During my practice in commercial property transactions, clients including commercial property landlords, tenants, and business owners often raise questions around the topic of Business Rates. But what are Business Rates? How are they calculated? Who is responsible for paying these, landlord or tenant? Or someone else relevant? Today, let us discuss these questions with the hope of providing some insight to those individuals affected.
What are Business Rates and how are they calculated?
Business rates are a tax for businesses that occupy commercial properties. The amount you pay is based on the rateable value. The government uses a specific formula to calculate how much you owe each year.
Rateable value is like an estimate of how much rent a commercial property could earn if it were rented out, namely its open market rental value. This value is set by a government agency called the Valuation Office Agency (VOA). The formula of VOA’s calculation is open information so you can easily find on the gov.uk website. I enclose the link if you are interested in the formula details: Valuation Office Agency – GOV.UK.
One thing to note is that the rateable value is checked and updated from time to time. If you think your rateable value is too high, you can ask the VOA to review it.
There are also some ways to lower your business rates, like small business rate relief. If you are a business owner, it’s worth checking to see if you qualify for these discounts. Similarly, I attach the link on business rates relief for reference here: Business rates relief: Types of business rates relief – GOV.UK.
Who Pays Business Rates?
Usually, the occupier of the business premises is responsible for paying these rates. It could be the owner, the tenant, or even a sub-lessee, depending on who occupies the property. This should be clearly stated in the lease agreement, or any other sub-lease or contract of occupation you sign. As a tenant or sub-tenant, it is important to read your lease or agreement carefully and if in doubt, to seek advice from a professional on the relevant terms. These terms should explain whether you have to pay business rates and if there are any limits on how much they can go up.
Sometimes, especially in certain types of leases, the landlord pays the business rates but will charge you for them later through rent or service charges. Again, make sure you understand your lease terms clearly on those terms.
In some cases that we had dealt with, it turned out the sub-tenant was the actual liable party to pay the business rates as they were the true occupier of the business premises, whilst the tenant was not.
What are the other scenarios of the liability to pay?
Besides the sub-tenant scenario I have mentioned, it is also possible where multiple tenants share a property, the landlord might take responsibility for the business rates of common areas. These expenses are subsequently recovered through service charges. In other situations, landlord and tenant may negotiate business rate responsibilities by fixed rate terms or percentage terms, as part of the lease agreements.
As business rates are collected by the local council, if you happen to be the tenant, or occupier of the business property, and are responsible to pay for the business rates, it would be a good idea to keep in contact with the council to stay informed about what you owe and any changes that might happen. And if there is any issue or changes on the premises, please do communicate with the council officer as soon as possible to avoid delay in actions which may cause unnecessary costs or dispute.
Finally, I would like to remind you that when the business premises becomes vacant, the liability for business rates may change. If the tenants leave but retain the lease without formally surrendering it, they remain responsible to pay business rates. It may also be the case that the tenant vacates without continuation, or the lease ends, then the landlord becomes liable to pay.
The conclusion of who pays business rates, tenant or landlord, is essentially based on occupancy and lease terms. Every case is different depending on the specific lease terms. Understanding your lease and your responsibilities regarding business rates is important for both landlord and tenant. It can save you money and help avoid surprises later. If you are unsure, do get professional advice when finalising a lease or dealing with property issues. With our expertise in commercial properties, we are able to provide advice on these type of commercial lease terms to suit your business needs.
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