Various schemes have evolved to minimise landlords' empty rates liability, a number of which have recently been scrutinised by the courts. These include schemes around lettings to charities and use for storage. Here's a reminder up of some of the recent decisions and the key points emerging .
Makro Properties Limited v Nuneaton and Bedworth Borough Council (2012)
The Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 ( SI 2008/386 ) ( 2008 Regulations ) include the following provisions in relation to non domestic properties:
- a landlord of retail property (including shops and offices) qualifies for 100% empty rates relief for a continuous period of three months following the date the property is vacated
- a landlord of industrial and warehouse qualifies for 100 % empty rates relief for a continuous period of six months following the date the property is vacated
- in both cases if the property is re-occupied for a period of six weeks or more, the clock will reset, and the landlord can claim a further relief period from the date the property is re-vacated
- The High Court (on appeal from the decision of the Magistrates' court ) held that storage of documents taking up only 0.2% of the floor space of an otherwise empty warehouse was enough to constitute rateable occupation of the premises , effectively legalising empty rates avoidance tactics .
- One of the Makro companies had entered into an arrangement with its former landlord , Makro Properties Ltd to occupy 0.2% of a warehouse for storage of 40 pallets of documentation for six months. The court found that this did constitute rateable occupation sufficient to trigger a six month empty rates grace period once the files were removed - saving just over £117,000 for the period.
- It was held that there was sufficient intention to occupy- the occupying Makro company incurred a rates liability to pay business rates which entitled its former landlord to claim relief when that occupation came to an end . Furthermore despite the fact that the area occupied was small , the use was not insignificant , providing a practical benefit to the occupier.
Chiltern District Council v Principled Partnership Limited (2012) (unreported)
- In this unreported Magistrates court decision , the court followed the Makro High Court decision and held that the provision of short term storage facilities by a business whose principal aim was to provide 6 weeks occupation of vacant premises to assist landlords to mitigate their rates liability was sufficient beneficial occupation to enable the landlord to avoid non-domestic rates liability (even where it was found that some storage boxes in the properties were empty).
- Both cases offer some relief to commercial property owners and place further pressure on councils over empty rates avoidance schemes.
Preston City Council v Oyston Angel Charity (2012)
This considered the interpretation given to S 45A(2) of the Local Government Finance Act 1988 which provides that unoccupied premises shall be zero rated where :
- the ratepayer is a charity or trustees for a charity
- it appears that when next in use the hereditament will be wholly or mainly used for charitable purposes ( whether of that charity or of that and other charities).
- Oyston Angel Charity ( OAC ) entered into a licence agreement with the freehold owner in respect of a number of commercial units in Preston. The licence agreement allowed OAC to occupy the units for the permitted use of charitable purposes only and also to sub- licence the units provided it was for "charitable services". Preston City Council (PCC) sought a liability order in the Magistrates' court and it was found that while OAC did not themselves intend to occupy the units , given the restrictions on user in terms of any sub licence limiting user to charitable purposes - this was sufficient to attract zero rating for the purposes of Section 45A of the Local Government Finance Act 1988.
- PCC appealed arguing that zero rating would only apply if it appeared that when next in use the property would be occupied and used by the owning charity itself ( OAC ). The High Court dismissed the appeal and in upholding the Magistrates decision ruled there was no such requirement . OAC was therefore exempt from non- domestic rating liability on the basis that the occupiers or users of the units ( whether or not OAC ) would be charities . The High Court did emphasize that this conclusion was based on the issues that the Magistrates had before them , which did not include the possibility that any sub-licencees might have charitable purposes which differed from OAC.
Kenya Aid Programme v Sheffield City Council (2013)
- The landlord of vacant warehouse premises (which since 1 April 2008 have been liable to empty rates) agreed a letting of two warehouses at a peppercorn rent to a charity (Kenya Aid Programme) who used the premises for the storage of furniture. A charity in rateable occupation of premises used wholly or mainly for charitable purposes is entitled to an 80% rebate on its rates liability. Under the arrangement, the landlord agreed to indemnify the charity against the 20% residual rates liability. The effect of the scheme was therefore to reduce the landlord's rates liability by 80%. The advantage to the charity was both the use it made of the warehouses and the additional charitable contributions the landlord agreed to make. As the total rates due on the premises was £1.5 million, there was a substantial saving for the landlord for its additional contributions.
- The effectiveness of these arrangements was challenged on a number of grounds that the court had to consider. One argument put forward by the Council was that the use of the premises was so inefficient that they could not be said to be occupied wholly or mainly for charitable use. The issue was that the furniture could have been stored in a way that took up much less space than was in fact taken up (each warehouse could have accommodated the furniture it contained in a smaller space than the space in fact occupied and all the furniture could have been accommodated in one of the warehouses) and there was little turnover of the furniture in pursuance of the charity's activities. The court rejected the council's argument that inefficient use deprived the charity of its right to an 80% discount.
- Where the council might succeed, and the issue has been remitted to the district judge for final determination, is on the extent of the charity's use of the premises. Although since the charity was in rateable occupation of the whole of each warehouse and used each warehouse 'wholly or mainly' for charitable purposes (the efficiency of the use being irrelevant) there appeared to be no other use of the warehouses which could deprive it of relief, a charity is not entitled to rates relief where it uses the premises for fundraising purposes. The council argued that the premises were not being wholly or mainly used for charitable purposes because the landlord was indemnifying the charity against its rates liability and making additional contributions in such a way and in such amounts that the charity could be said to be using the premises (in part) for fundraising purposes, the argument being that the non-qualifying use (fundraising) eliminated the right to a discount because the fundraising use was extensive enough to prevent the other use from being the main use.
- If the district judge decides that there was a sufficient element of fundraising to remove the right to the 80% discount, then one means of avoiding empty rates liability by letting to a charity with an arrangement of this structure will have been blocked.
The current position is that carefully considered and imaginative schemes are still a valuable way for landlords to avoid empty rates liability. There have been numerous calls for the Government to scrap empty property rates and Judge Jarman QC in the Makro case emphasised that it is for the legislature to determine that further reform is needed. Legislative action to change the perceived injustices of empty rates liability is perhaps not far away...