A High Court judge has ruled that local authorities are allowed to consider the extent of a charity’s charitable use of a private landlord’s empty building before deciding whether to grant mandatory rate relief.

The recent judgment could have implications for the growing practice of charities renting empty properties from landlords in return for donations.

In recent years it has become quite common for charities to lease empty properties from private landlords for a peppercorn rent and a donation from the landlord, even if the charity doesn’t fully use the property. 

The landlord no longer has to pay empty-property rates, and the charity can claim 80 per cent mandatory charitable relief on the rates it pays to the local authority.

In 2011, the Charity Commission announced it was examining around 700 such cases.

A number of local authorities, feeling that this is not the intended use of charitable rate relief, have begun challenging cases in the law courts. 

Kenya Aid Programme vs Sheffield City Council

One legal battle between the Kenya Aid Programme and Sheffield City Council is due to return to court in June, but the latest High Court decision in the case ruled in favour of the charity.

In this case, the Kenya Aid Programme (KAP) was storing office furniture in two large industrial units in Sheffield, paying a peppercorn rent.  It had also received a donation of £17,000 from the landlord along with a payment amounting to 20 per cent of the non-domestic rates liability. 

The landlord, in return, did not have to pay empty-property rates.

The KAP sought mandatory charitable rate relief of 80 per cent. But Sheffield City Council refused the relief because it considered the charity’s use of the two properties to store office furniture was not a sufficiently charitable use of the premises, as both buildings were not even half-full.

In October 2011 the Council issued liability orders against the charity totalling just over £1.5m, and last year the District Judge upheld the Council’s position.

In November, the charity went to the High Court to appeal the decision.  In January, Lord Justices Treacy and King ruled that the District Judge had wrongly taken certain factors into account, and sent the case back to him for reconsideration.  This hearing is expected to take place in June.

The KAP had argued that as it was a charity, this automatically meant the premises were being used wholly or mainly for charitable purposes, and so it should be entitled to the rate relief.

The Council argued that it was entitled to examine the extent of the use of the properties, and if it didn’t consider this use to be sufficiently charitable then it was allowed to refuse the relief.

High Court judgment

Lord Justice Treacy, in his judgment, said the District Judge was right to take account of and place weight upon the extent to which the premises were used.

However, he also found that the judge wrongly took into account the “inefficiency of the furniture storage use” and whether it was necessary for the charity to occupy both premises.

“That appears to me to have been an irrelevant consideration which should not have been taken into account,” Lord Justice Treacy said.

He also said he suspected that the Judge took account of the mutual financial advantages to the charity and the landlord as a consideration against KAP’s entitlement to mandatory charitable relief.

“It is the function of the court to interpret the legislation; the success or otherwise of what may be tax planning measures…is not of direct concern to the court,” he said.

He concluded: “Accordingly, although I conclude that the District Judge was entitled to take account of the extent to which the premises were used… I am also of the view that he took into account other factors which he should not have or which he did not analyse sufficiently.”

Lawyer: useful decision for local authorities

Richard Kerr, a director at law firm Greenhalgh Kerr, said that even though the charity had won its appeal, it was now up to the District Judge to apply the ruling to the facts of the case and decide whether the Council was right to refuse the relief.

The High Court’s judgment is still a useful one for local authorities, Kerr said. “The courts have been quick to point out that they are not there to make moral judgments on how parties arrange their tax affairs. The test for charitable relief has now been clarified to some degree and various schemes out there can now be dealt with accordingly.

“Councils can quietly hope that common sense will prevail.”