Update – schemes to avoid empty rates
Posted by Cheraine Williams on 24th August 2012
Many businesses are finding it difficult to survive in the current economic climate and must restructure. This has had a particular impact on the High Street with unprofitable shops closing down and disappearing entirely from the High Street.
Landlords are therefore often left out in the cold with an empty shop or office space with no rental income but are liable to pay business rates.
Under “The Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008” a landlord of any retail property such as shops and offices only qualifies for a maximum of 3 months empty rates relief where the property is empty for a continuous period of 3 months. Landlords of any industrial and warehouse property are slightly better off as they are entitled to a maximum of 6 months empty rates relief where the property is empty for a continuous period of 6 months.
However in either case, any change of ownership during this time will not trigger a fresh period of empty rates relief and nor will any occupation of the property for less than 6 weeks by a tenant or a licensee.
Accordingly, to minimise empty rates liability many landlords have been granting Licences to Occupy empty space to businesses or Charities for free, particularly as the latter is exempt from rates and any Licence granted for a period in excess of 6 weeks to a business will trigger a new period of empty rates relief.
In Makro Properties Ltd v Nuneaton and Bedworth Borough Council (2012) and Preston City Council v Oyston Angel Charity (2012) the Courts have been considering schemes only set up to avoid empty rates liability.
In Makro Properties Ltd v Nuneaton and Bedworth Borough Council (2012) the High Court considered a Magistrates’ Court decision that letting 0.2% of a warehouse for the storage of 40 pallets of documentation for 6 months was not a rateable occupation and did not trigger empty rates relief as the only intention behind the arrangement was to avoid empty rates liability.
In order to trigger empty rates relief there must a Rateable Occupation which requires:
- Actual occupational possession (which involves actual use of the land).
- Occupation or possession that is exclusive.
- Occupation or possession which is of some value or benefit to the occupier or possessor.
- Occupation or possession which has a sufficient quality of permanence.
Considering all of the above, the High Court held that despite (1) the size of the space and (2) that the pallets could have been stored elsewhere the landlord had let the warehouse to store documents which must be retained for legal reasons and were therefore of practical benefit.
In Preston City Council v Oyston Angel Charity (2012) the High Court considered a Magistrates’ decision that a number of licence agreements to Oyston Angel Charity for various commercial units in Preston for the permitted use of charitable purposes only were zero rated even though Oyston Angel Charity did intend to occupy any of the units.
The High Court dismissed the Appeal and interpreted Section 45A of The Local Government Finance Act 1988 (“the Act”) which governs the provisions regarding zero rated property for charities as follows: “for an empty property to be zero rated for non-domestic rates where the owner is a charity and it appears that when the property is re-occupied, it will be wholly or mainly used for charitable purposes whether that of the charity or other charities”. Further, that the focus of the scheme was on ownership and not occupation.
Both cases provide useful guidance on the types of lettings which will qualify for empty rates relief or are zero-rated for non-domestic rates.
A business letting in excess of 6 weeks could trigger a fresh period of empty rates relief even where the landlord’s intention is to avoid empty rates liability. This could lead to a significant saving to landlords who could benefit from an additional 5 months empty rates relief per annum.
Any letting directly to a charity will also be zero-rated for the purpose of non-domestic rates as long as the letting meets the requirement of Section 45A of the Act. However, it is not clear whether any sub-tenant or sub-licensee must also have the same or similar charitable purpose to that of the head tenant of head licensor to qualify for the same exemption.
Whilst the government may legislate to close these loopholes, landlords should ensure that any business letting is in excess of 6 weeks and ensure that the four conditions relevant to whether there has been rateable occupation are met to take advantage of the scheme now. In particular, (1) clear evidence of an intention to occupy; (2) that the use of the space is not insignificant (as without evidence of intention a slight user may not be sufficient); and (3) there is limited control of the unit by the landlord indicating a letting.
On the other hand, landlords must ensure that any licence or lease granted to a Charity is granted by the freeholder and that it restricts the use of the property to a charitable purpose. If not, the head landlord or head licensee should carry out the same or similar charitable purpose as any sub tenant or sub licensee. If not, it may not be sufficient for the purposes of Section 45A of the Act.
In the circumstances landlords should act now and review their letting arrangements to ensure that they are maximising their chances of avoiding empty rates liability.