KILLIAN MORRIS and ADRIAN POWER KELLY review recent legislation regarding commercial rates, and its impact on practice.
Section 32 of the Local Government (Reform) Act 2014 – one year on
For those stakeholders operating in the commercial property sphere, local authority rates have always been a significant issue. However, for the most part rates liability issues are typically only examined in detail during property transactions.
Historically, the relevant legislation imposed liability for rates arrears (up to two years) on the incoming occupiers of a commercial property under what was known as the “liability of subsequent occupiers”. Following the economic crash, this liability became an impediment to some transactions and meant that, in certain parts of the country, commercial property was unlettable – so significant was the historic rates liability.
In every case, it is the owner of the property who must be primarily concerned with compliance with Section 32, even where the owner is not directly involved in the underlying transaction.
In an effort to address this issue, the legislature enacted Section 32 of the Local Government (Reform) Act 2014 (the “2014 Act”), which sought to abolish the historic position and, instead, imposed obligations on those transferring property and/or owners of property, in situations where the transfer of an interest results in a change in rateable occupier. While the new legislation can apply in different ways to different transactions, compliance with the new obligations, in general, is intended to result in: (a) the local authority receiving notice of the change in rateable occupier within 14 days of the change occurring; and, (b) having all of the historic arrears of rates (and not just two years’) paid by the party responsible to pay it (i.e., the party transferring the interest). In circumstances where those obligations are complied with by the owner/transferring party, then the new occupier (and the owner) will have no liability for the previous occupier’s rates.
Application in practice
In the case of the sale of the freehold interest or freehold equivalent in an owner-occupied property, the local authority rates must be discharged by the vendor and the vendor must inform the local authority of the change in ownership. If either does not take place, the arrears of rates and a penalty of up to two years’ unpaid rates can become a charge against the property. Clearly, ensuring that these obligations are complied with is of critical importance to any purchaser of such a property.
Another example might be where a tenant is taking a new lease of premises where a previous tenant had built up substantial arrears of rates. Provided that the landlord notified the local authority of the departure of the previous tenant and the arrival of the new tenants within the relevant 14-day period(s), then neither the new tenant nor the landlord will have a liability for the previous tenant’s rates arrears or any penalties under the 2014 Act. The landlord may of course be liable for any rates applicable for the intervening period between the previous tenant’s departure and the commencement date of the new lease, subject to any applicable vacancy credit, and this would need to be discharged in compliance with Section 32.
In every case, it is the owner of the property who must be primarily concerned with compliance with Section 32, even where the owner is not directly involved in the underlying transaction. Situations will arise where tenants depart or where rateable occupiers change, and the owner may not necessarily consider the implications of Section 32 until it is too late. In such a scenario, a landlord might inadvertently end up becoming liable for penalties of up to two years’ unpaid rates, which also becomes a charge against the property.
The landlord may of course be liable for any rates applicable for the intervening period between the previous tenant’s departure and the commencement date of the new lease, subject to any applicable vacancy credit, and this would need to be discharged in compliance with Section 32.
Variation throughout the country and issues for clarification?
As local authority rates are collected by each local authority, various practices have developed throughout the country and, at times, it can be difficult to reconcile the various approaches taken. In most cases, the best advice is to speak with the rate collector to ascertain the likely approach. From a practical perspective, the following appear to be the main issues arising:
1. Liability for receivers/mortgagees in respect of historic rates
It has become accepted practice that the effect of Section 32 is to oblige receivers/mortgagees to discharge all commercial rates that accrue up to the date of sale, to include rates due from when the mortgagor in question was in possession. There seems to be some disagreement on this point, and there is a view that a receiver should only be liable for the rates accrued since his appointment; historic Revenue case law from the UK contains authority for the proposition that a receiver cannot be liable for the tax liability of the borrower/mortgagor, as he is merely agent for the borrower. Section 32 does refer to receivers indirectly (as “agents of the owner” and being the “party entitled to receive rent”) but it also states that the amount payable is the amount for which “he or she is liable”. It is certainly arguable on this basis that their liability for rates, as agents for the mortgagor, can only commence on the date of their appointment.
At present, the Law Society guidance is that all such arrears (even those relating to the period prior to the receiver’s appointment) should be paid and, therefore, in the absence of specific agreement to the contrary with the local authority concerned, a purchaser’s solicitor will inevitably require payment of all arrears on completion. We would anticipate that, in a case where the arrears are significant and satisfactory agreement cannot be reached, there may be merit to challenging this interpretation in the courts.
2. Current year liability on date of sale
Section 32 requires the vendor/owner to pay all rates for which he is liable at the date of sale. The historic legislation provides that the date “the rate is struck” in each year is the liability date for the entire year’s rates; therefore, where the date of sale takes place after that date, the liability of the transferring occupier is for the entire year, notwithstanding the fact that rates are typically paid either by instalment or in two half-year moieties. In order to deal with this, an occupier vendor should pay rates for the entire year and recover the balance from the purchaser by contractual apportionment. However, on a practical level, most rate collectors are happy to accept an apportioned payment up to the date of sale pursuant to Section 2(1) of the Poor Law (Amendment) Act 1890. If in doubt, a prudent vendor should always check this in advance.
3. Vacancy credits
Vacancy credits issued in respect of empty premises are applied differently around the country in accordance with Section 31 of the 2014 Act. Some areas provide a 100% credit and others 50% or less. Further, the entitlement to a vacancy credit is dependent on being able to show that the premises is either for let or is undergoing refurbishment. Difficulties can arise during a sale/letting process, after a transaction has been agreed but not completed. We have recently seen one example where a rate collector refused to apply a vacancy credit for the period between the signing of a contract for sale and the closing date – on the basis that it was no longer “available to let”.
It is clear that this will continue to be a controversial and evolving area as more and more transactions occur.
New legislation – Valuation (Amendment) Act 2015
The Valuation (Amendment) Act 2015 (the “2015 Act”) was enacted on April 23, 2015, and was commenced (with the exception of section 14) on June 8, 2015.
The rationale behind the 2015 Act was to enable the Government Valuation Office to speed up the re-valuation of commercial properties throughout Ireland for rating purposes. This is a process that started in the South Dublin County Council Area in 2007, but which, to date, has only been carried out in six counties (South Dublin, Fingal, Dun Laoghaire-Rathdown, Dublin City, Limerick and Waterford). To expedite the process, the 2015 Act includes provisions for re-valuation by reference to indices, a quasi “self-assessment” system and outsourcing. The opportunity was also taken to amend some existing elements of the original Valuation Act 2001, including changes to appeal procedures.
Changes to the appeals process
Up to now, where a property was undergoing re-valuation, a ratepayer had a three-part process that could be used to minimise the rateable valuation. These stages included an initial consultation period, in the form of a “representations” stage, followed by a formal “first appeal” to the Commissioner, and lastly a formal appeal to the Valuation Tribunal. The 2015 Act has removed the first appeal, and a ratepayer now has only 40 days within which to make a representation to the Valuation Office in respect of the proposed rateable valuation. Thereafter, if the ratepayer is still aggrieved, a formal appeal directly to the Valuation Tribunal must be made within 28 days of receiving the Valuation Certificate. While the aim of removing the first appeal process is ostensibly to remove an unnecessary layer from the process, the experience of rating consultants dealing with both representations and appeals in the general revaluation of properties in the Dublin City and Waterford county areas was not encouraging. In Dublin City, approximately 7,600 representations disputing proposed rateable valuations were received, but only 1,250 properties had their valuations changed. There were approximately 2,600 first appeals lodged, and some 912 subsequent appeals to the Valuation Tribunal. More notably, consultants experienced minimal engagement at representation and first appeal stages, which no doubt contributed to the high level of subsequent appeals. It can be seen, from the fact that nearly half of the appeals to the Valuation Tribunal have been settled, that engagement from the Valuation Office at an early stage could have saved all parties considerable time and expense. In Limerick, a recent re-valuation process saw a higher level of engagement with consultants, resulting in 300 appeals, a majority of which were settled. Clearly, if the representations stage is to work as envisaged, it will require meaningful interaction and negotiation; otherwise, the Tribunal will see its workload substantially increase and its resources may be stretched.
Revaluation by indexing
Current legislation requires that where a re-valuation has previously been carried out it should be revisited every five to ten years. As a result, South Dublin’s revaluation will have to be completed again by 2017, followed by Fingal and Dun Laoghaire-Rathdown. This requirement could limit the ability of the Valuation Office to start re-valuations in other areas without requiring substantial additional resources and staffing. In an effort to alleviate this pressure, Section 5 of the 2015 Act has brought in a provision whereby rateable valuations can be determined by using general market data or “aggregated data”, which can include statistical techniques. This section has yet to be utilised but South Dublin may well be a target for this valuation methodology.
By its very nature, property is heterogeneous and a broad-brush approach to valuation is fraught with potential dangers. The circumstances of properties can change, e.g., physical changes to the building, changes in occupancy or changes to market dynamics within the local vicinity such as competing schemes. The Valuation Acts refer to equity and uniformity of value between properties but, as a practising Chartered Valuation Surveyor, I have difficulty in considering that the application of a mathematical equation to all properties accurately reflects the circumstances pertaining to each individual property.
It is also noteworthy that while the occupier can be required to submit a valuation, there is no provision whereby anyone other than the occupier may make representations disputing the valuation, e.g., a head lessee or a landlord.
Section 12 of the 2015 Act introduced a new element to rating law and practice in Ireland in the form of “Occupier Assisted Valuation”. Section 12 inserted a new Part 5A into the 2001 Act. An occupier of a property can be required to carry out a valuation of that property as part of a general re-valuation of all commercial properties within a rating authority area, and submit that valuation to the Commissioner. Ministerial regulations can include how the occupier must carry out the valuation and the records he must retain. Where the occupier submits a valuation with which the Commissioner does not agree, the Commissioner may substitute an alternative valuation. More importantly, where the occupier submits a valuation, which the Valuation Office considers to be inaccurate (or where it is not submitted within deadline), then the occupier may be guilty of an offence. Accordingly, there is a concern as to whether an occupier or consultant could be held guilty of an offence for having a differing opinion to that of the Commissioner. It is also noteworthy that while the occupier can be required to submit a valuation, there is no provision whereby anyone other than the occupier may make representations disputing the valuation, e.g., a head lessee or a landlord. It is only at Valuation Tribunal appeal stage that others can become involved in the process. The 2015 Act has introduced some innovative elements into rating practice in Ireland and many of these are still untried. It remains to be seen how these will play out in the short term, and in the coming years there are some potentially interesting valuation and legal arguments, which will be advanced before both the Valuation Tribunal and the courts.
Killian Morris is a solicitor at AMOSS Solicitors