Owners and occupiers of commercial premises are currently faced with unprecedented challenges during the COVID-19 pandemic, forcing many to seek innovative solutions. One of those is expected to be an increase in the use of property guardians.
Earlier this month, the Government published updated guidance aimed at helping current and potential property guardians to understand their legal rights. However, this guidance is also relevant to owners (which for the purposes of this article includes tenants and other property occupiers) who are considering how to secure potentially vacant premises and mitigate local tax liabilities over the coming months.
How Guardianship Schemes Work
A property guardianship scheme generally involves licencing a vacant commercial or residential property to a specialist agency, who will place guardians at a property by granting them sub-licences on behalf of the owner.
Consequently, the owner and guardian do not usually have a direct contractual relationship. Instead, the property is managed by the agency, which receives a below market rent from the guardian. In exchange, the guardian will endeavour to safeguard the property from damage, vandalism and squatting.
The Tenancy and Licence Conundrum
Owners should ensure that any licence granted by the agency is not a lease in substance, in order to prevent the guardian from acquiring security of tenure associated with a tenancy. Such enhanced rights of occupancy would delay or make it more difficult and costly to secure possession when required.
Any licence should therefore avoid granting exclusive possession to a guardian for a defined period in exchange for rent (or an otherwise defined payment). This can be achieved by ensuring that there is more than one guardian resident at a property and that there are shared occupied areas.
To avoid any doubt, an owner should also consider following the procedure set out in the Landlord and Tenant Act 1954 in order to exclude the application of the security of tenure provisions to the guardianship arrangement.
Even under a licence, a guardian must be given at least four weeks’ notice of termination under the Protection from Eviction Act 1977.
When guardians occupy a property, the local council will assess its rateable value based on how the property is used. Therefore, if the primary use of the property becomes a residential dwelling and each guardian has a separate and identifiable hereditament for rateable purposes, council tax will be payable instead of business rates.
Generally, the guardian will also be obliged to contribute towards outgoings, so this can be an effective way to mitigate business rates liabilities.
When considering the use of a guardianship scheme, it is also important to take account of the following additional considerations:
- Is the condition/layout of the property suitable for residential purposes? Owners will owe guardians a duty under the occupiers’ liability legislation to take reasonable steps to ensure their safety.
- If the owner is a tenant of the property, would occupation by guardians breach the permitted use and/or alienation provisions? If so, the landlord’s approval would be required in order to avoid a potential breach. The provisions of the tenancy should therefore be carefully checked.
- Would a temporary or permanent planning permission be required in order to permit the new use? Specialist planning advice or appropriate dialogue with the local planning authority may be required in order to establish the position.
- Would any additional consents be required? Occupation by multiple guardians would potentially mean that the local council designates the property as a house in multiple occupation (HMO), which would require a separate licence.
- Are other reliefs available that could mean that guardianship schemes are not the best solution for the owner? For commercial owners looking to minimise their tax liabilities, and in particular with owners in the retail, leisure or hospitality industries, it may be more effective to achieve the requisite level of occupation so that they can benefit from the Expanded Retail Discount (100% business rates relief) during the 2020/21 tax year.
If you would like more information about this article, please contact our real estate solicitors by calling 01202 786318 or emailing firstname.lastname@example.org.