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The only way is ethics (or, high passion in the rates department)

R (on the application of Principled Offsite Logistics Ltd) v Trafford Council

Background

As property-owning readers will be only too aware, the fact that a commercial property is vacant does not mean that national non-domestic rates (NNDR) are not payable.

If a commercial property becomes vacant then the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (2008 Regulations) allow for time-limited reliefs - supposedly to encourage property-owners to ensure their properties do not lie dormant and are brought back into economic use.

The current position is that commercial property, such as a shop or office, is entitled to 100% relief but only for a period of three months. Industrial and warehouse property fares slightly better and is entitled to six months’ relief. After expiry of these respective periods, full NNDR become payable again. There are other reliefs and exclusions - the legislation is complex - but for our purposes these are the principle reliefs.

The problem

Case law establishes that a building must be capable of beneficial occupation in order to be liable to NNDR. It is this principle that many property-owners have turned to in order to relieve themselves of the burden of NNDR, with the result that our industrial cities and towns are blighted by semi-derelict buildings which have been vandalised by their owners to ensure that they are not capable of beneficial occupation following expiry of NNDR relief. Thus, the restriction of empty-rates relief, rather than ensuring an early return of a building to positive economic activity, has resulted in the permanent removal from the economy of many thousands of square meters of commercial and industrial floor space. This was, of course, a completely unpredictable result…

The relief

However, all is not lost for those who wish to keep their property wind and water-tight because the legislation states that if the property-owner can find an occupier for the building within the three or six-month period then that occupier becomes liable for NNDR. But, to benefit the owner, the occupation must last for at least six weeks. If premises are occupied for less than six weeks, the period doesn’t count as an interruption to the emptiness of the building and the owner becomes rateable as a non-occupier at the end of the period of occupation. If the occupation lasts six weeks or more, when it ends the owner will have a further three to six month period of non-rateability in which to find another occupier. So, an owner may seek to avoid rates liability by arranging a series of “six weeks plus” occupations by a tenant, provided not more than three months elapse from the end of one such occupation to the start of the next.

The case

Principled Offsite Logistics Ltd v Trafford Council reached the High Court in May 2018 and the judgment was handed down by Mr Justice Kerr in July. His judgment starts on an unpromising note for the reader seeking excitement in rating law. He said: “to the uninitiated, this might seem like a dry enough question”. Indeed. But the teasing reference to the “uninitiated” gives a hint of the thrills to come to those in the know, as he continues “but in certain circles it arouses high passions…”. Those so aroused appear to have been mainly in the rating department of Trafford Council - so perhaps no surprises there. For the rest of us thrill-seekers the case is nevertheless of interest as it considers rates avoidance schemes and also the court’s approach to the ethics of such schemes.

Facts

To say that the scheme in Principled Offsite Logistics Ltd (POLL) was blatant is an understatement. Noting that the 2008 Regulations have spawned a new growth industry, the judge described POLLs and similar businesses as “professional occupiers”. Indeed, POLL’s main business was occupying premises for reward on behalf of landlord commercial property owners and for the avowed purpose of minimising the landlord’s liability to pay NNDR. POLL entered into an agreement with the property-owner on terms that a tenancy was granted to it at a peppercorn rent for a six month term. POLL agreed to pay all business rates assessed on the property throughout the term and the landlord covered utility bills. This was, the Court found, a true tenancy and not a sham. The commercial agreement terms were quite explicit as to the intention and provided for POLL to take a tenancy “of your empty commercial property” stating that the “cost of our service is 20% of the rates saving achieved”; payable “30 days after exit”; however, the fee was refundable “if a local authority successfully disputes our occupation”.

The tenancy was granted, the property-owner subsequently claimed a further empty-rates relief period and the passionate Trafford Council disputed the whole arrangement and claimed that NNDR were payable. Trafford’s principal argument was that there was no beneficial occupation by POLL. Any goods stored must somehow benefit the person storing them and the mere placing of items in the building showed no such benefit. In essence, occupation was only beneficial if goods deposited resulted in a benefit to the depositor. There was also a suggestion that there was an ethical and moral dimension to such occupation in a rates-avoidance scheme.

The decision

The judge disagreed. The transactions were genuine and produced the legal results for which, by the wording of the documents, they provided. The lease created a genuine relationship of landlord and tenant and the terms of service provided for a genuinely payable fee of 20% of the rates saved. Furthermore, the judge felt reminded to guard against a “moral dimension in the search for the nature of occupation that is “beneficial””. The Court must resist any temptation to find that the occupation has to be of “the right kind” to qualify as beneficial. But the occupation still has to be beneficial, in law and in fact, applying a morally neutral analysis.

Practice points

In the present case, the business of POLL was the business of occupation. The purpose of the occupation was not to store goods but “to plant the occupier’s flag”; to populate the premises to whatever extent was required to occupy it in law and fact. It was sufficient for there to be an intention to occupy for reward, without any further commercial or other purpose. The reason why that was done – the motive – was rates avoidance for the landlord, but in the judge’s words “the morality of that is neither here nor there”.


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