Catherine Dear and Tim Morshead QC take a hypothetical case study to show where savings can be made on non-domestic rates.
Non-domestic rates are intended to capture the value to the occupier of its occupation of property, using the hypothetical rent under an assumed annual letting to provide a uniform measure.
Covid-19 and its associated public health response have interfered substantially with the extent to which occupiers of some properties may make beneficial use of their premises. In such cases, a change of circumstances has occurred that reduces and sometimes denudes the value to the occupier of its occupation of land.
In March, the government made a tacit admission of this, in implementing the “expanded retail discount” scheme, which provides a 12-month rates holiday for the retail, leisure and hospitality sectors. For occupiers who fall outside that scheme, but the value of whose occupation has been affected adversely by Covid-19, it would be worthwhile to consider whether the change of circumstances is also what rating law regards as “material”, such as to trigger a right on the part of the ratepayer to make a proposal for a reduced valuation.
It seems probable that there will be cases where Covid-19 and/or one or more of its associated public health responses amount to a material change of circumstances (MCC). This is likely to be a fertile area for ratepayers who for one reason or another do not benefit from the rates holiday. But it is a technical field in relation to which expert advice must be obtained in individual cases.
We will look at some of the possibilities and other ways to reduce rates bills using this worked example of a hypothetical building.
Covid-19 has had a massive impact on many businesses and, as can be seen, it is important that all grants and reliefs should be claimed where and as soon as possible to help cashflow and longer term health of a business – both from the occupier’s and the landlord’s viewpoint.
Hypothetical scenario
- Ground floor: two units. One is a restaurant/café which has been forced to close due to lockdown. The second is a supermarket where there is a hole-in-the-wall cash point
- First floor: charity occupying under a 10-year lease
- Second floor: a commercial long leaseholder who has recently exercised a break option and vacated the third floor and started work to split this floor into two separate units
- Third floor: unoccupied commercial space
- Fourth floor: offices occupied by a business whose staff have been working from home since lockdown.
Options to mitigate the business rate liabilities
Ground floor: Unit 1 is eligible for the expanded retail discount. This is a discount of 100% for 12 months from 1 April 2020. Usually, premises will not cease to be “occupied” because trade has been suspended, assuming an intention to resume when feasible. If the rateable value is small enough, the ratepayer may be eligible for a grant. Unit 2: supermarkets qualify for the expanded retail discount. Again, they might receive a grant. The cash point is unlikely to attract rates following Cardtronics Europe Ltd and others v Sykes (VO) and others [2020] UKSC 21; [2020] EGLR 26.
First floor: charities enjoy rate relief of up to 80% on property used for charitable purposes; and up to 100% if they can obtain an additional layer of “discretionary relief”.
Second floor: some businesses are taking this opportunity to carry out works to their business space. The principles in SJ& J Monk v Newbigin (VO) [2017] UKSC 14; [2017] EGLR 21 may be applied by arguing that the premises should be valued with regard to its actual physical condition (without a hypothetical assumption that the premises are in repair). Therefore if an owner is carrying out works which make the premises incapable of “beneficial occupation”, the landlord is likely to be eligible to apply to have the premises listed with a rateable value of £1, depending on the nature and extent of the works.
Third floor: the empty business rates relief will apply for the first three months after the property becomes vacant, after which rates will apply again if the building remains unoccupied or a strategic business rates mitigation scheme is not adopted. Examples of mitigation schemes include:
- Granting a lease for six weeks, the minimum occupancy period, to renew the eligibility for the empty rates exemption. Numerous companies offer mitigation schemes whereby landlords allow a short-term occupier to adopt the business rates liability during their occupancy of the minimum required time for a fee, in order to gain a further exemption period and therefore minimise the landlord’s liability for business rates: R (Principled Offsite Logistics) v Trafford Council [2018] EWHC 1687 (Admin); [2018] PLSCS 125.
- Granting a lease to a company which then goes into liquidation and then automatically falls within the rates exemption until the lease is disclaimed: Rossendale Borough Council v Hurstwood Properties (A) Ltd and others [2019] EWCA Civ 364; [2019] EGLR 20.
- Following the recent Court of Appeal decision in Southwark London Borough Council v Ludgate House Ltd and another [2020] EWCA Civ 1637; [2020] PLSCS 221, the popular mitigation scheme of using “property guardians” has been placed in doubt. It will be interesting to see if the appeal ruling is challenged further, given the potentially exposed liabilities this decision has now created.
Fourth floor: offices do not qualify for the expanded retail discount. Office occupiers who find their premises are under-used during the pandemic need to consider with expert input whether their premises have been affected by an MCC (see above) and what grants they might be eligible for. They should act quickly because even if they are able to make a proposal to reduce the rateable value, the reduction will not be backdated.
Catherine Dear is a an associate solicitor in Irwin Mitchell’s real estate disputes team and Tim Morshead QC is a barrister at Landmark Chambers
