Reducing business rates liability in the covid-19 crisis: part 2

In the first article in this two-part series, I looked at steps business could take immediately to reduce their liability to rates in response to the covid-19 crisis. This article discusses what can be done to reduce the valuation of business premises on account of covid-19. There are certainly opportunities for businesses here, but they need to be carefully thought through, as this article explains.

This topic has attracted a lot of attention, with talk of a group action by ratepayers to secure reductions. It certainly feels instinctively that physical property is less valuable than it was before the crisis, given the widespread restrictions (both direct and indirect) on the use of business property of all kinds. However, the relevant legal provisions mean that reductions in valuation can only occur in certain circumstances. Businesses or rating agents seeking reductions on their behalf will need to ensure they pass through one of these gateways. The procedure is such that the relevant gateway needs to be identified very early on in the process; if this is not done correctly then the opportunity to secure a reduction will probably be lost altogether.

The gateways

Generally speaking, a "material change of circumstances", and consequent reduction in valuation, can only be established if certain essentially physical matters have altered since 1 April 2017. The most relevant ones are defined in legislation as follows (LGFA 1988, sch 6 para 2(7)):

(a) matters affecting the physical state or physical enjoyment of the hereditament,

(d) matters affecting the physical state of the locality in which the hereditament is situated or which, though not affecting the physical state of the locality, are nonetheless physically manifest there, and

(e) the use or occupation of other premises situated in the locality of the hereditament.

Facts which may pass through a gateway

The most obvious gateway that a ratepayer could rely on is (a). Where the use of premises has been restricted, it is likely that a tribunal would find that the "physical enjoyment" of the premises had been affected. Valuation changes were made on this basis in the past in response to the smoking and handgun bans.

This gateway may be of little practical use, however. The premises that have been restricted in this way are those in the retail, hospitality and leisure sectors, which have in general been relieved of any liability to business rates in 2020/21 anyhow. A reduction in valuation is unlikely to be of much interest to the owners or occupiers of such hereditaments, unless the restrictions endure beyond 2020/21. This gateway may still be of some use for those with empty premises which therefore do not benefit from the relief, of course.

Paragraph (e) may allow a broader class of properties to benefit from a reduced valuation. This will happen most obviously if the crisis causes an oversupply of certain premises in the market in the short to medium term. Whereas demand for properties is an 'economic' matter which must be assessed as at the valuation date (1 April 2015), supply is a physical matter for which allowance can be made if it has increased markedly at a later date.

An additional, and more novel, approach to (e) would be to rely on the closure of shops and other amenities as a factor reducing the value of nearby office premises. This will raise several interesting valuation questions (how can the availability of nearby amenities be quantified?), foremost among which will be the question of duration: current indications are that the severest restrictions will endure for a period of some three to four months. Would a landlord and tenant negotiating a lease from year to year with a reasonable prospect of continuance regard disruption for such a period as significant in their negotiation over the annual rent? If not, an alternative approach may be to agree a reduction effective only for the duration of the restrictions.

Gateway (d) is curiously worded and has caused perhaps the most debate recently, including the Upper Tribunal's decision in my own case of Merlin v Cox (VO) [2018] UKUT 406 (LC). Could a change in footfall as a result of the covid-19 outbreak and response amount to a matter which is "physically manifest" in the locality of a hereditament?

Merlin (and the similar case of Wigan Football Club v Cox (VO)) has nothing directly to say about that question, as it concerned a change which was attributable to the ratepayer's own conduct on its own hereditament, rather than to anything stemming in truth from the locality. The Tribunal in Merlin did however offer some (non-binding) guidance to the effect that changes in footfall will be relevant or not depending on the cause of the change. If the change in footfall stems from a change in the frequency or availability of public transport services, it is relevant because it relates to an intrinsic quality of the locality, namely its accessibility. If on the other hand it simply reflects a change in "economic matters" which are not physically manifest, it will be irrelevant.

Ratepayers who can attribute a change in footfall to the reduced availability of public transport would therefore seem well placed to have such a change taken into consideration in the valuation of their hereditament. However, the correctness of the distinction drawn in Merlin is also open to question. Why should it matter what the cause of the change is, as long as the change in footfall itself is physically manifest? This is question which will have to be answered in another case.

Procedure and timelines

Where a ratepayer seeks to establish a material change in circumstances, the gateway factors set out above are assessed as at the 'material day'. Under the 'check, challenge, appeal' procedure introduced for the 2017 list, this will usually be the date midway through the 'check' stage at which the ratepayer confirms (or otherwise) the accuracy of information held by the VO. As such, a 'check' needs to be initiated during the currency of the circumstances relied on in order to secure any benefit in terms of a reduced valuation.

This may cause difficulties for any ratepayer who has not yet been able to 'claim' his or her property. The process of claiming a property on the online system can be arduous and drawn out and, if it is only started now, may not be concluded until before the restrictions have lifted. Although the VO is able to conduct checks otherwise than under the online system, it appears that currently the line is being taken that checks will only be processed if submitted in that way. Some ratepayers may no doubt feel that this is unfair and there is potential for a legal challenge here if the VO cannot articulate clear reasons why, in the exceptional circumstances of covid-19, he will not accept a check by other means.

If a reduction can be established, it will take effect from the date on which the circumstances relied on first occurred. It may be given a limited duration if the things have by then returned to 'normal'. Because the valuation date for the next list has passed, any changes brought about by covid-19 will only have an effect on what is now to be the 2022 list if a material change of circumstances can be established in the 2017 list, and if that change has endured until 1 April 2022. Clearly, the pushing back of the new list to a later date makes it less likely that this will happen, which may well have been a key reason for the change.

A ratepayer and his advisers therefore face a number of legal and valuation hurdles before a reduction on covid-19 grounds can be secured. These factors will have to be considered carefully and on a sector-by-sector (or even property-by-property) basis before deciding whether it is worthwhile in any given case to pursue a challenge and appeal.

Cain Ormondroyd is a barrister specialising in all aspects of local taxation and land valuation.