Author: Adam Baker
The relief from business rates available to charities has long made the letting of otherwise unused premises to them an attractive proposition for both landlords and charities alike. Where the landlord would otherwise be liable to pay empty rates on premises that are producing no income for them, they can instead let them to a charity which will take over the liability for business rates. The charity in turn can take advantage of the relief available to them and are able to enjoy use of the premises for well below market rent or even at a peppercorn. The landlord can maintain flexibility by granting a lease with a rolling landlord break allowing them to end the tenancy and relet the premises to produce a better income if the opportunity arises.
The decision of the High Court in South Kesteven District Council v Digital Pipeline Limited serves to highlight that, depending on the nature and use of the premises, charities need to tread carefully if they want to avoid an unexpected and unwelcome rates claim from the local authority.
The charity in this case, Digital Pipeline Limited (Digital), collected unwanted IT equipment to be donated to recipients in Africa who would not otherwise have access to computers. To this end, they leased large premises at a peppercorn rent at which they would hold periodic appeal days to take donations of equipment and raise awareness of their cause. However, the majority of the floor area of the premises remained unused on these appeal days and the appeals were the only purpose the premises were used for.
By way of background, relief from business rates is available to charities where:
Was Digital’s use of the premises wholly or mainly for charitable purposes? Because of the operation of charitable relief, the key to the rates liability of Digital across all days (appeal and non-appeal) was in the treatment of the use on appeal days.
The local authority’s position was that Digital’s use of the premises on appeal days did not qualify for relief and they made an application to Grantham Magistrates Court for an order subjecting Digital to a full non-domestic rates liability. The judge found that on appeal days the premises were wholly or mainly used for charitable purposes, entitling Digital to relief.
The local authority appealed this decision and the matter was considered by the High Court, whose judgment considered the correct approach when deciding whether premises are wholly or mainly used for charitable purposes. Perhaps surprisingly, it confirmed that, even though it was clear that the Digital used less than 50% of the full area of the premises on appeal days, this was no barrier to the premises being wholly or mainly used for charitable purposes.
So, it is not possible to simply measure the use of premises on a floor area basis and determine whether the premises are being wholly or mainly used for a charitable purpose because the charity actively uses more or less than half of it. For example, a charity tenant may collect donations of books at a warehouse or library and store them on shelving along the walls. Even though the majority of the premises by floor area is “unused”, i.e. it is not occupied by anything specific to the charitable purpose, it cannot be said that the premises are not mainly used for charitable purposes because of this.
This will provide some comfort for charity tenants who may be concerned that, because they occupy premises that are perhaps larger than would ideally suit their purposes (as many charities must out of necessity), they will be stung with an unexpected rates bill. However, the High Court also found that the judge in the first instance case was not entitled to place as much emphasis as he did on the fact that the rest of the premises was not used for any other purpose. If premises are not used wholly or mainly for a charitable purposes, then a charity tenant cannot argue that they are just by virtue of the fact that the rest of the premises is unused or unoccupied.
The case yields few hard and fast rules in relation to this issue. Though this may be cold comfort to charity tenants worrying about the nature of their occupation of any premises, they can at least be assured that the courts do not seem to think that an unduly rigid approach is particularly helpful. Charities in particular, as well as the landlords who rely on them for reprieve from rates liability, will need to continue to consider the use of any premises carefully in order to minimise the risk of an unexpected rates bill.
Adam Baker, Associate, Fladgate LLP (firstname.lastname@example.org)