Property Guardianship – A Sound Approach to Business Rates Mitigation?
There are a number of different schemes in common use to try to minimise commercial property owners’ exposure to business rates where the property is vacant. The Court of Appeal upheld the legal basis of one such scheme earlier this year.[i] This scheme takes advantage of an exemption in the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386) (“the 2008 Regulations”). Those regulations provide that properties owned by a company that is subject to a winding up order or being voluntarily wound up are exempt from business rates. Some freeholders or head leaseholders have set up special purpose vehicles (“SPVs”) and granted them leases of empty property making them liable in principle for the business rates. Then, by voluntarily winding up the SPVs, they have been able to benefit from the exemption under the 2008 Regulations. Alternatively, liability has been avoided by allowing the SPVs to be struck off the register of companies and vest in the Crown.
Those schemes might be usefully contrasted with property guardianship schemes. Property guardians reside in vacant premises under a licence agreement, usually, until the building owner requires it for redevelopment. The property will be deleted from the non-domestic rating list on the basis that it is now domestic. The property guardians will be required to contribute to the council tax that becomes payable as part of their licence fee, so the local authority will still obtain some revenue. The providers of such schemes also point to its other advantages besides business rates mitigation, including providing affordable accommodation often in expensive city centres and helping protect the property against squatting, theft and vandalism.
Last year’s decision of the Valuation Tribunal for England (“VTE”) in Ludgate House Limited (“LHL”) v Ricketts (VO) and London Borough of Southwark appeared to deal a blow to property guardianship schemes. Whilst the VTE stated that the use of guardians to avoid liability for business rates had no impact on the legal issues in the case, it found that the property guardians were primarily installed to provide a security function and that the scheme provider’s licence agreements were not ordinary residential licences. The VTE was not satisfied that the property, Ludgate House, or any part of it, was used wholly for the purposes of living accommodation. The VTE accordingly decided that Ludgate House should be entered in the non-domestic rating list with effect from 1 July 2015 with a rateable value of £3,390,000. LHL appealed to the Upper Tribunal (Lands Chamber) (“UT”).
However, the UT has recently allowed LHL’s appeal.[ii] Crucially, it found that on 1 July 2015 the first property guardians in the building, and not LHL, occupied four distinct units capable of being recognised as separate hereditaments (even though other parts of the building were shared), and subsequent occupation of the building followed the same general pattern. The UT considered that the licensees were not in occupation to provide LHL with security services but to provide themselves with somewhere to live. The rooms used by the licensees were used wholly for the purposes of living accommodation and the licensees were therefore liable for council tax. The UT accordingly decided that Ludgate House should be omitted from the relevant non-domestic rating list altogether, so that no business rates were payable.
This decision should provide some comfort to owners of vacant property who allow it to be occupied by property guardians, rather than simply let it stand empty as happens with other schemes. However, the question of whether or not a property guardianship scheme proves effective to mitigate business rates’ liability remains dependent upon all the circumstances and, as this case shows, it is important to be aware of the potential risks and pitfalls.
[i] Rossendale Borough Council v Hurstwood Properties (A) Ltd and others  EWCA Civ 364
[ii] Ludgate House Ltd v Ricketts (Valuation Officer) UKUT 278 (LC)
This article was written by Richard Hosmer. For more information, please contact Richard on email@example.com on +44 (0)1483 252 635