It is perfectly legitimate and lawful for landlords of empty commercial premises to enter into business rates mitigation schemes. However, as a High Court case showed, judges are adept at spotting sham arrangements which have rates avoidance as their sole purpose.
A landlord of a number of empty offices entered into an arrangement with a company that specialised in rates mitigation schemes. A series of leases were granted to off-the-shelf companies with the intention of shifting the landlord’s liability in respect of non-domestic rates onto their shoulders. Some of the leases had the unusual feature of restricting tenants’ use of the premises to snail farming.
The landlord accepted that the leases were not purely commercial and were artificial in the sense that they were intended to implement a rates mitigation scheme. It also accepted that, in some of the offices, unconvincing attempts had been made to give an appearance that snail farming was in progress. However, it asserted that none of that affected the validity of the genuine leases.
The local authority agreed that it is lawful to create leases for the purpose of shifting liability for business rates. However, it argued that the landlord’s method of achieving that was unlawful in that, contrary to appearances, the leases were sham documents which were never intended to confer exclusive possession of the premises on the tenants. The council’s arguments succeeded before a district judge, who ruled the landlord liable to pay more than £100,000 in non-domestic rates.
Dismissing the landlord’s appeal against that outcome, the High Court ruled that the district judge was entitled to conclude that the leases were shams. They had not been created with the intention of providing exclusive possession to the tenants for the conduct of their businesses. Their sole purpose was to seek to avoid the landlord’s liability to pay business rates in circumstances where the tenants themselves had no intention of paying such rates.