Against a backdrop of a challenging economic climate in which more and more tenants are struggling and landlords have an increasing number of voids across their portfolios, empty rates liability has become an increasing problem for many. Despite calls from some MPs to abolish the tax, it is an issue that is unlikely to go away for the time being.
Empty properties are unsightly in town centres and further erode the economic value of the areas in which they are located. There have been a number of recent initiatives seeking to make better use of the empty units on some of our ghostly high streets. Certain initiatives seek to encourage landlords to allow their empty units to be used for community or social benefit. The Portas Review is another example of a high profile attempt to breathe much needed life into our struggling town centres. The results of the Portas pilot scheme will be hotly anticipated by both the property industry and the wider public.
As landlords continue to grapple with unwanted rates liability for empty units, the High Court’s ruling in Makro Properties Ltd and another v Nuneaton and Bedworth Borough Council [2012] PLSCS 150 is likely to fuel further debate about the value of the tax. Judge Jarman QC ruled that Makro’s use of a warehouse to store 16 pallets of documents from November 2009 to January 2010, was enough to create six weeks of rateable occupation, which in turn triggered a further six month rate free period, despite the fact that the pallets only took up 0.2% of the floor space in the warehouse. The judgement might act as further encouragement for landlords to think of creative ways to deal with empty rates liability.
Charities
One option available to a landlord is to let an empty unit to a charity. This practice has attracted a large amount of media attention recently. A charity occupying commercial property qualifies for a mandatory 80% discount on business rates, provided that the property is used wholly or mainly for charitable purposes. Local authorities can also grant the remaining 20% as a further discount. If a landlord is struggling to let a unit at market rate, they may be willing to grant a lease of the space to a charity for a reduced or nominal rent. This enables the charity to occupy properties they could not otherwise afford and gives the landlord a rates saving. The charity may also receive a charitable donation from the landlord to reflect a percentage of the business rates they would otherwise be liable for.
Aside from any potential rates saving, there are other benefits that a landlord will receive from letting an empty unit to a bona fide charitable organisation, for example: the good press associated with helping a charity; satisfying corporate social responsibility objectives; the deterrent to vandals of the unit being occupied; and the benefit of any maintenance services that may be provided by the charity.
Careful consideration must be given to the length of the arrangement, and any break rights to be contained in the agreement. A landlord will need to consider how they will bring the arrangement to an end in the event that they find a tenant willing to pay the market rent. A charity may not want to commit itself to any one site for a significant length of time and will want a reasonable notice period within which to relocate if the landlord serves notice to break the arrangement in place. The parties must also think about charity specific provisions that may be required in any lease entered into.
There are risks involved in entering into such an arrangement. A number of schemes have come to the attention of the Charities Commission, whereby retailers and landlords of other hard-to-let properties, target charities to enter into tenancy agreements to relieve the landlords of the liability to pay the business rates, in return for a donation from the landlord. The Charities Commission wants to make sure that charities are not involved in what may be considered business rates avoidance.
A landlord must ensure that any arrangement is sufficient to make the charity the rateable occupier, and a charity must be aware of the pitfalls of entering into such an arrangement. A tenancy arrangement may impose onerous tenant’s obligations on the charity, and the charity trustees must be satisfied that the agreement is in the best interest of the charity and will further its charitable purposes.
The government is keen to crack down on schemes that exist only for the purpose of avoiding empty rates and therefore specialist advice should be sought before entering into such an agreement. If a local authority is not satisfied that the arrangement is bona fide, the charity or the landlord may find themselves footing an unexpected bill for business rates.
About the author
Andrew Miles started at Cripps as a trainee in September 2006 and qualified into the commercial property department in September 2008. Since qualifying, Andrew has provided property advice to a number of charities. He is a keen sportsman and plays both football and rugby at weekends. He is, however, still awaiting his England call up.
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