Too Good to be True: Charities and Business Rate Relief
Commercial Property solicitor Helen Hayward provides advice on business rate relief for charities and their landlords.
From the 1st April 2008 unoccupied commercial properties which were previously exempt from the payment of business rates became subject to the payment of 100% business rates following an initial 6 months of non-occupation. As a result a landlord whose property was vacant for over 6 months was forced to pay business rates on the vacant property.
Charities in England and Wales (and in Scotland) have the benefit of a mandatory 80% reduction in business rates for properties wholly or mainly used for charitable purposes and a subsequent 20% discretionary relief. It therefore became apparent that if a landlord could lease his vacant property to a charity the financial burden in the form of business rates would be substantially reduced.
The result of this is that a new style of lease between landlords and charities was born. These leases were normally for a peppercorn rent, to prevent substantial expenditure by the charity. They would also have a short notice period, normally around 7 days, to allow the landlord to re-let the property to a business on a market rent should interest in the property increase. Finally this new style of lease contained a “reverse premium” where the landlord would pay the charity to occupy the premises. Such a reverse premium almost always came to a figure greater than 20% of the rateable value of the property, to ensure that the charity did not in effect have to pay the 20% business rates which the local authority still had the discretion to charge. Any additional monies making up the premium would then be seen as a donation to the charity and would provide a source of revenue for the charity involved. Provided that the reverse premium did not reach the value of 100% of the business rates due from the property the landlord would still make a saving and the charity would benefit from free use of the building. This relationship has been described as a “match made in heaven” .
This was however all too good to be true. With the increased squeeze on the public purse such arrangements have come under increased scrutiny from local authorities and in 2013 several cases have emerged which have demonstrated that this relationship really was too good be true.
The first case to bring this arrangement into question was Kenya Aid Program v Sheffield City Council where a charity used less than half the space in two warehouses for the storage of furniture which was infrequently shipped to Kenya. In this case the judge decided that the premises were not wholly or mainly used for charitable purposes as the charity’s use of the space was inefficient and the actual space required was less than half of the space they currently used. This case was appealed to the High Court where the judge determined that considerations in relation to efficiency of use were irrelevant and so set aside the previous decision. However the High Court did approve of the view that in order to benefit from the mandatory 80% relief a charity must use the property wholly or mainly for charitable purposes rather than leaving it wholly or mainly unoccupied.
Later in the year this issue was once again looked at by the High Court in relation to three appeals from the Magistrate Court. In Public Safety Charitable Trust v Milton Keynes Council the charity leased buildings and then installed Wi-Fi and Bluetooth transmitters which according to one District Judge equated to use of 0.1% of the property. Here again the High Court confirmed that the property was not wholly or mainly used for charitable purposes as it was wholly or mainly unoccupied.
The Public Safety Charitable Trust case also considered the possibility of creating a new “Wi-Fi only” rateable property banding as a separate rateable property within commercial buildings. This would mean that charities using buildings as Wi-Fi hotspots would be charged business rates for the Wi-Fi banding of the property and the owner would still face the normal business rates bill for the building. This approach was considered because of the exceptionally small amount of space taken up by Wi-Fi generating equipment means that the building could still be fully utilised by another party who could pay business rates for that use.
Whilst both of these cases were decided in the High Court, and so there is the possibility of two further levels of appeal altering the decisions, these cases do currently represent the law in relation to business rates and charitable relief. As a result the Charity Commission has issued a fresh warning to charities noting that charities should be wary of entering into agreements which jeopardise public trust.
The Charity Commission has emphasised that charities must ensure that tenancy agreements are for the exclusive benefit of the charity and will further the charities purposes and its best interests. Charities should ensure that the property is genuinely required and is fit for purpose as well as considering potential liability in relation to business rates. The Charity Commission is at pains to emphasise that charities must safeguard their independence and not be used as a way of benefitting commercial companies via reduced costs.
Charities who are currently parties to leases with reverse premiums and those considering taking out such a lease should consider taking professional advice on their positions and the impact that relief being withdrawn may have.
Any charities taking out or renewing leases of premises are always advised to take professional advice on a range of issues including the business rate position.
About the author
Helen is a Partner and head of the Commercial Property team.