The requirement to pay rates for unoccupied commercial property remains a significant problem for the property industry.

There are certain exemptions from paying rates, but as a recent case made clear, the courts will apply the conditions under which exemptions can be claimed rigorously.

Pall Mall Investments (London) Ltd v Gloucester City Council considered the exemption that applies when an owner is prohibited by law from occupying the property or allowing it to be occupied.

The company owned a couple of office blocks in Gloucester. They were unoccupied for three years and Gloucester City Council made an unoccupied, non-domestic rate demand for each year amounting to more than £365,000. Pall Mall sought an exemption on the grounds that non-occupation was the result of dilapidations, caused partly by vandalism and the state of the properties was such that occupation was prohibited by law.

The council refused the exemption and applied to the magistrates’ court for a liability order. The judge decided in the council’s favour, holding that the properties were not exempt from rates. Pall Mall appealed to the High Court, but the appeal was rejected. Pall Mall contended the properties’ condition made their occupation unlawful and, therefore, the owner was prohibited by law from occupying them. Building surveyors had established that if they were occupied as offices, the owner would be in breach of its responsibilities under the Health and Safety at Work Act 1974.

Consequently, Pall Mall argued that it could not occupy itself or allow others to occupy, since that would place the owner or its tenant in immediate breach of the duties under the 1974 Act. The effect of the legislation was to prohibit by law the occupation of the properties.

However, the council argued that a “prohibition in law” can only arise if the law prohibits occupation of the properties or a prohibition notice prohibits occupation, and that was not the case here. The High Court agreed. It would appear to be highly improbable that parliament intended that owners should be exempted from unoccupied rates because of their own failure to carry out necessary maintenance and repair.

The case highlights that it is not enough for the owner to establish that, if he occupies, he will be liable to prosecution under health and safety legislation. The owner must show the law prohibits occupation, but the health and safety legislation does not prohibit occupation. Therefore, Pall Mall did not qualify for the exemption and was liable for the rates.

Warren Gordon is head of real estate know-how at Olswang