Are tenants liable to pay business rates while their premises undergo substantial works or fit out periods?

A recent decision of the Lands Tribunal has ruled on the liability of a tenant to pay business rates while undertaking substantial works to its premises.

As a general rule, business rates are payable on vacant premises.  However, an exception to this rule is that business rates are not payable if the premises are incapable of beneficial occupation. 

This case was an appeal brought by R3 Products Limited (R3) against the decision of Valuation Tribunal for England in respect of the rateable value of its premises in Sheffield.  R3 had entered into a 10 year lease at a rent of £100,000 per annum.  Before completing the lease, R3 discovered that the premises required substantial works to provide it with the large quantities of electricity it required for its manufacturing processes.  These works were to be carried out over three phases.  R3 managed to negotiate a 3 month rent free period with its landlord in which to carry out the works.

R3 submitted that, during phase 1 of the works, they were unable to use the premises to manufacture its products.  Therefore the premises were incapable of beneficial occupation and should be removed from the rating list for this period.

The Lands Tribunal found against R3.  The test of whether a property is capable of beneficial occupation is whether the premises are ready for occupation as a building, it was not whether the premises are fit to be used by a specialist occupier or for some special purpose - carrying out these works did not in itself prevent beneficial occupation as per the test.

This decision serves as useful guidance and a reminder that tenants must carefully consider their potential liability to pay business rates when negotiating and entering into leases, even where there are to be substantial works or fit out periods.