IS IT THE END OF THE ROAD FOR PROPERTY GUARDIANSHIP BUSINESS RATES MITIGATION SCHEMES?
The recent Court of Appeal decision in Southwark London Borough Council v Ludgate House casts doubt on whether property guardianship schemes will survive as a legitimate means of mitigating business rates liability on empty properties. The decision is significant for landlords and building owners seeking to reduce their liability on empty property. It comes at a time when COVID-19 and its impact on public health has interfered substantially with the extent to which occupiers of properties can use their premises and the financial implications which have ensued have resulted in many more properties becoming vacant. This is in spite of the Covid-19-business rates expanded-retail discount introduced earlier this year.
BUSINESS RATES LIABILITY
In England, the taxes payable on the occupation of commercial property are non-domestic rates (NDR), otherwise known as business rates, and, for domestic rating, council tax (different rates and reliefs apply in Scotland). NDR is payable on business premises, whether occupied or empty. NDR on empty property is a tax on a non-incoming producing asset and it has been termed, a "tax on failure". As a result, affected ratepayers frequently look to mitigate their liabilities to empty property business rates. It is not surprising that rates mitigation has been a fertile area for disputes between local authorities and landlords, with the courts being asked to adjudicate on the lawfulness of various business rates mitigation schemes.
BUSINESS RATES MITIGATION SCHEMES
There are various schemes which are available. These include:
- granting a lease to a company which then goes into liquidation and then falls within the rates exemption (Rossendale BC v Hurstwood Properties)
- granting a lease to a company which uses the premises for storage for six weeks so as to give rise to beneficial occupation with the property then being vacated so as to benefit from the business rates holiday of three months afforded to empty properties (six months for industrial and warehouse premises) (R(Principled Offsite Logistics) v Trafford Council)
- granting licences to property guardians to occupy premises with a view to allowing the owner to argue that as the property is being used for residential use, it ought to be removed from the non-domestic rating list, or, that the presence of property guardians ought to reduce the value of the property and result in a lower valuation for rating purposes. Instead of paying business rates, the property guardians should instead contribute to the council tax that becomes payable as part of their licence fee. However, the position is not always straightforward.
WHAT ARE PROPERTY GUARDIANS?
A property guardian arrangement is usually made with a company (the scheme operator) which in turn grants rights to individuals (known as "guardians") to live in premises which are otherwise vacant (e.g. empty offices). Those individuals usually occupy under a short-term licence terminable on relatively short notice (e.g. until the building owner requires it for redevelopment) and pay a licence fee (in essence, a low rent) in return for basic facilities and to live at the property. Usually, the scheme operator will share part of the licence fees with the building owner. The building owner normally pays a fee to the scheme operator, often a percentage of the monies saved by the mitigation scheme. The building owner may actually make a profit whilst reducing or extinguishing their rates liability.
FROM A BUSINESS RATES PERSPECTIVE…
The question of whether or not a guardianship scheme will mitigate business rates liability will depend on who is in "rateable occupation" of the property. The use by guardians of premises as a residence has often resulted in the Valuation Office (VO) removing the premises from the non-domestic rating list on the basis that the building is wholly used as a residence. The result being no liability for business rates but, instead, this creates a liability for council tax: the local authority will still obtain some revenue. However, any council tax payable is likely to be significantly lower than business rates for the same premises. Even if the premises remain on the rating list, the VO may well accept that the presence of the guardians in some parts of the building will result in the building having a lower rateable value and so reduce the rates payable if the property remains liable for business rates.
A WIN, WIN SITUATION?
There has been an upsurge in property guardians during the current pandemic as key workers have occupied vacant property closer to work as temporary housing. The providers of guardianship schemes also point to its other advantages besides business rates mitigation:
- providing affordable accommodation often in close proximity to workplaces or in expensive city centres
- helping local authorities with council housing waiting lists
- protecting the property against squatting, theft and vandalism without the need for additional security costs. This can be particularly important for commercial property given that squatting in commercial property is still not a criminal offence and court proceedings are usually required to regain possession.
THE LUDGATE HOUSE CASE
In the Ludgate House case, the owner of a vacant 11 storey office building (a 175,000 square feet building close to Blackfriars Underground, London), earmarked for redevelopment, agreed with a scheme provider that they would grant licences to guardians to occupy part of the building. The Valuation Tribunal decided that, in spite of the presence of property guardians at the property, it was occupied by the building owner Ludgate House Ltd. Accordingly, Ludgate House Ltd was liable to pay millions of pounds in business rates. That decision was reversed by the Upper Tribunal.
UPPER TRIBUNAL DECISION
The Upper Tribunal held that the guardians’ individual rooms were separate units and the relevant occupier was not the owner of the building but the individual guardian whose temporary home it was. The rooms were used wholly for the purposes of living accommodation and the guardians were not liable for rates but were liable for council tax. The building was not a composite because there was no single occupier of the domestic and non-domestic space. That outcome suited the building owner but not the local authority, Southwark, who was granted permission to appeal to the Court of Appeal.
COURT OF APPEAL DECISION
One of the appeal grounds included an argument which fundamentally undermines guardianship schemes: that where the¬ guardianship scheme uses premises in such a way that they should be licensed as a house in multiple occupation (HMO), and no licence is actually obtained, the Court should, on grounds of public policy, decline to allow the building owner to rely on that scheme.
Southwark submitted that the business rates mitigation scheme amounted to a criminal offence contrary to section 72 (1) Housing Act 2004 and the scheme harmed the public interest by undermining the HMO licensing legislation. Once five or more people occupied the premises (in the case in question, 32 people) it would be subject to mandatory licensing as an HMO. If classed as an HMO, having to comply with the minimum standards for health and safety would make such schemes unviable. Southwark submitted that the Court should not allow the building owner to use the premises as an illegal HMO in order to avoid business rates.
The Court of Appeal allowed Southwark’s appeal: the building owner (the rate payer) retained "general control" of the building and that was enough to leave the building owner with liability for empty property business rates. The scheme provider engaged guardians as their means of providing services to the building owner, who was otherwise liable for the empty property rates. The Court declined to consider the point as to whether the guardian scheme was unlawful.
The Court of Appeal judgment is bad news for the building owner as ratepayer, but good news for the local authority responsible for collecting the rates. Subject to appeal to the Supreme Court, (no news yet), it appears doubtful that property guardian mitigation schemes will survive this decision. Undoubtedly lawyers will review the contractual terms under which guardians occupy property in the light of the decision. However fundamental problems remain: 100% business rates liability on empty properties and the payment holiday not being long enough. Many feel that no tax should be so high that it directly impacts a company's decision whether it should remain open and this issue was apparent before the current economic downturn. If Santa can bring one wish for business owners this year, it will be a fundamental reform of business rates liability as soon as possible.