A 2017 Supreme Court ruling strongly supported the principle that you could have reduced rates burden during refurbishment of a commercial building.
Although this applies to commercial properties, and to conversions from commercial to residential, what would happen if the reverse were true, or from one type of residential purpose to another?
The relationship between commercial and residential properties is not necessarily in one direction only. Much of the news about changes to planning rules has focused on relaxing red tape for changing commercial to residential. But what about converting residential properties to commercial purposes, or some alternative residential purpose?
Healthcare is one sector where this type of conversion is more common.
Conversions in the Care Home Sector
Care homes have made headlines for tragic reasons during the pandemic, but what the current Covid-19 crisis has also highlighted is the pivotal role they play.
There is currently a shortage of residential care homes in England. And elderly care also faces acute challenges to its economic structure and its image, as well as dealing with capacity issues.
Developing purpose built care homes is expensive, and the potential profitability of alternative commercial land uses can put would-be developers off.
One alternative for developers is to convert residential housing to care homes, which can offer a more cost-effective solution to developing purpose-built facilities
But if, in this type of situation, a property’s original use is residential, what implications would this have for any potential rates reduction during refurbishment?
Monk vs Newbigin
The Monk versus Newbigin case questioned the assumption of whether a developer can pay nominal or zero business rates on a vacant property during its redevelopment.
In its ruling the Supreme Court overturned a Court of Appeal judgement, and provided clarity over the issue of what rates would be payable during the refurbishment of commercial properties.
The original Court of Appeal ruling for the Valuation Office suggested that refurbishment works were indistinguishable from “economic” repairs and would therefore attract rateable values reflecting this. Importantly, these values would not be the equivalent of a nominal rate.
The Supreme Court saw things differently, and overturned this ruling. The result being that very often where developers of commercial properties strip them out for refurbishment, then effectively zero business rates applies.
This includes commercial conversions to residential use.
Case Study: Inverting the Argument
A provider of care homes and mental health hospitals had purchased a number of adjacent domestic properties.
The developer’s plan was to strip them out and convert them into an assisted living scheme.
The property consisted of 24 dwellings that formed part of a terrace of houses, and the objective was to convert the entire 24 dwellings into a dedicated living space for people with special needs.
The developer deemed the properties potentially unsafe in their current state and so carried out preliminary works. They then commenced a full strip-out.
This was to remove anything on-site that might attract unwanted attention, such as wiring and copper pipework. At the same time, this work would make the site safe.
The work also involved the removal of various internal walls and creating new openings to allow free movement during subsequent development work.
Our argument was that it was incapable of beneficial occupation and therefore not just in a state of disrepair.
It should, therefore, be deleted from the valuation list during the period of works.
This makes it something of a test case, since it takes the principle of Monk vs Newbigin but applies it to an existing residential property, where Council Tax would otherwise be payable.
The success of our argument has wider implications.
What are the Wider Implications?
The future of property development in the UK is in flux.
There are potentially long-term changes likely as a result of how Covid-19 has meant people are working differently; and it has forced companies to look at what future commercial space they might need to occupy, for example, can existing buildings be repurposed for alternative uses, or will a property be stripped out pending a potential new use.
It also raises the potential of more people looking for dedicated co-working facilities much closer to home.
But this state of flux could also apply to a broader range of property types, beyond office accommodation.
The balance, and purpose, of commercial and residential buildings is likely to alter. Therefore, as buildings undergo a change of use, financial considerations as to the impact on business rates and Council Tax during any building works are far reaching.
Therefore, a ruling for zero Council Tax on residential conversions might offer developers more scope for different types of building solutions to meet the changing needs of society.
When it comes to rates reductions and what to do during development work, it’s always best to check first and seek expert advice. Please contact our team for more information.