Can a local authority in Scotland decide that a landlord, rather than a charity occupier, is liable for non-domestic rates?

Lots of commercial property in Scotland, which may otherwise lie empty, is occupied by charities on what might - depending upon your perspective - be perceived to be favourable terms. This includes small high-street stores, large office buildings and behemoth retail units previously occupied by department stores.

Such arrangements have long been considered to generate benefits for both the charity occupier and for the landlord. For the charity occupier, the obvious benefit is the use of a property to operate from on affordable terms. The landlord also benefits because its property is in use (this can be especially important if the empty unit forms part of a parade of shops, shopping centre or other multi occupancy development) and because, generally speaking, the landlord is able to offload the usual liabilities that come with being the 'occupier' of property, including liability for non-domestic rates.

The issue from the perspective of a local authority is that a charity occupier is entitled to at least 80% rates relief (and is often given 100% relief). We live in a time when pressure on local authority finances has never been higher.

On 1 April 2023, The Non-Domestic Rates (Miscellaneous Anti-Avoidance) (Scotland) Regulations 2023 (the "2023 Regulations") came into force. The 2023 Regulations gave local authorities in Scotland the power to determine that an arrangement between a landlord and a charity occupier (whether via a lease, a licence or otherwise) is 'artificial non-domestic rates avoidance'.

If a local authority determines that an arrangement is artificial non-domestic rates avoidance, then the landlord (rather than the charity occupier) is liable for rates going forward. If the landlord is a repeat offender (i.e. if the local authority has made an earlier determination of rates avoidance in relation to the same property), then the local authority can backdate a landlord's liability.

If a local authority wants to exercise its powers under the 2023 Regulations, then it must follow a prescribed procedure. First, it must serve a written notice on the landlord to confirm that it considers the arrangement to be rates avoidance, explain the reasons for its decision and specify the date from which it proposes to make the landlord liable. Secondly, it must allow the landlord 28 days to make representations. Thirdly, it must consider any representations from the landlord and issue a final notice confirming its decision. If the local authority decides to find a landlord liable for non-domestic rates, then (unless the landlord is a repeat offender) the earliest date from which liability can be imposed is 28 days after the date of the final decision.

There is no statutory right to appeal a local authority's final decision. A landlord can challenge only by means of an application for judicial review, made within three months of the final decision.

Under the 2023 Regulations, there are several different grounds upon which a local authority is empowered to declare an arrangement artificial non-domestic rates avoidance. An examination of all available grounds is beyond the scope of this article.

In practice, what we have seen - in relation to charity occupiers - is that local authorities are increasingly willing to determine that arrangements are rates avoidance because they are "not on a commercial basis" since "the rent charged is significantly below the level of the rent which could reasonably have been obtained on the open market at the time the tenancy or other arrangement was entered into".

The interesting issue which arises is that charity leases are often entered into because there is no commercial market for the premises. This can be because of macro factors (e.g. a near absolute decline in demand from commercial occupiers in a particular geographical area or industry / sector) or factors specific to a particular property (e.g. a property is subject to a significant redevelopment proposal which makes it impossible to let to a commercial occupier meantime). An argument might therefore be made that the annual rent payable under an arrangement, even if as little as £1, is the most that could reasonably have been obtained on the open market at the relevant time.

In our experience, where a peppercorn rent is paid, local authorities are shying away from offering any view on what the open market rent for premises is and, instead, simply declare the rent paid under the relevant arrangement to be "significantly below" the market. This approach will frustrate some landlords.

We are not yet aware of any determination under the 2023 Regulations having been the subject of an application for Judicial Review, but it is likely to be only a matter of time given: (1) the prevalence of charity leases; (2) the consequences for landlords found liable for rates; and (3) that, in some cases, there will be a cogent argument that the rent being paid by a charity occupier is the best (or perhaps the only) rent that could have been obtained on the market.

We anticipate lots of activity on this issue in the remainder of 2025 and beyond.

If you need advice on The Non-Domestic Rates (Miscellaneous Anti-Avoidance) (Scotland) Regulations 2023 then please get in touch with our Real Estate Litigation Team or your usual Brodies contact.