An impending car crash: business rates on serviced offices

Over the last 12 months, I’ve reported on a potentially significant shift in the way the Valuation Office (VO) assesses serviced offices for business rates purposes. There has been a dramatic increase in the prevalence of serviced offices over the last decade, and a marketplace that was occupied by Regus and local business centres has exploded into many and varied operators, all tapping into shifting work patterns and a desire for flexibility that was only accelerated by Covid-19. It’s now a diverse and very crowded marketplace.

The traditional model and Ludgate House challenge

The traditional business rates model for serviced office occupiers has always been to have separate assessments on the individual offices. Most of the tenants receive Small Business Rates Relief (SBRR). Empty units get the benefit of three months empty rates or are below the £2900 threshold for incurring empty rates liability, with landlords then running empty rates mitigation schemes. And so, the status quo has remained for many years. Until December 2023….

The problem is Ludgate House, or more accurately, Ludgate House Ltd v Ricketts (VO) and London Borough of Southwark (2019). On the face of it, this case has nothing to do with serviced offices; – it was about live-in guardians in an empty office building, but the decision shone a light on paramount control, i.e., who ultimately has authority or influence over the space within a property.

From a serviced office context, if that control remained with the landlord, because of the flexibility afforded to the tenant with a short-term lease and the ability of the landlord to enter or move tenants on a whim, then it would be the landlord, not the tenant, who had paramount control and therefore should be responsible for rates.

The practical implications of this would result in one single large assessment covering all the units within a development rather than multiple separate assessments. The landlord would, therefore, face a very large bill for a single rateable value, regardless of whether space was empty or not.

The VO then suggested that they would backdate this change to 1 April 2017 – the start of the last rating list, thereby creating a backdated liability and an almighty car crash of big bills, refunds, and revised bills for old tenants. The local authorities didn’t want this.

Paramount control and potential ramifications

Common sense would surely prevail. The last time I reported on this, it looked like an agreement had been reached that if the occupier licenses met certain criteria, then separate assessments should remain. Phew. Operators breathed a big sigh of relief. But it’s never that simple with the VO, who have a statutory obligation to maintain the rating list based on legislation and evolving caselaw. They are legally compelled to do so. In December 2023, the VO merged several assessments on large, serviced offices at Birmingham, Moorgate & Shepherds Bush in London, and Manchester. There will no doubt be more. These assessments have also been backdated into the 2017 rating list. Why? Because the current agreements will allow the landlords too much control over their tenant’s space.

What lies ahead and immediate concerns

So, what happens next? It seems that the VO will merge assessments where the agreements don’t meet their requirements on paramount control. The VO has until 31 March 2024 – just over 6 weeks to backdate assessments into the 2017 rating list, after which it’s closed and no changes can be made. After that, alterations are restricted to 1 April 2023. The operators and professional bodies have been liaising with the VO for months to agree exactly what ticks the VO’s boxes to keep separate assessments, but in the majority of cases, these will only apply going forward.

We will, therefore, see situations where the VO merges and backdates assessments, then split them up again from the date that the agreements are shown to comply. This all causes an avalanche of changes for Local Authorities and real uncertainty for the operators who will be faced with large, backdated bills that were previously largely borne by the tenants.

My concern is that the VO will merge without giving operators the opportunity to show that their agreements comply and are then stuck in the backlog of checks & challenges to rectify the position. There seems to have been little regard for the viability of business where a large and backdated liability is thrust on the operators and for many; it will come as a bolt from the blue. One thing is for certain though; many will breathe a sigh of relief when we get past the end of March and the VO’s ability to backdate pre-April 2023 is lost.

If you have concerns about how this could affect your business, please get in touch.

Richard Roberts Bsc MRICS, principal director

richard.roberts@rvwcs.co.uk

07881503540

01925205060