Leasing commercial property to a charity

30 Jul,2018Business Rates

Leasing commercial property to a charity

If you’re a commercial landlord with a hard-to-let property, then offering it to a charity at a low rent to free yourself from business rates liability might seem like a sensible move. After all, it’s a win/win situation, isn’t it?

You save the money due in business rates and you have someone occupying the space; the charity gets cheap premises and pays low or zero business rates thanks to charity rate reliefs (a mandatory 80% discount plus the possibility of a further 20% discount at the discretion of the local authority).

What can go wrong?

The reality isn’t quite so straightforward. The main difficulty is that the discounts only apply if the property is used ‘wholly or mainly’ for charitable purposes. And the term ‘wholly or mainly’ is open to interpretation – as several court cases have shown.

What is clear is that neither local authorities, the Charity Commission or the courts will be happy with any situation that looks like business rates avoidance. The Charity Commission has stated that they will take firm regulatory action where they have evidence that charities are systematically not using leased properties or are allowing the good name of the charity to be abused for the benefit of commercial companies.

What compliance looks like

To comply with the business rates rules on charity rate reliefs, each of the following must apply:

  • The tenancy agreement must be for the exclusive benefit of the charity, help further the charity’s purpose, and be in its best interests.
  • Any benefit to the landlord should be incidental to the benefit to the charity.
  • The property must be genuinely required by the charity and be fit for purpose.

These points are in addition to the ‘wholly and mainly’ test.

What happens if the local authority disputes the charitable rate relief

If the local authority disputes use of the premises and at any time refuses rates relief, then the charity could be liable to pay the full amount of rates backdated to the start of the tenancy agreement. No responsible landlord would want to see a charity tenant in this situation – or indeed to be linked to a situation the local authority has deemed rate avoidance.

How responsible landlords can help

Low cost property leasing helps charities keep costs down, and can work extremely well for both the charity and the landlord. But it’s important that everyone involved understands the issues and can go ahead confident that the arrangements comply with rating regulations.

While it is of course down to the charity itself to ensure they will be making proper use of the premises, not all charities – particularly smaller ones – will be aware of the rules and risks.

We’d therefore suggest that if you are considering leasing premises to a charity, you recommend that they look into rating issues fully and talk to the local authority before they make any decision.

To find out more see Commission warns charities on business rates relief

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