In a Judicial Review by Bridgeport Estates Limited, Petitioner, the Court of Session considered a ratepayer’s attempt to challenge a Local Authority’s decision to apply the Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023.
What are the Regulations?
The Regulations were made by the Scottish Ministers using powers in the Non-Domestic Rates (Scotland) Act 2020. This Act allowed the Ministers to make such provision as they considered appropriate to prevent or minimise advantages arising from arrangements entered into with a view to avoiding non-domestic rates liabilities. When applied, the property owner is held liable for the non-domestic rates.
The Regulations contain the scheme by which a Local Authority is required to determine the circumstances in which it must treat the owner of land as liable for non-domestic rates and sets out a process by which this determination must be notified to the ratepayer.
When is an arrangement a non-domestic rates avoidance arrangement?
A local authority must be satisfied that there is an artificial avoidance arrangement and the main purpose, or one of its main purposes, is to gain an advantage.
An ‘advantage’ is anything that reduces the amount of rates payable, delays payment of the rates or results in repayment of rates.
Arrangements are ‘artificial’ where, broadly, either the entering into of the arrangement is not a reasonable course of action in relation to the non-domestic rates provision or the arrangement lacks economic or commercial substance.
Bridgeport Estate Limited – The facts
Bridgeport Estates is the owner of premises in Inverness. For over 24 years the premises had been let to Costa. When Costa’s lease came to an end on 1 August 2024, attempts were made to secure a new tenant. The premises were advertised as being available for let and offers were invited for a rent in excess of £32,500 per annum.
On 1 August 2024, Bridgeport also entered into a lease with Room for Faith Ltd, who in turn sub-let the premises to Local Faith Ltd. The rent in each case was £1. Bridgeport continued to pay for the utilities. Local Faith Ltd wrote to the Local Authority stating that the premises would be used as a place of religious worship (triggering rates relief).
Two months later, the Local Authority issued a notice under the Regulations, advising that it intended to treat Bridgeport as liable for the non-domestic rates. Bridgeport challenged the local authority on the ground that it had provided no evidence that the rent due under the leases was not the best rent that could be obtained on the open market.
The Local Authority held firm and determined that Bridgeport, as owner, was to be treated as liable to pay non-domestic rates in respect of the premises, on the basis that the leases were an artificial non-domestic rates avoidance arrangement within the meaning of the 2020 Act. The Local Authority then issued a formal demand for payment of rates.
Bridgeport raised a judicial review in the Court of Session, asking the court to set aside the Local Authority's determination that it was liable for non-domestic rates.
What were the arguments?
Bridgeport asked the Court to quash the Local Authority’s decision. It argued that the decision was unlawful and irrational because the decision was not supported by any evidence and the respondent’s reasoning was internally inconsistent and perverse.
The Local Authority advanced two lines of defence. First, it argued that the petition was incompetent because the petitioner could have appealed the formal demand for payment under section 238 of the Local Government (Scotland) Act 1947 but had failed to do so. The general rule is that judicial review was not available where there was an alternative remedy which had not been resorted to or exhausted. Second, the Local Authority argued that it was entitled to reach the decision that it did on the evidence and that there was nothing inconsistent with its reasoning.
What did the Court decide?
Both arguments advanced by the Local Authority were successful.
The judge, Lord Braid, decided that the general rule applied. The ratepayer could have appealed under s. 238. As it had failed to do so, it could not now bring a challenge by way of judicial review.
On the merits, Lord Braid decided that the Local Authority had not acted irrationally in finding that the rent charged was significantly below the level of rent which could reasonably have been obtained for the premises son the open market at the time the arrangement was entered into.
Despite valiant attempts by Bridgeport to argue that the fact the premises had been advertised for offers of rent in excess of £32,500 per annum was neither here nor there, Lord Braid did not agree.
Lord Braid’s opinion was that the level at which commercial subjects are advertised for rent is an adminicle of evidence as to what level of rent might reasonably be achieved on the open market, on the basis that no owner, acting on professional advice, would be likely to seek a rent which was commercially unrealistic. Further, the actual rent charged was only £1 which was on any view a nominal amount. In those circumstances it would take little in the way of additional evidence to entitle a decision-maker to conclude that a nominal rent was significantly less than the rent which could have been achieved.
Nor did Lord Braid consider it inconsistent to say that a purpose of the arrangement was to secure the religious relief exemption. If the premises were not in fact being used for religious purposes, then it was also open to the Local Authority to find, applying the statutory test, that the arrangement was an artificial one.
What are the lessons from Bridgeport Estates?
The case is a reminder of the powers held by local authorities to challenge arrangements that they consider to be artificial.
Local authorities are increasingly looking to rely on these powers. If you find yourself in receipt of a notification that a Local Authority intends to rely on the anti-avoidance regulations, you must carefully consider your options (and remedies), and the applicable timescales for any challenge.
Bridgeport is a clear indication that the Court’s will be slow to find that leases granted at nominal rents represent open market rent. That will potentially make it difficult for property owners to avoid the Regulations being applied.
This is especially so if property owners have sought a significant market rent before entering into an arrangement at nominal rent.
It is also clear from Bridgeport that local authorities (and the Court) will look carefully at the actual use to which premises are being put.
If you have any questions about Non-Domestic Rates Anti Avoidance Measures, please contact our real estate litigation lawyers, or your usual Brodies contact.
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