In R3 Products Ltd v Salt [2014] UKUT 0333 (LC), the Upper Tribunal (Lands Chamber) considered whether a factory was capable of ‘beneficial occupation’ whilst substantial refurbishment works were being carried out.
The tenant, R3, needed to install a high voltage electricity supply and factory lighting before it could start its manufacturing business. Whilst negotiating the factory lease, it was discovered that the supply had been cut off and cabling removed (although there was still a basic domestic supply), so the landlord granted R3 a rent-free period whilst the cabling was installed. R3 carried out the refurbishment in three phases.
R3 received a business rates demand covering the period of the works. It contested this with the Valuation Office Agency (VOA) on the basis that the property was undergoing major refurbishment and it was impossible to use it for manufacturing without high voltage cabling and factory lighting. As the refurbishment was being done in three phases, R3 argued that the rates should initially be nil, but then increased in phases in accordance with the work done. The VOA refused to remove R3 from the rating list and the issue was referred to the Valuation Tribunal for England (VTE).
The VTE dismissed R3’s claim and found that the property was capable of beneficial occupation. It held that although the property (without the high voltage electricity supply) was not suitable for R3’s occupation, it could still be used by a different non-specialist occupier. R3 appealed.
The Upper Tribunal agreed with the findings of the VTE, finding that R3 was in beneficial occupation whilst the refurbishment works took place: the factory was fit for occupation before the refurbishment works commenced and R3 was therefore in beneficial occupation of the factory from the date the lease was agreed.
The ruling is a warning to tenants. R3 signed the lease knowing that the property did not have the required cabling and electricity it needed to run the business. When negotiating leases, tenants must consider their potential liability for business rates, especially when substantial works need to be carried out at the property before the business can operate properly.