Landlords with shop premises know that there is pressure on the High Street; that empty shops on any high street have an adverse effect on rent levels, especially when there’s a lot of vacancies in any one location. What’s worse, when landlords have vacancies of their own, income takes a big hit.
When retail premises become vacate, the landlord has a 3-month grace period on Business Rates, but after that, these rates become payable in full by the owner. Not only that, the insurance for the building now falls on the landlord rather than an occupying tenant – at an inflated price because of the increased risk with a vacant premises – plus all the services’ standing charges become the landlord’s responsibility: gas, electric, telephones, water etc.
From functioning as a nice steady earner, cash-flow dries up; the landlord’s prize investment becomes something of a liability. What can the commercial landlord do to mitigate these losses?
What can a commercial property owner of empty retail properties do to mitigate their liability for rates and prevent the other expenses racking up?
One option, if the landlord is having problems securing a longer-term tenant, is short–term lets. Under the landlord and Tenant Act 1954 (Part 2), the legislation provides for short-term letting without encumbering the landlord with a protected tenant with full security of tenure.
These guidelines apply primarily to England. Other regions and jurisdictions are similar but there may be important differences and this is becoming more so in the UK with devolution. This is not a definitive interpretation of the law, every case is different and only a court can decide. You are advised to seek professional advice.
Another word of warning: when the landlord wants to get the premises occupied quickly, there is a temptation to allow occupation on an informal basis, not getting lawyers involved and not caring too much about the legalities of the occupation – this can be a big mistake.
It’s fine and dandy while the parties are in agreement as to what they are trying to achieve with the short-let. There’s a lot to be said in this situation for the landlord and tenant to agreeing on a joint strategy to mitigate costs for both parties: a lower rent for the tenant and reduced or no costs for the landlord. But all too often when the landlord decides he wants the property back, perhaps for a long-term tenant, the occupier decides she wants to stay!
It is always advisable to seek proper legal advice, making sure the relationship during any short-term occupation is properly documented, and this also includes when finalising the terms of a full lease; when fitting out is allowed pending the grant of a new lease, or when a tenant holds-over after the end of a fixed-term lease.
There are four main ways to legally let a retail premises:
A fixed term lease which gives the occupier a legal interest in the property, for a specified term, in return for the payment of rent; A periodic tenancy which is similar but often less formal in terms of documentation and allows a short notice of one rent period; A tenancy at will, rarely used these days but is personal to the parties in which either party may immediately bring the tenancy to an end, and finally; An occupational licence which allows non-exclusive occupation, with use of the premises in a specific way.
What is Rateable Occupation?
Changes of ownership during the three-month period do not trigger a fresh three-month exemption. The exemption applies to the property, not the person paying the rates.
Short-term occupation of the property (of six weeks or less) by, for example, a tenant or licensee during the three-month period will be ignored. The three-month period and the business rates exemption will continue to run during that period of short-term occupation. This rule prevents owners from gaining additional periods of rates exemptions by establishing a series of very short temporary lettings.
If the property is let or occupied for a period of more than six weeks, the rates exemption will end at the start of that period, but when the property becomes vacant again, a new exemption period can be claimed.
Legality v Morality
There has been some controversy over using short-term lettings by landlords to avoid paying empty business rates, and this comes down to the letter of the law and timing.
100% relief is allowed for a continuous period of three months only, and any changes of ownership of the premises during the three-month period, if the landlord sells for example, will not trigger a new three-month exemption. A new owner will not get that benefit.
Any Short-term occupation of the premises for six weeks or less will not trigger a new rates free period when that occupation comes to an end. The three-month exemption will run on during the occupation only.
However, if the property is let for a period of more than six weeks, the rates exemption will not run during the let period, but a new exemption period can be claimed when the property again becomes vacant.
The controversy has been settled. A High Court legal case* over what is rateable occupation and the legality and morality of the use of short-term lettings with the aim of minimising business rates has been concluded.
The judgement ruled that the purpose of occupying the premises was in fact to occupy to whatever extent was required by the law and fact, and that the motive was to avoid rates for the owner and morality was irrelevant.
Eversheds Sutherland, acting on behalf of Principled Offsite Logistics Ltd (Principled), successfully won the multi-million pound High Court Business Rates case following a lengthy litigation against Trafford Borough Council et al.
*The Principled Offsite Logistics case was welcomed by property owners nationwide when it considered the meaning of ‘occupation’ in the context of business rates and decided that the motivation for occupation is not relevant. Principled Offsite Logistics Limited v Trafford Council, Lancaster City Council and Basildon Borough Council  EWHC 1687