Court of Appeal decides on important empty property issue concerning charitable use, Business Rates Retention Arrangements and a £1.5m liability order

Ref. Kenya Aid Programme v Sheffield City Council [2013]

The Court of Appeal has recently passed judgement on a case that should provide a strong precedent in an issue facing councils and landlords up and down the country.

Increasingly, charities and landlords are striking agreements on empty properties that allow the charities to use the premises. This assists the landlord in two ways: allowing them to avoid a potentially long and costly search for a tenant in recession hit Britain and giving them the benefit of the substantial business rates reductions charities benefit from – paying just 20% of typical rates or less.

The trend for this sort of scheme has not been welcomed by many councils and South Cambridgeshire, Milton Keynes and Cheshire West & Chester are all already embroiled in litigation due to be finalised in mid May.

The results of those cases may be substantially affected by the points made in this case.

In it, the Court of Appeal was asked to consider an arrangement involving the Kenya Aid Programme (KAP). The case, just like those being considered with regard to the Councils listed above, turned on the true definition of the phrase ‘wholly or mainly’ contained in the requirements of Section 43(6) of the Local Government Finance Act 1998. The two key requirements are that the property must have been wholly or mainly used during the relevant period, and that use must have been wholly or mainly for charitable purposes.

The charity required a defence of their position to avoid paying the full business rates because it was argued that they were not using the premises wholly or mainly for charitable purposes.

The charity’s interpretation was that they need only physically occupy the premises for the purposes of charitable activity; the amount of actual charitable work occurring thereafter was irrelevant. The premises themselves were two large industrial units in Sheffield.

Evidence in the case gave usage of the first property at 30-35% and the second unit at 25-30%. It was acknowledged that KAP received a payment relating to 20% of the NDR liability together with a further donation of £17,000 from the landlord. The lease itself was for a peppercorn rent capable of termination on seven days’ notice.

KAP sought mandatory charitable relief of 80% on the basis that it was a charity, in rateable occupation and that the use to which the premises were being put was for charitable purposes only. They argued that this was really all that was required to fall within the relief provision.

This interpretation was found by Treacy LJ to be wrong – although it was too far to consider the efficiency of the use, it was necessary to take into account, and put weight upon, the true usage of the premises. This was the true intention behind the Local Government Finance Act 1998 and it was a position established in the earlier case of English Speaking Union v City of Edinburgh Council (2009) and reinforced by the District Judge.

The judgement in the English Speaking Union case gave a common sense and plain English interpretation of “wholly or mainly” relating to the actual physical use of the premises by the charity. It is now fairly certain that this is the correct approach and that which will most likely be applied to the cases of the three councils awaiting proceedings in May.

In the context of the ‘business rates retention arrangements’ that will come into force on 1 April this year, we could see a more aggressive stance taken by councils on this issue, as they seek to bolster their own budgets by increasing the business rates revenues they take.

The changes will ensure that councils which manage to increase the business rates revenues in their patches, by fostering growth for example, will directly keep a portion of that increase.

Landlords and charities should therefore be wary of Kenya Aid Programme v Sheffield City Council [2013] as the precedent it sets could make establishing a mutually beneficial relationship over empty properties a much more complicated and risky process.

The matter has not yet finished, however, as Treacy LJ referred the case back to the District Judge for review with the benefit of his thoughts. A final judgement is yet to be passed, therefore, and interested parties should track the case to its fruition.

Treacy LJ’s full judgement is at this link.

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