Pictured above: Riaz Dudhia
Granting short term leases at a minimal rent, with the tenant
fronting up the cost of rates, could be an option for landlords hit
by the changes to empty property rates relief. Commercial
property solicitor at East Midlands' law firm Nelsons, Riaz Dudhia
explores the benefits of leasing short term and how to avoid
potential pitfalls of a 'short-term tenant' outstaying their
welcome.
From April 2011, the threshold for empty property business rates
relief, which applies for commercial properties that lie empty for
more than 3 or 6 months depending on the type of property, reverted
from £18,000 to £2,600.
This will clearly mean that fewer empty non-domestic properties
will be exempt from business rates, resulting in landlords or their
business tenants having to pay thousands of pounds extra in
business rates.
While the squeeze on relief poses an undesirable financial
burden in the current economic climate, landlords may be able to
reduce their rates bill by granting short term leases of their
property, at a minimal rent, to a tenant on the basis that the
tenant meets the cost of rates. The lease would include an
option for the landlord to bring the lease to an end should they
find a willing occupier prepared to take a lease at the open market
rent.
If a property is occupied for a period of six weeks or more,
then it can be empty again for the 3 or 6 months period before the
owner or occupier is once again liable for business rates. If this
process is repeated, the liability could potentially be deferred
indefinitely.
These short term leases are not without their problems of
course; simply documenting a tenant's occupancy as a licence will
not be enough to defeat a tenant's claim that he can stay on in the
property and argue statutory protection.
To avoid the tenant obtaining statutory protection, the letting
cannot be rent-free, must not exceed 6 months and the landlord must
not allow the parties to renew the tenancy or extend it beyond 12
months. If a 'short-term tenant' ends up being in occupation
of the property for over 6 months, which is not altogether uncommon
if all parties are happy with the arrangement, the landlord must
also ensure that the tenant moves out within 12 months of moving in
or grant the tenant a new tenancy. Hence the proper procedures for
excluding the tenant's statutory protection will have thereby been
carried out prior to granting the new tenancy.
If the landlord does not follow these guidelines, he may have a
very difficult time removing the tenant from the premises. This
will prejudice the landlord's ability to obtain a market rent for
the premises quickly if and when the market picks up and of course,
the relationship with any tenant seeking to claim these rights
could become strained.