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Mitigating empty rates liability

Mitigating empty rates liability

Helen Hayward describes the measures that commercial landlords are taking to avoid paying rates on empty properties and the law surrounding them.

If you are struggling to let a property, paying hefty business rates while it is empty can be an additional financial headache.  The current rates regime has no anti-avoidance measures so unsurprisingly a number of ways have been employed by landlords to avoid paying rates on empty properties. 

The basics….

Business rates are a tax on non-domestic properties. Open land without buildings is not rateable, and some buildings are not rateable (whether occupied or not), for example, agricultural premises and places of worship. Case law has established that a property must be capable of beneficial occupation to be rateable. If a property isn’t capable of beneficial occupation, it will be removed from the rating list, or, if it is undergoing reconstruction or redevelopment, it may be kept on the list but reclassified and given a nominal value. 

The law gives certain relief from rates for certain empty properties.  This includes property owned by individuals who are bankrupt or companies in administration. There is also 3 months’ relief for empty retail/offices and 6 months’ relief for empty industrial property.  Empty listed buildings have unlimited relief.  There is also a zero-rating regime for empty properties owned by charities if it appears that once re-occupied the property will again be used for a charitable purpose.  In relation to the time limited relief for retail/offices/industrial property, short term occupation (of six weeks or less), for example, by a tenant while a property is otherwise empty will be ignored.

Unless your property falls within one of the exceptions above you are probably only eligible for time limited relief, so do you have any options to mitigate this ongoing liability?

The options to mitigate liability….

The table below outlines some of common methods used by landlords to mitigate their rates liability on empty properties. 

Measure Thing to think about

Short term lettings (6 weeks plus) which, once they have ended, restart the empty rates relief period. 

A reverse premium payable might be considered (and off sets the tenant’s liability to pay the rates during the tenancy)

Needs to satisfy 4 occupation tests:

is there actual occupational possession?
is there exclusive occupation?
the occupation must be of some benefit to the occupier; and
the occupation must have a sufficient degree of permanence

Case law can help us establish what is needed to satisfy these tests, but the right arrangement is capable of satisfying these requirements.  There are companies that specialise in putting in place these types of short term lettings in place to mitigate rates liability

Keep a lease in place after a tenant goes into administration Business rates are not payable by companies in administration. An administrator cannot disclaim a lease and a landlord can’t be forced to surrender it
Demolishing properties or carrying out other works A property has to be capable of “beneficial occupation” for business rates to be payable. Careful note needs to be taken of the types of works undertaken, as well as a careful cost analysis of overall benefit 
Letting to a charity Registered charities are only liable for 20% of full business rates when in occupation (a landlord could make a charitable contribution to cover the 20% actually paid)


For how much longer?

It remains to be seen when the Government will close or limit the effect of these anti avoidance measures, which are reported to cost local authorities around £230m per annum in lost rates. A government consultation paper published in July 2015 contained various recommendations to tackle these issues, but, as things stand these loopholes remains open.

Helen is a Partner in Burnetts’ Commercial Property team. For further advice on commercial property issues, contact Helen on 01228 552222 or hh@burnetts.co.uk.

About the author

Helen Hayward profile photo

Helen Hayward

Helen is a Partner and head of the Commercial Property team.

Published: Monday 10th April 2017
Categorised: Commercial Property, Legal Services in Newcastle, Penrith, West Cumbria

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