Rates – an objective test

Author: Alison Mould

This article is taken from the latest edition of Fladgate’s Footfall Update. Please email the marketing team on marketing@fladgate.com to be added to the mailing list for future updates.

As we know, liability for rates falls on the person entitled to occupation, normally the tenant in relation to leasehold property. That applies whether or not the tenant is in actual occupation of the property. The tenant is the person entitled to occupation and liability therefore rests with the tenant.

If a building is not capable of “beneficial occupation” then rates are not payable – for example, if there had been a fire in the building, or severe flooding as we experienced earlier this year.

It had also been thought that a building was not capable of “beneficial occupation” during the tenant’s fit-out period. That would certainly be the case in a number of situations.

However, a recent tribunal decision has determined that the Valuation Office should assess whether the building is able to be beneficially occupied using an objective, not a subjective, test. This could have huge cost implications for many tenants.

The tribunal decision referred to is R3 Products Limited v James R Salt (Valuation Officer) [2014] UKUT0333(LC). In a nutshell, R3 Products operated a business for the construction sector which transformed waste plastics into goods. R3 Products took a lease of a factory with a rent free period granted by the landlord to allow them to install a high voltage electricity supply which they required to operate their business, but which was not currently available at the property.

The Valuation Office claimed business rates for this period of fitting out works. The tenant, R3 Products, argued that the premises were not available for “beneficial occupation” by them as they could not undertake their manufacturing process without the high voltage electricity supply which they were installing during this rent free period. They argued that the carrying out of these fitting out works did not, in itself, constitute beneficial occupation.

The tribunal held that this factory was not to be removed from the rating list for the period of its refurbishment. It accepted that the factory could not be used for the tenant’s manufacturing processes during the fitting out period, but went on to point out that the tenant ratepayer had accessed the property in order to carry out fitting out works, meaning that the property had not, therefore, been incapable of beneficial occupation so as to justify its removal from the rating list.

The key question is, therefore, whether a building is capable of occupation by any tenant, not the specific tenant in question. The fact that the specific tenant had to carry out crucial and essential works in order to enable it to use the premises and beneficially occupy them for the purposes of its business was irrelevant.

Consequently, when taking new leases which include rent free periods, tenants should not now necessarily assume that there will be no rates liability for the same period. The test appears to be an objective one and if the premises are capable of beneficial occupation, ignoring the subjective nature of the tenant’s business, then rates will apply in the normal way.

Alison Mould, Partner, Fladgate LLP (amould@fladgate.com)

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