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High Court sides
with landlords over
business rates ‘loophole’

High Court sides with landlords over business rates ‘loophole’

Published: 14th August 2018
Area: Litigation & Dispute Resolution
Author: Barry Jervis

The UK courts have fallen on the side of commercial landlords and tenants who use mitigation schemes as a method of reducing their business rates liability. However, local authorities continue to challenge what they consider to be a legal loophole and could now aim to put a stop to it with legislative intervention.

The background

Empty property relief was first introduced in 2008, meaning that if a building is left unoccupied, landlords do not have to pay business rates for three months. Ever since this, landlords with properties for which they cannot find long-term tenants have been using short-term lease arrangements as a way to mitigate their annual business rates.

Under these arrangements, the landlord will typically rent out properties on short-term leases, often on very favourable terms for the tenants, allowing the landlord or property agent to take advantage of empty property relief when the lease is up and the tenants leave. Done properly, this can be a sure-fire way to significantly reduce business rates liability.

Local authorities, fully aware of this practice, tend to challenge these short-term occupations at every opportunity, usually pushing for evidence that the property is genuinely occupied and that there is a commercial benefit to the occupation. They claim that to be regarded as a ‘rateable occupation’, the tenant should be seen to be running a business from the premises to make a profit and if they are not, then they should be exempt from accessing empty property relief.

The case – Principled Offsite Logistics Ltd v Trafford Borough Council

One case, heard recently at the High Court, saw Trafford Borough Council arguing that use of a premises just to store goods on a short-term basis did not mean that any commercial benefit was being gained from its occupation. In this instance, the tenant openly described the arrangement as a ‘rates mitigation scheme’, one in which they would pay a peppercorn rent to the landlord in exchange for storing their goods at the premises, as well as receiving a percentage of the savings when empty property relief was leveraged.

In light of this, Trafford Borough Council obtained Magistrates’ Court summonses seeking rates liability orders against Principled Offsite Logistics Ltd. However, Principled pushed back, challenging the Council’s approach by requesting a judicial review.

The court’s review concluded that, despite the Council’s protestations, ‘rateable occupation’ does not legally have to be for commercial benefit and instead has to merely be of some benefit to the tenant. This outcome means that local authorities will no longer be able to successfully levy their most common complaint against this type of rates mitigation scheme, and businesses, commercial landlords, property agents and corporate occupiers can breathe a sigh of relief.

However, this doesn’t mean that the situation won’t still change in the future. Local authorities still consider these schemes to be a loop hole in the law and could well see this recent high court decision as reason enough to push for legislative changes. Either way, there are likely to be further challenges ahead.

The commercial dispute resolution team at Shakespeare Martineau have successfully defeated a number of challenges relating to rates mitigation, acting on behalf of landlords and corporate occupiers in both Magistrates Court and High Court. For more information, or to discuss any of these issues further, please contact Barry Jervis or Ben Humphreys of the dispute resolution team.

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