Empty Commercial Properties: Welcome News for Landlords
Businesses are operating in economically uncertain times in light of Brexit, which will now take place on 31 January. That date marks the start of the transition into new and unchartered economic territory for many, at a time when commercial landlords are trying to attract new tenants and reduce costs.
The use of companies to avoid tax or business rates can hardly be described as rare or novel. They are also frequently inserted in tax avoidance schemes for no reason other than to mitigate or avoid taxation. Furthermore, it has long been recognised that ratepayers or potential ratepayers can and do organise their affairs so as to avoid liability to pay rates. This is the opinion of the High Court expressed in an important ruling upholding the legality of the use of special purposes vehicles (SPVs) to avoid paying business rates.
This is welcome news for commercial landlords who are finding it a challenge to place new tenants in unoccupied properties.
The law requires business rates to be paid by the tenant or other individual/entity entitled to possession of it, but the landlord becomes liable instead if the property is unoccupied. However, limited companies which are in liquidation are not liable for business rates as the landlord is not entitled to possession.
Special purpose vehicles (SPVs) have increasingly been used to enable landlords with vacant commercial properties to avoid business rates. An SPV is an asset-free limited company which is then granted a lease at a low rent or a rent that is waived. The SPV is then put into voluntary liquidate for the term of the lease – making it exempt from business rates. The landlord is not entitled to possession of the property so no rates demand can be made of the landlord.
PAG Asset Preservation1
The secretary of state (SOS) recently failed to persuade the courts that companies who engaged in business rates mitigation schemes, such as SPVs, were subverting the purpose of insolvency legislation.
The SOS brought action against two companies – one started operating the rates mitigation scheme and the other carried it on. The SOS described them as rates avoidance schemes – arguing that their business model subverts the purpose of liquidations and demonstrates a lack of commercial probity, such that it was just and equitable to wind them up.
In a significant blow to the government, the High Court said such schemes were not unlawful.
Motive proved an important factor for the court: “It should not matter if the motive of those involved in so doing is to enable the company in MVL to act as an asset shelter or for the purposes of furthering some artificial transaction designed to avoid tax, since this does not involve the misuse of companies legislation or the insolvency legislation so long as the MVL does nonetheless objectively and without sham transactions involve the collection and realisation (where necessary) and distribution of its assets.”
In fact, the court found “no proper objection… to the members of a company putting the company into an SPV for the purpose of avoiding business rates after creating and placing an artificial asset … into the tax ‘shelter’ created by the company being in MVL - so long as putting the company into MVL and maintaining the company in MVL is, considered objectively in law and in fact, for the purpose of the collection, realisation and distribution of the assets of the company. It was not against the public interest.”
Furthermore, the SPVs were not used “as engines of fraud or to take an unconscionable advantage”.
What does this mean?
Unless a different decision is reached by the courts, commercial landlords have an important tool at their disposal to ease the financial impact of being unable to rent out properties.
1Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Ltd [2019] EWHC 2890
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