The recent economic climate has seen a growth in empty commercial premises; some of which remain empty for quite some time. The changes to the business rates regime introduced in 2008 mean that property owners must now pay business rates even on empty properties. It is hardly surprisingly that landlords have been seeking to find ways to minimise the impact of this harsh reality. Charities (who qualify for business rates relief) have been able to enjoy the opportunity to utilise some of these empty property thus relieving the landlord of the burden of empty property business rates. Some initiatives have however caused problems and some recent case law shows how local authorities are aggressively challenging some schemes, potentially saddling the charities involved with a substantial business rates bill.
Since 1 April 2008 full business rates are due on nearly all empty commercial properties that remain unoccupied after three months. This includes small units and small shops. Charities that occupy commercial property qualify for a mandatory 80% discount on business rates, provided that the property is used wholly or mainly for charitable purposes. Local Authorities have the discretion to grant the remaining 20% as a further discount. It is not surprising therefore that Landlords have become willing to let properties, that would otherwise stand empty and attract full rates, to charities for very low or nil rents. This kind of arrangement enables the charity to take advantage of low rents whilst the landlord is freed from the burden of paying rates on an empty property. It is estimated that thousands of properties nationwide are occupied in this way.
The concept of using property for trading purposes is considered to be “wholly or mainly for charitable purposes” where trading is carried out as a primary purpose, i.e. selling to further the charity’s aims, or non-primary purpose trading; which is usually the selling of goods or services to raise funds to further the charity’s aims. Care must be taken where a charity chooses to use a trading subsidiary or shares its retail premises with a third party, as this may affect the entitlement to business rates relief.
Once recent case where such an arrangement was challenged involved the Kenya Aid programme (KAP), which stored furniture in two huge industrial units in Sheffield which had previously been empty. KAP paid a peppercorn rent and also received a donation from its landlord equal to 20% of the business rates liability. Sheffield City Council refused the mandatory charitable relief because in its view the charitable use of both properties was insufficient (they were ach about 25% full). The High Court made it clear that for mandatory relief from business rates to apply:
- A charity must be able to demonstrate that it was wholly to mainly using the premises for charitable purposes.
- Mere occupation by the charity was not enough.
A second case involved the Public Safety Charitable Trust (PSCT), a charity which installed transmitting devices in approximately 250 properties in order to send public safety messages. PSCT would install a small transmitting device (not much larger than an average household broadband router) in each of the otherwise empty properties. Three local authorities rejected PSCT’s claim for business rates relief. They refused to grant the 80% mandatory relief on the basis that PSCT was not using the properties wholly or mainly for charitable purposes. The High Court agreed and ruled that PSCT were liable for full business rates running to approximately £2 million.
The Charity Commission has warned that, as well as the risk that the charity may become liable for full business rates, its charity trustees may be personally liable if, before entering into such arrangements, they have not carefully considered the proposed future use of the property should rates relief not be available.
The advice to charity trustees is:
- Be sure that the tenancy agreement is for the exclusive benefit of the charity, will further the charity’s purposes and is in its best interests.
- Trustees should ensure that the property is genuinely required and is fit for purposes.
- Trustees must consider the potential liability of the charity to pay outstanding rates if the local authority disputes the use of the premises and refuses rates relief.
- The trustees need to ensure that the charity is not being abused for the benefit of a commercial company.
- Where appropriate charities should take legal advice before entering into a tenancy agreement.