The importance of business rates provisions in leases of commercial property
The government’s recent decision to postpone revaluation of business rates until 2017 was met with widespread disappointment by the business community. The last revaluation was in 2010, but many businesses are still paying rates based on 2008 rent levels, leading to severe distortions between areas of business decline and areas of relative prosperity.
The distorted market for business rates makes it even more important to consider the relevant clauses in commercial leases, especially for small businesses, for which rates can be a severe burden. Liability for rates will usually depend on whether the property is occupied.
The standard position in commercial leases is that the tenant or occupier is responsible for paying rates to the local authority, unless the property is exempt (e.g. farm buildings). If rates are payable in respect of a property together with other property, the tenant should pay a fair proportion. The tenant should not make any proposal to alter the rateable value without the approval of the landlord, as this may have an effect on the rateable value of any nearby properties owned by the landlord. The tenant may consider amending such a clause so that the landlord cannot unreasonably withhold approval.
The person who has the right to occupy the property is generally liable for rates when a property is empty. If the tenant moves out but still holds the lease, the liability will continue to be the tenant’s. If the lease has come to an end, it will be the landlord’s. A landlord may wish to include a provision in a lease that a premium will be payable to cover rates if a tenant forfeits or surrenders a lease early.
Rates are payable in full after a commercial property has been unoccupied for three months or after industrial or warehouse property has been unoccupied for six months. Empty property relief is claimed in relation to the property, not in relation to individual owners, so changes of ownership do not trigger a fresh three/six month exemption. A lease will often contain a provision that if, after the end of the term, the landlord loses rating relief because it has been allowed to the tenant, the tenant will pay the landlord an amount equal to the relief lost.
Rates clauses in commercial leases are closely interlinked with other key provisions, such as alterations, permitted user and dealings and insurance, which can all affect the level of rates payable.
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A version of this article has recently appeared in the East Anglian Daily Times
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