A couple of cases have been reported recently where charities have (unsuccessfully) attempted to claim business rates relief in respect of their 'occupation' of commercial properties. On the back of these decisions, the Charity Commission (the English charity regulator) has published an updated warning to charities. We thought it would be useful to summarise the issue.
Business Rates – the basics
Business rates are based on the rateable value of a non-domestic (business) property, multiplied by a poundage set nationally by Scottish Ministers, less any relief to which a ratepayer may be eligible.
The occupier of a property is liable to pay these rates. Charities are able to benefit from business rates relief provided certain conditions are met. The relief is fixed at 80%, but local authorities have the discretion to top this up to 100%.
So, it's easy to see why the owners of vacant properties would be keen to attract charities as tenants, for a nominal rent - doing so means that the owner is not liable to pay empty property rates, and the charity become tenant for a low rent and can get relief on its business rates. It seems like win/win situation…or does it?
Around 18 months ago, we were asked to provide advice to a charity in respect of a similar deal. There, the charity planned to take on a lease of a commercial property (for a peppercorn rent) and then sub-let the majority of the space to a commercial tenant (on commercial terms), while the charity would retain a small amount of space for itself. Prior to consulting us, it had been suggested to the charity that it could claim 100% relief in respect of the whole property even though it was not in full occupation.
We thought the proposal sounded too good to be true and indeed, after a review of the facts and circumstances, that was what we concluded. In order to be able to seek the relief, the property has to be “occupied by…a charity and wholly or mainly used for charitable purposes”. It seemed to us that if the reality was that the charity only occupied a small part of the property, then it would fail this test. Our view has been backed up by the recent decisions.
In the first case, the Public Safety Charitable Trust had entered into around 2,000 peppercorn leases in respect of 240 different properties. It used these properties to install technology to transmit public safety messages. Several councils took the charity to court for non-payment arguing that the properties were 'mainly unused' by the charity. The judges in the High Court agreed, and issued their decision in favour of the councils. It is reported that the charity is now likely to face claims of nearly £2 million for non-payment.
Another case involving Kenya Aid Program is due to be heard in the summer, having been remitted back to the magistrates court from the High Court. In this case, the charity leases two industrial units for a peppercorn rent to store furniture before the furniture is sent to Kenya. In turn, the landlord gives the charity an annual donation. Evidence in the case suggested that whilst the charity was in sole occupation of the units, usage amounted only to 25-30% in the first case and 30-35% in the second case. The local council has argued that given less than 50% of the premises was actually in use by the charity, in determining the meaning of "wholly or mainly used for charitable purposes", it was entitled to take account of and place weight on the extent to which the premise are used as opposed to occupied. The payment of the donation could also be viewed as a fundraising activity in context and the Court is entitled to take that into account in considering whether the charitable test is met. The decision of the magistrates court will be keenly awaited by the parties - it is reported that the charity could be liable to pay £1.6 million in unpaid rates if the decision goes against it.
The Charity Commission's guidance
At the end of 2011, the Charity Commission indicated it was investigating 700 similar cases, so it seems to be of continued concern to the English regulator.
The outcome of the Public Safety Charitable Trust case has prompted the Commission to issue an updated warning to charities on this subject, saying it is "concerned that these charities may find themselves involved in what local authorities might consider to be business rates avoidance by landlords".
The Charity Commission's advice for charities considering entering into a tenancy agreement to occupy an empty property is:-
- be assured that the tenancy agreement is for the exclusive benefit of the charity, will further the charity's purposes and is in its best interests;
- ensure the property is genuinely required and is fit for purpose;
- consider the potential liability of the charity to pay outstanding rates if the local authority disputes use of the premises and refuses rates relief;
- very carefully safeguard the charity's independence and ensure the charity is not being abused for the benefit of a commercial property; and
- where appropriate, take suitable professional advice, including legal advice, before entering into a tenancy agreement.
While the Charity Commission is the regulator of English charities, Scottish charities should consider exactly the same questions before entering into a lease.
To read the Charity Commission's guidance go here.