Company entitled to use rent free period in the first five years for valuation purposes, tribunal finds

Out-Law News | 20 Jul 2012 | 5:07 pm | 2 min. read

A Valuation Tribunal has rejected an approach by assessors that would have increased the business rates paid by a City firm by 20% over the first five years of a lease. 

Property owners often offer long-term tenants rent-free periods to encourage them to occupy their properties. Businesses have traditionally used these periods early in the lease to reduce costs early in the lease, when a tenant has to meet other costs of starting up a business, such as fitting-out.  Business rates are based on the rent paid by a tenant.

In a case involving insurance company Thomas Miller and its City of London offices, a Valuation Officer from the Valuation Office, which is part of HM Revenue and Customs, had tried the "totally new" approach of spreading the inducement over the first 10 years of the lease instead of the first five years.

This would have led to the charging of higher business rates in the first five years of the lease than would have been the case if the rent-free period was treated as falling within that initial five year period.

The Valuation Tribunal for England rejected the Valuation Officer's approach and said that Thomas Miller was entitled to treat the rent free period as falling within the first five years leading up to its first rent review.

Business rates are charged on most non-domestic premises including shops, offices, warehouses and factories. Premises are assigned a rateable value by the Valuation Office which is used by the local authority to calculate how much the occupier of that property should pay.

Commercial property law expert Suzanne Gill of Pinsent Masons, the law firm behind Out-Law.com, pointed out that the case was the second challenge to City business rates in quick succession.

"As rents are static or falling, rates are becoming an increasingly significant part of property costs and it's not surprising that they are being challenged, especially in London with its high rateable values," she said. "This decision will be a relief for hard-pressed businesses - the lettings market for commercial premises is poor at the moment, especially in secondary premises and outside London."

"Though the business's preferred approach might not have changed the total rates over the whole term of the lease, it would have decreased the amounts due in the very short term, and businesses are very focused on reducing immediate property costs right now," said Gill.

The decision confirmed that the previous practice by the valuation tribunal of using up rent free periods in the first five years was "broadly correct", she added.

"It was the right decision, as it means that business rates are treated in the same way as rent-free periods are treated," she explained. "Because of this, rates bills will not change – if the judgment had gone the other way, they would have risen."

Last month the Upper Tribunal (Lands Chamber) decided that where a business occupied two or more unconnected floors in the same building, that property should be treated as a single 'hereditament', or unit of occupation, for the purposes of calculating a rateable value. The High Court recently ruled that landlords were entitled to use the so-called '42 day rule' loophole, allowing them to trigger a six-month 'grace period' from paying business rates on property left lying empty, as a means of managing liability for business rates.

According to Knight Frank, the tribunal said that although the tenant's approach was correct the end result still had to "stand up to scrutiny" and deliver a value comparable to that of nearby properties. The evidence presented by Thomas Miller supported its approach.