Empty Rates

In the 2007 Budget report, the Government’s intention was to modernise business rates in respect of empty properties. The purpose of reform was to enhance the supply of commercial property available to new and existing businesses.

The Rating (Empty Properties) Act 2007, which received Royal Assent in July 2007, raised the rates liability for empty commercial properties from 50% to 100% of the basic occupied rate, following an initial 3-month rate-free period, extended to 6 months in the case of industrial properties such as warehouses which had previously been entirely exempt.

The 2008 empty rates changes were essentially a penalty; with the aim to expediate property occupation. The legislation is punitive for those Landlords who, despite their best endeavours, are unable to let their buildings within the short duration of the current period for relief.

The proliferation of e-commerce, shifting consumer preferences and high street cost pressures have all led to an oversupply in retail space. The acquisition of the Debenhams and Arcadia brands, for example, saw all 562 stores totalling 1,389,137 m2 of retail floor space, the equivalent of 194 Premier League football pitches, across the UK coming vacant and to-let.

Landlords will potentially have to face annual empty rates of circa £50 million for Debenhams and £91 million for Arcadia Group stores following the exemption period, unless new tenants can be found quickly once possession was taken back.

“The Government must urgently recognise that the current 3 and 6 month exemption periods are woefully inadequate to allow commercial properties to be refurbished and/or repurposed, marketed and relet. It is through that redevelopment and refurbishment that the real estate industry adds most value to the UK economy. “

Edward Searle, BSc, MRICS Vice President, Altus Group

Landlords have been almost entirely overlooked by Government support measures during the pandemic, despite being asked to play a supportive role.

The business rates ‘holiday’ for retail, leisure and hospital premises did not cover those properties vacant and to-let, and that exclusion left Landlords with estimated empty rates liabilities of £924 million in England and £25 million in Wales during 2020/21.

Supreme Court Rules On SPV Schemes

The 2008 empty rates changes led to a proliferation of questionable business rates avoidance schemes, culminating in a long running battle between Local Authorities and landlords. In this respect, a significant judgment was handed down in May 2021 by the UK Supreme Court in Hurstwood Properties (A) Ltd and others (Respondents) v Rossendale Borough Council and another (Appellants).

The business rates avoidance schemes, in the above cases, involved granting a short lease of unoccupied properties to a special purpose vehicle (“SPV”), such that the SPV became the “owner” for the purpose of non-domestic rates liabilities rather than the respondent company. The SPV was subsequently dissolved or put into liquidation, escaping business rates liabilities levied on empty properties.

The appeal concerned whether the appellant local authorities, Rossendale Borough Council and Wigan Council, had reasonable grounds for claiming non-domestic rates from the respondent companies which were the registered owners of various unoccupied commercial properties.

The local authorities’ claims were test cases representative of 55 similar cases where the value of unpaid rates varied from a few thousand to millions of pounds.

The Supreme Court held that neither the dissolution nor the liquidation scheme had any business or other ‘real world’ purpose - their sole purpose was to avoid liability to pay business rates. The SPVs had no assets or business, and it was never intended that the empty rate would ever be paid. The lease included a rent clause, but it was not intended that the rent would be demanded or paid.

The dissolution scheme involved letting the SPV incur a liability for business rates (but not paying it) before it was dissolved under the Companies Act 2006. Upon dissolution, the SPV’s property passed to the Crown as bona vacantia and the Crown became liable for the rates as owner. The scheme relied on the local councils not finding out about the dissolution until long after it had occurred.

The liquidation scheme involved placing the SPVs in voluntary liquidation shortly after granting the lease to trigger regulation. The liquidation was artificially prolonged to maintain the existence of the SPVs and therefore the exemption from business rates.

The dissolution scheme was held by the Supreme Court to be an abuse of legal process through the way in which the SPV liability for rates was handled and may also have involved unlawful conduct by the directors. The liquidation scheme was declared to be an abuse of the insolvency legislation.

As a result, the Supreme Court ruled that there was a triable issue whether the respondents remained liable for business rates throughout the duration of the leases.

“Our long term and unwavering advice to clients was always to avoid such schemes. No one likes empty rates which is, in effect, a tax on the absence of income. If the tax was more affordable, owners wouldn’t have been forced into finding complicated ways to try and mitigate their liabilities. “