A licence to ask taxing questions

From our founder, Katharine Hibbert

Business rates on empty commercial property are high on the agenda for property guardian companies at the moment, for two reasons.  

First, as the economy struggles over the winter, it’s likely that more commercial properties will become vacant as businesses close, meaning that the cost of rates will fall on landlords who are already missing out on rental income. 

Second, an appeal hearing in the Court of Appeal later this month will test the circumstances under which property guardian schemes can legitimately be used by property owners to mitigate those empty buildings rates.  

This long-running case, between London Borough of Southwark and the owners of Ludgate House, a large office building on the South Bank of the Thames, has shone a light on the way the law on property guardianship works. We hope that in the long run it will drive better practice in the sector.  

This blog sets out our view on the issues at stake.  We’ll explain what happened and then we’ll set out two key insights from this case that we think all property owners should take on board when considering guardianship schemes.

What happened

The rules on business rates are set by the Valuation Office Agency (VOA), and their guidance is that in most cases buildings lived in by property guardians should be considered for council tax not business rates.  Council tax is usually the lower of the two taxes, creating an incentive for building owners to get their empty properties into use to house property guardians. 

However, in the case involving Ludgate House, the Valuation Tribunal for England initially found that the building should be liable for business rates and not council tax, despite the fact that the owners had brought in a property guardianship company to place people in it.  Only four guardians were in residence even though the property has 11 storeys and 175,000 square feet of floor space, so the tribunal decided that the building was not truly being used as living accommodation.

The building’s owners appealed this initial decision in the Upper Tribunal.  They argued that although each guardian’s bedroom was small relative to the whole building, the residents were allowed to use other space in the property for living purposes, and their purpose in being there was to live in it as their home.  While they did increase the building’s security and mitigate business rates, that wasn’t their main motivation as occupiers.  The Upper Tribunal agreed, and accepted that the building should be liable for council tax not business rates.  A write-up of the appeal by the lawyers acting for the owners of Ludgate House is available here. 

Now, London Borough of Southwark’s lawyers are appealing once again, and hoping to reverse that Upper Tribunal decision in the Court of Appeal.  A central part of their argument this time is that if the building was being used for residential purposes, it should have been licensed as a House in Multiple Occupation (HMO) and no licence was obtained.  They are therefore arguing that the use of guardians was not only an illegitimate attempt to mitigate business rates, but actually a criminal offence.  The case will be considered later this month.  A summary of LB Southwark’s lawyers’ view is available here.

Dot Dot Dot’s view

The legitimacy of using property guardian schemes to mitigate business rates

At Dot Dot Dot, we’re in favour of paying tax when it’s due.  We’re also very much in favour of buildings being brought into use whenever possible – and we welcome decisions by the VOA which encourage property owners to bring in charities and residents who can bring buildings to life and turn them into a positive presence for the local area, rather than a deserted shell.  

So it’s positive that Council Tax not Business Rates are charged where buildings are lived in by guardians, and this is how we pay tax on the relevant buildings that we manage.  The appeal currently being considered by the courts is very unlikely to change the current situation where places people live in are taxed as such, although it helps to clarify exceptions to the rule.

Property guardian companies must obey the law

This case illustrates the fact that some of our competitors ignore the laws that apply to property guardianship by failing to get HMO licences.  It has always been clear that when buildings lived in by guardians meet the local criteria for HMO licensing, the property guardian company must obtain a licence.  

At Dot Dot Dot, we always get licences for buildings we manage which are eligible under these rules, and we turn down work where we do not believe we will be able to obtain a licence.  

This is not a matter of box-ticking, it’s about guardian safety. The licensing criteria and the local authority staff who issue the licences are there to ensure that buildings are suitable to be lived in by the number of people in residence, with enough fire protection and adequate bathrooms and kitchens.  We’ve always found our conversations with council officers around licensing to be positive and safety-focused, and we welcome the rules.  

We also try to communicate the rules to would-be guardians and property owners considering guardian schemes – as in this recent blog.  So contrary to the comments made by LB Southwark’s lawyers, the success or otherwise of their argument in this appeal will make no difference to Dot Dot Dot’s approach.

However, this appeal reinforces the message that all property guardian companies must get HMO licences where relevant, which has to be positive – it keeps guardians safer, as well as creating a level playing field where conscientious property guardian companies cannot be undercut by those who break the rules.

To talk to us about how Dot Dot Dot’s brilliant property guardians could be part of your regeneration strategies, please do get in touch at partnerships@dotdotdotproperty.com.

You can also find out more about our commitment to raising standards in our industry here.