as it in fact existed at the material day. This principle, which in the past was described by the Latin phrase, rebus sic stantibus (ie as things stand), […] is often referred to as “the principle of reality” or “the reality principle” [….].”

The reality principle has two limbs, namely the physical state of the property and its use, as Lord Hodge noted, at [14]:

“In Scottish & Newcastle Retail Ltd v Williams (VO) [2001] 1 EGLR 157 the Court of Appeal upheld the decision of the Lands Tribunal that the reality principle meant that it was assumed that a hereditament was in the same physical state as upon the material day, save for minor alterations, and could be occupied only for a purpose within the same mode or category of purpose as that for which it was occupied on the material day.”

Before the 1988 Act the terms of the notional letting by reference to which the annual value of a hereditament (and hence its rateable value) was determined was specified by statute to include that the landlord would bear the cost of repairs. Case law directed that it should also be assumed that the landlord had first put the property into repair. In applying that assumption, as Lord Hodge explained, at [17], “[c]ase law 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.”

As originally enacted, the 1988 Act reversed the former assumption about the terms of the hypothetical tenancy and the tenant was now taken to assume responsibility for repairs, but it did not disturb the reality principle so far as it concerned the condition of the property or its mode of occupation. This change had unforeseen consequences which the repair assumption introduced by the 1999 Act was intended to address. In Jackson (VO) v Canary Wharf Limited [2019] UKUT 136 (LC), at [22], this Tribunal (the Deputy President and Mr P.D. McCrea FRICS) summarised Lord Hodge’s account of why the 1999 Act was introduced:

“In the Supreme Court Lord Hodge pointed out that the repair assumption had been introduced by the Rating (Valuation) Act 1999 to reinstate the law as it had been understood to be before the decision of the Lands Tribunal in Benjamin v Anston Properties [1998] 2 EGLR 147. Before the 1988 Act the statutory hypothesis had been that the landlord was assumed to bear the cost of repairs under the notional tenancy of the hereditament. In a series of decisions of the Court of Appeal this had been held to require an assumption that defects which were present in reality would be put right at the notional landlord’s expense, and so would not reduce the rateable value of the subject. In Benjamin the Lands Tribunal held that, by placing responsibility for repairs under the hypothetical tenancy on the tenant, the new valuation hypothesis (as originally enacted), did not permit an assumption that the hereditament was in repair if, in reality, it was not. The promoter of the Bill which became the 1999 Act had explained to Parliament that the purpose of the change was to address this conclusion, and to reverse its effect so that an old principle governing rating valuation should merely be restated” (Monk, at [21]).”

Lord Hodge explained the purpose of the 1999 Act, at [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)).”

Lord Hodge then turned his attention to the practicalities of how the repairing assumption should be utilised in the circumstances of a building undergoing refurbishment. He endorsed a three stage approach submitted in an intervention by the Rating Surveyors’ Association and the British Property Federation:

The final part of Lord Hodge’s analysis concerned how to differentiate between premises undergoing reconstruction and those which are simply in a state of disrepair. He concluded that the subjective intentions of the owner are irrelevant; what is required is an objective assessment of the physical state of the property on the material day, which can have regard to the programme of works which is being undertaken on the property.

In Canary Wharf the Tribunal rejected a submission that the Supreme Court’s analysis in Monk represented a narrow “building in the course of redevelopment” exception to the repair assumption. At [36] the Tribunal instead emphasised that:

“If premises are not capable of beneficial occupation they are not a hereditament.”

The VO’s acceptance in Canary Wharf that office premises which had been stripped back to shell condition were not capable of beneficial occupation was therefore “the beginning and end of the appeal.”