Who Pays Business Rates on a Commercial Property? Landlord or Tenant

Who Pays Business Rates – Landlord or Tenant? A Complete Guide

When renting or leasing a commercial property in the UK, one of the key questions that arise is who is responsible for paying business rates—the landlord or the tenant? Business rates are a tax on non-residential properties, and understanding who is liable for these payments is crucial for both parties.

This guide will explain what business rates are, who typically pays them, and how they are handled in different leasing agreements between landlords and tenants.

What Are Business Rates?

Business rates are a tax levied on most non-domestic properties in the UK, such as offices, shops, warehouses, and factories. The tax is collected by local authorities and is used to fund local services.

Business rates are based on the rateable value of the property, which is set by the Valuation Office Agency (VOA). The rateable value reflects the estimated rental value of the property on the open market. Local councils then apply a multiplier (a fixed rate per pound of rateable value) to calculate the total business rates due.

Who Pays Business Rates – Landlord or Tenant?

In most cases, tenants are responsible for paying business rates, not landlords. However, the exact responsibility depends on the terms of the lease agreement. Let’s explore different scenarios:

1. Tenants Pay Business Rates in Most Standard Leases

When a tenant occupies a commercial property under a lease agreement, the responsibility for paying business rates typically falls to the tenant. This is because the tenant is the one benefiting from the use of the property for business purposes. The lease agreement usually specifies that the tenant is liable for all occupational costs, including rent, utilities, and business rates.

• Why tenants pay: The tenant occupies and operates their business from the premises, and business rates are considered part of the running costs of using that space.

2. Landlords Pay Business Rates When the Property is Vacant

If a commercial property is vacant (i.e., not leased or occupied by a tenant), the landlord is responsible for paying business rates. However, landlords may qualify for empty property relief, which provides an exemption from business rates for a certain period.

• Empty property relief: When a property becomes vacant, landlords are usually entitled to three months’ relief from business rates. For industrial and warehouse properties, this relief can extend to six months. After this period, landlords are required to pay full business rates unless they qualify for additional relief based on the property type or usage.

3. Short-Term Tenancies and Licence Agreements

In some cases, such as short-term lets or licence agreements, the responsibility for business rates can vary. If the tenant occupies the property for a very short period, the landlord may include business rates in the overall rent or charge the tenant directly, depending on the agreement.

4. Service Charges and Inclusive Rent Agreements

Some commercial leases are structured with an inclusive rent, where the tenant pays a lump sum that includes rent, business rates, and other costs such as maintenance and insurance. In these cases, the landlord may be responsible for paying business rates, but the cost is effectively passed on to the tenant through the rent.

• Inclusive rent: In some lease agreements, the landlord charges an all-inclusive rent that covers both the rent and business rates. This arrangement is more common in managed offices or serviced properties, where landlords bundle all costs into a single payment.

What Happens if Business Rates Are Not Paid?

If the tenant fails to pay business rates, the local council can take enforcement action to recover the outstanding amount. This can include legal proceedings, issuing a liability order, and ultimately sending enforcement agents to recover the debt. In the worst-case scenario, non-payment of business rates could lead to business closure.

For landlords, if a property remains vacant beyond the relief period and business rates are unpaid, they too may face enforcement action from the local council.

Special Considerations for Business Rates

There are several special considerations regarding business rates that both tenants and landlords should be aware of:

1. Small Business Rate Relief

• Small Business Rate Relief (SBRR) is available for businesses that occupy a property with a rateable value of £15,000 or less. Tenants who qualify can receive full or partial relief on their business rates, reducing their financial burden. Landlords with small units may find this attractive to potential tenants.

2. Empty Property Exemptions

• Some properties, such as listed buildings or properties owned by charities, may be exempt from business rates even when vacant. Landlords of such properties should verify whether they qualify for this exemption to avoid unnecessary business rate payments.

3. Shared Workspaces and Co-working Spaces

• In shared workspaces or co-working spaces, business rates are typically handled by the provider (landlord or operator), and tenants pay an all-inclusive fee. This fee includes rent, utilities, and business rates. Tenants in such spaces don't need to deal with business rates directly.

Negotiating Business Rates in Lease Agreements

When entering into a commercial lease agreement, it is important to clearly outline who is responsible for paying business rates to avoid disputes later on. Key points to consider include:

• Responsibility clause: Ensure that the lease specifies whether the tenant or landlord is responsible for business rates.
• Vacancy period: If you are a tenant negotiating a lease, try to agree on terms in case of a temporary vacancy, especially if you plan to sublet part of the property.
• Rent inclusivity: If the rent is inclusive of business rates, confirm with the landlord the exact breakdown of costs to avoid paying more than necessary.

Conclusion

In the UK, tenants are usually responsible for paying business rates when they occupy a commercial property. However, the exact responsibility depends on the terms of the lease agreement. In cases where the property is vacant, it’s the landlord’s responsibility to cover business rates, though relief is often available for a limited period.

Whether you’re a landlord or tenant, it’s essential to have a clear understanding of your obligations regarding business rates to ensure compliance and avoid potential disputes or penalties. If you’re unsure, consult a solicitor or property expert to clarify your lease agreement and ensure both parties are aligned on who is responsible for business rates.