Outer House decision challenges artificial lease arrangements in non-domestic rates relief case

The Outer House of the Court of Session refused the judicial review of a decision by Highland Council  to deny non-domestic rates relief to a property leased to a religious organisation for a nominal rent of £1.

Lord Braid ruled that the lease was a contrived set up specifically designed, in contravention of the Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023 (the 2023 Regulations), to avoid the payment of non-domestic rates. 

Background

The petitioner, Bridgeport Estates Limited, had previously leased the premises at 14 Inglis Street, Inverness to Costa Ltd under a 24-year lease. However, when this lease ended, Bridgeport advertised the premises for a new lease for offers in excess of £32,500 per annum. Bridgeport then entered into a lease of the premises with Room for Faith Ltd with an annual rent of £1 – who in turn sub-let to Local Faith Ltd. Local Faith contacted Highland Council stating that the premises would be used for religious worship and subsequently sought to benefit from a non-domestic rates exemption.

On the basis of the 2023 Regulations, the Council argued that the religious relief claim should be rejected and that the leases were an artificial arrangement designed to avoid payment of rates. The Council then issued a demand notice requiring payment of non-domestic rates for the relevant period. Bridgeport did not lodge an appeal against the rates notice but instead petitioned the court for judicial review against the Council’s decision.

Judgement 

Lord Braid held that the judicial review petition was incompetent on the basis that an alternative remedy, a right to appeal against Bridgeport’s liability for non-domestic rates under section 238 of the Local Government (Scotland) Act 1947, was available to Bridgeport.  

On the merits, Lord Braid, noting that the property had been advertised for a rent of over £32,500, found that the level of rent under the lease (a nominal rent of £1 per annum) was significantly below the level of rent which could reasonably be obtained at the open market. On that basis, he ruled that he would not have found the decision by the Council, to treat Bridgeport as liable for non-domestic rates, as “unlawful or irrational”.

Implications 

The key implication of the ruling is that any artificial lease arrangement will be scrutinised by a local authority in the context of rates relief and that the courts are willing to uphold such decisions. 

Local authorities are willing to invoke the 2023 Regulations where the lease arrangements lack economic substance or where the rent is “significantly below the level of rent which could reasonably have been obtained on the open market at the time the tenancy was entered into”. Furthermore, the ruling re-affirms that, other than in exceptional circumstances, where an alternative and effective statutory remedy exists this must first be exhausted before judicial review can be utilised. 

If you would like to discuss anything discussed in this article, please get in touch with Sam Wyman or Alan McMillan, or your usual Burness Paull contact. 

Related News, Insights & Events