Summary and implications
The number of vacant shops has risen to an all-time high according to the latest shop vacancy report from the Local Data Company. The cost burden on a landlord of void units is exacerbated by its liability to pay business rates on empty properties and landlords therefore need to be aware of the possible ways in which they can reduce their liability for rates.
The rates exemptions available to the institutional landlord for unoccupied shops, offices and industrial properties are limited and, at best, only offer a temporary solution. Property owners are therefore continuously seeking to minimise their liability for business rates by adopting new initiatives.
One of the most recent initiatives is the “Meanwhile Lease” and this article looks at the key terms and advantages to the landlord. Landlords should note:
- Nabarro has worked with institutional landlord clients to create a form of Meanwhile Lease acceptable to a meanwhile occupier, such as a charity or other non-commercial body;
- the Meanwhile Lease can be used across all property sectors, including retail, offices and warehouses; and
- in practical terms, the landlord will actively market the meanwhile let unit until a commercial tenant is found, upon which the landlord may trigger the break provision contained in the Meanwhile Lease and obtain vacant possession.
The Meanwhile Scheme – background
The Meanwhile Scheme is a government-led initiative to encourage the temporary occupation of vacant units for non-commercial purposes. The intention is that occupiers, such as local voluntary or charitable groups will be able to use a vacant property temporarily and periodically for a non-commercial purpose, whilst the landlord looks for a more permanent commercial tenant on more favourable terms.
Examples of meanwhile use include art/culture based exhibitions, learning facilities and workshops and information centres. The length of time these projects last varies between one week and several years and the use need not be continuous.
The Meanwhile Scheme was set up as part of the Revitalising Town Centres policy launched in April 2009 and is led by the Development Trusts Association on behalf of Communities and Local Government, in conjunction with Meanwhile Space CIC. More information can be obtained by clicking on the Government Guidance links below.
Nabarro have created a standard form of Meanwhile Lease which aims to create a balance between protecting the landlord’s capital interest and preserving the effectiveness of the Meanwhile Scheme. Essentially, the meanwhile occupier will be responsible for paying the rates in respect of the property during the term of the lease, which in the case of a charity can be reduced to zero in certain circumstances. The landlord only has to make a contribution if the meanwhile occupier has failed to achieve its zero rating. It is intended that the landlord makes a contribution towards the occupier’s set-up costs but this is calculated as a percentage of the expected saving. This structure therefore benefits both parties.
Nabarro Meanwhile Lease: key elements
Nabarro structures the Meanwhile Lease in a manner to reduce risk from the landlord’s point of view.
a) Term and break
Due to the limited contractual rights of the landlord against what is essentially a weak covenant, the term of the Meanwhile Lease should be as short as possible. The Scheme envisages that the tenant will occupy the property for up to six months but a longer lease of up to five years can be agreed, provided that appropriate mutual breaks are included. The Meanwhile Lease shall be excluded from the security of tenure provisions under the Landlord and Tenant Act 1954.
The Meanwhile Lease is for non-commercial use only. The tenant is given an opportunity to showcase its art/community-based use in a prime property it would otherwise be unable to afford in a booming market. The Meanwhile Lease expressly prohibits the tenant from using the property for any commercial gain or operating a profit-making business from the property.
c) Rent and other financial sums
It is not intended that the tenant pays any rent, premium, service charge or buildings insurance. What would usually be the tenant’s proportion of the service charge and insurance premium will therefore be covered by the landlord. The tenant should however be responsible for the cost of the supply of utilities to the property, at least outside core hours or above a basic level of provision.
d) Liability for rates
When negotiating heads of terms with prospective tenants, landlords should always make it clear who is responsible for rates during the term of the lease, including any period in which the property may be empty.
Most leases impose liability for rates on the tenant. The Meanwhile Lease is no different. As the person entitled to occupation is likely to be a charity, the tenant may be able to claim zero rating relief. However, many charities do not have the resources to risk liability for rates and so the landlord enters into a side letter agreeing to be responsible for the reimbursement of any rates provided that the Tenant has used its “best endeavours” to minimise its rates liability. This is a very high standard. If the tenant is reimbursed by the local authority for such payments, these are to be paid in full to the landlord.
The rates “saving” by the landlord is usually shared to some extent with the tenant. This would typically include a payment to the tenant which provides the designated charity with the funding required to set up its exhibitions or other resources at the property.
The tenant is subject to a basic repair covenant which is subject to a schedule of condition.
The Meanwhile Lease is personal to the tenant and it cannot assign or underlet the property. Allowing any dealings or concessions at the property may jeopardise the tenant’s ability to claim relief and therefore the effectiveness of the Scheme.
From a landlord’s point of view, the Meanwhile Scheme is an attractive mechanism to avoid or at least minimise empty rates across a portfolio. The Meanwhile Lease can be rolled out to several properties across the landlord’s portfolio with the same tenant, with the tenant holding a number of exhibitions or training workshops, for example, across the UK every year in each property across the Scheme.
Before proceeding with the Scheme, the landlord should consider the following:
- expert ratings advice should be taken as to whether the proposed tenant is eligible for ratings relief; report on the extent of meanwhile use.
- check whether the property’s funder would approve the Scheme and whether a formal consent would be required in accordance with the funding agreement; and
- tax implications including any SDLT or VAT liability.