A shopping centre is anchored by a department store. The department store closes; no other retailer is willing to take over. Alongside the anchor store, a row of shops is now economically obsolete, but they do not empty overnight; the leases have not expired. There is no demand for any of the shops other than at nominal rents.
The anchor store announced its intention to close just before 1 April 2019, the valuation date for the rating list coming into force on 1 April 2021. Is the fact that rent is still being paid for some of the units relevant to the rateable value (RV) of any of the others that survive until 1 April 2021?
This scenario is prompted by a new Supreme Court decision. The case concerned the RV of an office building. The origin of the controversy is found in the office letting market in Blackpool, a decade ago. Mexford House had been occupied by two government departments since the 1970s. In 1998, Telereal Trillium took a virtual assignment of the lease. Immediately before the rating valuation date of 1 April 2008, the annual passing rent was £417,000. However, both occupiers had announced that they would be leaving. By the time the new rating list came into force on 1 April 2010, both had gone.
The valuation officer sought an RV at 1 April 2008 of £490,000 (later moderated by comparable evidence to £370,000), from 1 April 2010. Telereal proposed an RV of £1 because there was no demand for the premises in the actual market at the valuation date. The Valuation Tribuna and the Court of Appeal agreed with Telereal. The Upper Tribunal agreed with the valuation officer.
The Supreme Court also decided in favour of the valuation officer. For rating purposes, one looks not only at the demand for the premises in question but also at whether there is general demand in the area for comparable buildings.
A property may be unoccupied because of a surplus between supply and demand in the market or because the property is intrinsically valueless having reached the end of its economic life.
Where supply exceeds demand but there is general demand for comparable space, a substantial RV is appropriate. A nominal value is justified where the premises are intrinsically valueless or the lease responsibilities are such that beneficial occupation is impossible.
And those unit shops? Two of the five Supreme Court justices said evidence that rent is still being paid for some of the units does not demonstrate demand for the now-vacant units. A nominal RV applies.
Roger Cohen is real estate sector partner at Bryan Cave Leighton Paisner