Insolvency and business rates liability

Business rates liability is complex and the question of who is liable if occupiers become insolvent is one that often arises during periods of economic uncertainty, such as the pandemic.

Business rates liability for insolvent companies

Business rates liability attaches to specific units of property known as “hereditaments”.

The person liable for business rates is usually the person in occupation of the hereditament. If the hereditament is not occupied, the “owner” will be liable. The “owner” is the person entitled to possession of the property. The tenant will ordinarily be entitled to possession and so generally they will be liable for business rates even if they are not in occupation. In multi-let properties, landlords sometimes agree to pay business rates themselves and will then recover from tenants through the service charge or other specific provisions in the leases.

Where a tenant has become insolvent, this will not necessarily release it from liability to pay business rates. That will depend on a number of factors, most importantly whether it occupies the premises.

Liability when the premises are occupied

If they continue to occupy, insolvent tenants will still be liable for business rates which will be treated as an expense of the company in administration or in liquidation (whether compulsory or voluntary liquidation).

Administration

Once a company in administration has stopped using the premises for the purpose of the administration, the administrators will normally write to the landlord to say they have vacated and will no longer pay any costs (including rent, utility costs and business rates) in relation to the premises. They may also contact the Local Authority to inform it that they have vacated and are no longer responsible for business rates (regardless of whether or not that is technically correct). Landlords would be well-advised to consider their options regarding business rates liability as soon as it is clear the tenant is in financial difficulty to be well-prepared for this scenario.

Liquidation

Where a company in liquidation stops using the premises for the purpose of the liquidation and vacates, the liquidator will often disclaim the lease. While the premises are being used for the purpose of the liquidation, the company remains liable for business rates which are payable as an expense of the liquidation. Following disclaimer, liability for business rates will revert to the landlord.

Receivership

For companies in receivership other than in exceptional circumstances liability for business rates will remain with the tenant.

Liability when the premises are empty

There are certain temporary exemptions from business rates liability for empty premises. For retail property, there is full relief from liability for a period of three months,[1] whereas for industrial and warehouse property it is six months.[2] This is commonly known as “empty rates relief” and applies regardless of the insolvency status of the tenant.

As stated above, where the premises are unoccupied, it is the “owner” who the local authority will look to for business rates. The “owner” is the party entitled to possession and need not necessarily be in actual occupation. Other, permanent, exemptions may be available for insolvent companies when the premises are empty and the insolvent tenant is not in actual occupation of the hereditament.

There are a number of situations in which an exemption from business rates liability will apply. These include:

• Companies in liquidation: an exemption applies to unoccupied hereditaments where the owner is a company which is subject to a winding up order under the Insolvency Act 1986 or which is being wound up voluntarily.[3]
• Companies in administration: an exemption applies to unoccupied hereditaments where the owner is a company which is in administration in accordance with the relevant provisions under the Insolvency Act 1986 or is subject to an administration order under the Enterprise Act 2003.[4]

For businesses which are in receivership, the company will be entitled to the “empty rates relief” noted above, but thereafter business rates liability will continue to accrue. The company, rather than the receiver, will be liable.

Comment

Business rates liability can be a significant expenditure for occupiers of commercial property. Landlords of insolvent tenants often want the leases to continue. Once the lease is brought to an end, the landlord will have the right to possession but will therefore also be liable for business rates. The exemptions which might be available to the insolvent tenant will not apply to the landlord.

Whether the insolvency-related exemptions are available will depend on the facts including whether the premises are occupied or unoccupied - which can be a more complex question than it seems. Following a recent Supreme Court judgment landlords might still be considered the “owner” of premises even if they have granted a lease to a company which is then wound up as part of a business rates mitigation schemes. The decision in Rossendale BC v Hurstwood Properties (2021) was considered in one of our previous Law-Nows.

Should you require further advice in these matters or business rates liability more generally, please contact one of CMS’ business rates experts.

[1] Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, reg. 4(a).

[2] Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, reg. 4(b).

[3] Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, reg. 4(k).

[4] Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, reg. 4(l).