Irritating - But what about the business rates?
Date:
19 November 2013
Changed days indeed!
A quick look round any high street today will tell a completely different story. Empty shops and "to let" signs abound. It has not just been fly-by-night operators or tenants who could perhaps have been expected to be "here today and gone tomorrow" that have brought this situation to bear.
Highly regarded retailers and long established family businesses have fallen like ninepins in the wake of the worldwide financial crisis. Household names such as Jessops, Comet, GAME and more recently Barratts Shoes and Blockbuster have all but disappeared from the high street and retail parks of this country. Even some legal firms have become casualties. This would have been beyond contemplation 10 or 15 years ago.
But what about the rates liability?
Landlords, faced with a sudden termination of income from a tenant or the insolvency or suspected insolvency of a tenant, are faced with a bit of a dilemma. On the one hand they would wish to terminate the Lease, as having a tenant in place who is not paying rent or other charges is a disaster. However, on the other hand, apart from the loss of rental income there is now almost as big a threat for landlords if they do proceed to terminate a Lease and take back the premises - and that is non-domestic rates. Landlords now face paying 90% of non-domestic rates for empty Scottish retail or office properties (slightly less than the 100% due for similar unoccupied properties in England).
Better to leave the lease in place?
Therefore, unless there is a tenant ready to take on a new Lease of the premises, most landlords will be advised not to take proceedings to irritate or terminate the Lease but rather just to leave it in place - as the insolvent tenant, not the landlord, will be liable for the non-domestic rates.
Most Leases leave it in the gift of the Landlord to terminate a Lease where there has been an irritancy, whether it be non payment of rent or an insolvency situation arising - termination on such grounds is not automatic. If the landlord doesn't terminate the Lease he can advise the Rates Department, should they come knocking at his door, that there is still a Lease in place and exhibit that. The non recovery of non-domestic rates in situations like this will no doubt continue to be a problem for Local Authorities. It's quite possible that they might, in the future, increase their rates in order to try to recoup some of those losses.
Individual tenants
In the case of an individual tenant who is made bankrupt, it could on the face of it be possible for the tenant to be discharged from bankruptcy and find themselves still on the hook under a Lease which has a number of years to run after discharge of their bankruptcy. There are however arguments under the bankruptcy legislation as to why the Landlord would not be able to recover further rent from the tenant in those circumstances, but at least the landlord should be absolved of a rates burden.
The advice for landlords is therefore not to rush into terminating a Lease too quickly despite loss of rental income and to have greater consideration for the potential rates liability.
