UK Supreme Court rules in favour of ratepayer in charity business rates dispute
Published on 15th Jun 2023
Unanimous decision upheld Court of Appeal judgment entitling Nuffield Health to non-domestic rates relief for charities
The UK Supreme Court has released (7 June 2023) its judgment in the case of London Borough of Merton Council v Nuffield Health Ltd, with a unanimous five-judge panel ruling in favour of Nuffield Health, the ratepayer, dismissing the London Borough of Merton's appeal against the Court of Appeal's judgment.
With this long-running case finally reaching a conclusion, the Supreme Court held that Nuffield is using the premises wholly or mainly for its charitable purposes and is therefore entitled to mandatory relief from non-domestic rates under section 43(6) of the Local Government Finance Act 1988. This resulted in Nuffield being entitled to an 80% reduction in its rates bill.
Legislative developments and a host of unforeseen macro-economic factors have made business rates liability one of the key commercial property concerns in the first half of 2023. This case represents one in a series of high-profile rates mitigation cases this year. However with increasing financial difficulties, it is hardly surprising that rates litigation is on the increase as landlords and tenants attempt to limit liability for business rates.
Nuffield acquired the Merton Abbey gym complex when it bought the business of Virgin Active on 1 August 2016. Nuffield, which runs more than 112 fitness and wellbeing centres, is a registered charity established "to advance, promote, and maintain health and health care of all descriptions and to prevent, relieve and cure sickness and ill health of any kind, all for the public benefit".
Nuffield pursues those purposes primarily through the provision of gym facilities, including the Merton Abbey complex. The facilities at this gym are mainly restricted to fee-paying members which in April 2019 were £80 per month. Some services are offered to non-members at Merton Abbey but these are limited.
After buying Merton Abbey, Nuffield applied to the London Borough of Merton for mandatory rates relief (80% of the rates otherwise payable). Despite initially being granted, Merton then withdrew the relief following a visit by the council inspector who found that the site was not being wholly or mainly used for charitable purposes. Merton decided that the terms of admission for the gym excluded less well-off residents and so did not satisfy the "public benefit" condition for charity relief.
It is well established that a charity must be established for exclusively charitable purposes and the nature of the charity's purposes must be capable of benefitting the whole community. The first limb is generally recognised and set out in the Charities Act 2011 but the second limb (the public benefit test) is more controversial as there is no statutory definition. The guidance produced by the Charity Commission states the test has two parts – it must benefit the community at large, and those who benefit must be sufficiently numerous and identifiable to constitute a section of the public.
To appreciate the impact of the decision, it is important to understand how the findings of the lower courts influenced the Supreme Court's thinking.
First instance decision in favour of Nuffield
Nuffield challenged the decision of the council inspector and won in the High Court which held that the charity has been at all times since 1 August 2016 entitled to mandatory relief from business rates at the premises.
Merton applied for leave to appeal the decision in the High Court and the Court of Appeal gave permission to appeal on the following grounds:
- Ground 1: the judge was wrong to hold that Nuffield was not required to show that the premises were being used for the public benefit, as an aspect of showing that the premises were being used wholly or mainly for its charitable purpose.
- Ground 2: the judge failed to apply the correct standard of public benefit for Nuffield's use of the premises.
- Ground 3: even if the judge applied the correct standard, the judge erred in his evaluation of whether the public benefit requirement was satisfied.
- Ground 4: the judge was wrong to conclude that the premises were not being used wholly or mainly for fundraising.
Grounds 2 and 3 were conditional on Merton being successful on ground 1, whereas ground 4 was a free-standing point.
Court of Appeal affirmed High Court
The Court of Appeal emphasised that the case turned on the interplay between rating law and charity law. When assessing ground 1, it defined this key issue as the following question - where a registered charity uses a hereditament (Merton Abbey) for a particular purpose (gym and wellbeing facilities) what is the statutory question which determines whether it is entitled to mandatory rates relief under section 43(5) and 43(6)(a) of the act? It stated there were two possible approaches:
- Is the charity using that hereditament for a purpose which is one of its charitable purposes? Or,
- Is the charity using that hereditament for a purpose which is, taken by itself, a charitable purpose?
Nuffield argued that the requirement under section 43(6) was that the hereditament be used wholly or mainly in pursuit of charitable purposes and that this was to be judged by reference to the activities of the charity as a whole, and not for the use of the premises to be viewed in isolation. The majority of the Court of Appeal preferred Nuffield's broader construction of section 43(6) and held that previous case law, legislative history and policy considerations aligned with the first approach and therefore dismissed ground 1.
Grounds 2 and 4 were held to be not relevant based on the facts. On ground 3 Merton argued that it failed the public benefit test by reason of the level of the membership fees and the absence of any sufficient public benefit in the provision of services to non-members. However the Court of Appeal held in favour of Nuffield that the question of public benefit did not need to be assessed separately for each site where charitable activity is carried out. Overall Merton's appeal was dismissed however the Supreme Court granted them permission to appeal, predominantly on grounds 1 and 3.
Supreme Court affirms previous decisions
On 7 and 8 March 2023, the Supreme Court heard the case and released its judgment on 7 June 2023, which affirmed the decision of the Court of Appeal and dismissed Merton's appeal.
The Supreme Court held that sections 43(5) and 43(6)(a) of the act imposes two conditions for the entitlement to the mandatory 80% relief from rates for charities. The first is that the ratepayer is a charity, which must either be a registered charity or, if not, meet the test for a charitable status. Nuffield is a registered charity and so met this condition. The second is that the premises are used wholly for the charitable purposes of the ratepayer, or of the ratepayer and other particular charities. It emphasised that this condition was a question of fact and not of charity law.
The judgment said that Nuffield "plainly uses the Merton Abbey gym for the direct fulfilment of those charitable purposes" because when it is "viewed overall" it satisfies its obligations as a charity even if, at the Merton Abbey gym, access is not available to those of reduced means. The court clarified that whilst charities must not exclude the poor, if a charity has multiple locations, "the rich may be served in some locations and the poor in others". Nuffield's purposes are "irrebuttably presumed all to be charitable, in all the places where they are carried on" and therefore satisfy the public benefit test. The Supreme Court entitled Nuffield to the mandatory 80% relief from business rates.
Osborne Clarke comment
The decision of the Supreme Court in this case has reinforced the status quo regarding the mandatory relief from business rates for charities. Whilst the focus of this case was a gym and wellbeing facility, it has a broader application to charities overall, confirming that charities will continue to be eligible for that relief if they use the premises in question wholly or mainly for their charitable purposes.
In the aftermath of the pandemic and given the continuing struggles of high streets, it has become commonplace for property owners to reduce their exposure to business rates liability on vacant units (when empty rates relief expires after three or six months) by encouraging charity lets. The clarity delivered by the Supreme Court's decision will therefore be welcomed by property owners and charities alike, though there remains the possibility of disputes to establish what would constitute properties "mainly" being used for charitable purposes.
Charitable institutions will also be relieved that the Supreme Court has sought to maintain an objective test in this area, assessing it as a question of fact, rather than engaging subjectively with the "public benefit" aspect of specific sites.
More broadly, given the need for local rating offices to maximise income and the desire of property owners to limit their exposure to business rates liability, we expect to see further rates mitigation cases come before the Courts.