In 2008, landowners in England and Wales lost relief from business rates for empty property. In those countries, there is now only a 3 month exemption period for non-industrial properties and a 6 month exemption period for industrial properties – and full business rates are payable following the exemption periods.

Despite the controversy surrounding the changes, it seems that empty rates liability is here to stay in England and Wales.

Mitigation schemes

A number of potential schemes to mitigate liability for empty rates have been debated by the industry.

Since 2008, many of these schemes have been tried and tested. This is a summary of some of the more common schemes in England and Wales and their potential problems.

1. Short intermittent reoccupation

Method: Reoccupy your property for at least 6 weeks. You will be liable for full rates for that period however upon vacating, a new exemption period (3 or 6 months) applies. It seems the process can be repeated as often as required.

Problems: You must derive some actual benefit from your occupation. So it's possible that your actual use of property may be queried.

2. Short intermittent letting

Method: Grant a short lease for at least 6 weeks. Your tenant must occupy the property and will be liable for full business rates. Following the expiry of the lease and the tenant vacating the premises, a new exemption period (3 or 6 months) applies. It seems the process can be repeated as often as required – grant another short lease and gain a further exemption period each time.

Problems: Finding a tenant. "Guaranteed Tenant" schemes are currently being marketed where a tenant is found for a 6 week period, with a new exemption period arising upon the "tenant" vacating. These schemes involve paying a fee and the landlord usually has to indemnify the tenant for its 6 week rates liability.

The tenant must derive some benefit from its occupation. Accordingly it is possible that such schemes might be challenged on the basis either (a) that the tenant/landowner derives no genuine benefit from its short term occupation, or alternatively (b) that a genuine tenancy has not been created.

If you are offered a "Guaranteed Tenant" scheme, check who would bear the risk and costs of a successful challenge – and ensure that you respect the tenant's right to exclusive possession of the property while the 6 week tenancy is in place.

3. Charities

Method: Letting a property to a charity or a community amateur sports club allows the landowner to avoid liability for empty rates. Charities have a full exemption, provided it appears that when the property is next in use it will be used wholly or mainly for charitable or community amateur sports club purposes.

Problems:
It must appear that the expected future use will be of the whole or the main part of the building. The Courts have ruled that occupation of one small part of a larger building will only mitigate rates liability for the part that is occupied – meaning that full rates are still payable for the rest of the building.

4. Insolvent tenants

Method: Let the property to a company that then enters insolvency, e.g. an SPV that is put in to administration or liquidation. Companies in liquidation or administration are exempt from liability for empty rates.

Problems: If the transaction is set up with the sole aim of avoiding a liability for empty rates and the SPV was never genuinely solvent then it is possible that the directors of the company might face sanction under insolvency legislation. It is arguable that such conduct could amount to fraudulent trading. As the local authority could be the largest unsecured creditor, they may appoint their own liquidator to investigate the background to the transaction in which case the landowner would lose control over the liquidation.

Any liquidator may disclaim a lease of premises located in England and Wales – and is likely to do so at the earliest opportunity – at which point the owner becomes liable for rates again.

5. Property unoccupiable

Method: If a property is in such poor repair that it cannot be occupied and cannot be economically repaired, or if occupation is prohibited by law (for example due to non compliance with fire regulations), no business rates are payable.

Problems: Anti-avoidance legislation may be brought in soon, so that changes in the state of a property after it becomes vacant are disregarded.

In the meantime, the Valuation Office (which deals with business rates in England and Wales) has stated that it may take a view that any damage, however caused, is economically repairable. Deliberate vandalism may therefore often be ignored, and the property deemed to be in repair for rating purposes.

6. Unfinished Developments

Method: Leave your development unfinished, as no rates are payable whilst the property is being constructed.

Problems: The local authority may serve a completion notice, if it considers that the development could reasonably be completed within 3 months. The notice will specify a completion date (in 3 months time) from which the development will be deemed complete and the exemption period will start to run. The landowner will then become liable for empty rates in the usual way.

Comment
Empty rates can be a significant liability which landowners will obviously want to avoid wherever possible.

Some property owners have been approached with schemes that promise to avoid empty rates liability. However, these schemes may not always necessarily work. In some cases they may even carry significant risk. If you wish to investigate whether a mitigation scheme would work for you, make sure you obtain legal advice on your options, strategy and any risks.

And the position in Scotland?

The Scottish position on empty property rates wasn't subject to a change such as that in England in 2008. Empty office and retail properties in Scotland are eligible for a 3 month exemption, with a 50% discount after that, while there are no rates to pay on empty industrial properties even after the first 3 months.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.