Empty rates mitigation scheme was legal and effective

Changes to the empty rate regime in 2008 prompted the development of some ingenious, and some less ingenious, strategies for rates mitigation. These strategies in turn have prompted a series of legal challenges, with local authorities and ratepayers testing the effectiveness of different mitigation strategies through the courts. The recent High Court judgment in The Queen (on the application of the Secretary of State for Health and Social Care on behalf of Public Health England) v Harlow District Council [2021] EWHC 909 (Admin) is interesting, not so much because it sets out any significant new propositions of law, but because it seeks to bring together propositions from a number of previous cases, and to set out a protocol for the future resolution of disputes about occupation of premises.

The case concerned the former Glaxo Smith Kline building in Harlow which had been acquired by Public Health England (PHE) as its new national headquarters. The property was vacant whilst PHE finalised plans for its new use. PHE sought to mitigate its empty rate liability during this period by adopting a strategy of “intermittent occupation”. This is a well-established strategy for mitigating empty rate liabilities and involves taking temporary occupation, often in a fairly minimal manner, of a vacant property, for a sufficient period (in this case six weeks) to trigger a new rates-free “void” period. PHE moved some chattels, about 30 crates of documents, into the property to occupy it for a six-week period from 1 May 2018 to 27 June 2018. At the end of this period the crates were moved out of the property and PHE’s agents sought a new three-month rates-free period. However, Harlow District Council (HDC) issued empty rate demands for the entire 2018/19 rate year and these were paid by PHE.

In 2019 PHE repeated its occupation of the property by moving in some further crates, about 27 on this occasion, and sought to recover from HDC part of the rates paid for the 2018/19 rate year. HDC refused to repay any of the rates, on the basis that PHE had not been occupying the property during the period from 1 May to 27 June 2018, nor during a subsequent six-week period starting in September 2018. It was this refusal to repay empty rates paid that was challenged by PHE in the High Court.

PHE contended that it had been in occupation of the property during the relevant periods because the tests of rateable occupation were satisfied. There had been actual occupation of the property, which did not need to be substantial, and could be slight or even minimal. The occupation of the property had been exclusively by PHE and this was not disputed by HDC. The occupation was of some value or benefit to PHE, in the sense that it served the purpose of the occupier. There was an intention to occupy the property, in the sense that the goods stored there were not items that had been abandoned. Finally, the occupation was not “transient” in the sense that the building was a permanent structure and the use of the property was for a period of six weeks. PHE contended that HDC had failed to apply correctly the tests of rateable occupation and, as a result, had incorrectly concluded that the property had not been occupied during the two six-week periods in 2018.

HDC submitted that PHE’s motivation was to mitigate empty rate liabilities, rather than an intention to occupy the property, and that PHE had only an intention “to give the semblance of occupation”. HDC also contended that the occupation by PHE was no more than de minimis, and was of no real value to the occupier, because the intention was to mitigate rate liability, and this was a benefit that only accrued to PHE when its use of the property ceased and it became entitled to a new rates free period. PHE had not established an intention to occupy, as distinct from an intention to give the semblance of occupation. Nor had it established that its intention to occupy was coupled with an actual use that was more than trifling. HDC had therefore been entitled to conclude that there had been no occupation of the property during the relevant six-week periods.

As an alternative, HDC sought to argue that, if PHE had been in occupation during the first six-week period, it had remained in occupation at all relevant subsequent dates. This alternative argument relied upon the presence at the property of cleaning materials and equipment, furniture, and tea and coffee making facilities. In response to this alternative argument, PHE contended that any use of the property outside the six-week periods was confined to discussions about the future development of the site, and the materials left at the property (such as cleaning materials) related only to caretaking and maintenance.

The court did not accept HDC’s contention that this was a case where there was intention to create only a semblance of occupation. The materials stored at the property belonged to PHE and it was entitled to store them somewhere. The court also did not accept the proposition that benefit accrues to a possessor, motivated by the prospect of securing rates exemption, only when the occupation ceases. Each day on which the property was occupied was capable of conferring benefit to the occupier. Actual use of the property, even if it was minimal, combined with an intention to occupy was sufficient to constitute rateable occupation, whether the motive for that occupation was rates mitigation or any other motive. The use does not need to be substantial, nor legally required. It must serve the purpose of the occupier, but that purpose can be obtaining a future rates exemption. This is subject to the caveats that, firstly, the purpose of the occupation must go beyond the upkeep and development of the property itself and, secondly, that occupation is not established by leaving abandoned goods at a property.

HDC’s alternative argument was rejected by the court because the use outside the six-week periods related only to the future development of the site and this did not constitute rateable occupation.

The court found that HDC had failed to apply the law correctly in reaching its decision regarding occupation, and PHE had been in rateable occupation during the two six-week periods.

The High Court produced to important annexes to its judgement. The first of these sets out 12 propositions of law relating to when properties are to be considered occupied for rating purposes; these propositions being derived from the decision in this case and from decisions in previous cases. This annex will be of considerable assistance to those seeking to mitigate empty rate liability by intermittent occupation, and should also be of assistance to any local authorities seeking to challenge this mitigation strategy.

The second annex sets out a protocol for resolution of disputes about occupation of premises. This comprises a series of steps, beginning with an inspection of the property by the billing authority and the preparation of an agreed list of contents. The billing authority should then notify the ratepayer as to its decision regarding occupation, and issue a rates demand if appropriate. A ratepayer disputing the decision should supply reasons in writing to the billing authority, and should refuse to pay any disputed element of rates, which would then be referred to the magistrates’ court for determination.

Other recent court decisions may have brought into question the effectiveness of “managed insolvency” and “property guardians” rates mitigation schemes, but the High Court’s decision in this case makes clear that a properly managed process of intermittent occupation can be effective in mitigating rates liability, with the High Court concluding that “the possessor of the property in question can, under the law, determine when it is in rateable occupation and when it is not, in order to benefit from the rates exemption”, noting also that “it is for the legislature to change the position if it decides to do so”.

The legislature in Wales has already undertaken a consultation on this issue and, in January 2021, proposed extending the period of occupation required to trigger a new rates free period from six weeks (as in England) to 6 months. This change was to have taken effect from 1 April 2021, but has been deferred to 1 April 2022 to allow Welsh Assembly Government “to monitor the impact of Covid-19 on local property markets”. It will be interesting to see if this does indeed go ahead.

The very high rate poundage, and the 100% level of empty rates liability, encourage ratepayers to seek to mitigate liabilities on properties that they are often unable to let. Empty rate exemptions offer opportunities for mitigation schemes. As one mitigation strategy is closed off by legislation or court decisions, another will be found. We have to hope that the Government’s “Fundamental Review of Business Rates”, now due to report in the autumn, will review whether it is appropriate to levy rates on empty properties at the same level as on occupied property.