Property problems: Owner, not tenant, primarily liable for rates

Q. I own some commercial premises with three long-term tenants. In the past, separate rates bills went directly to each of my tenants, who paid them without any involvement from me. Now I receive one bill - in my name - for all three. This is inconvenient, especially when the tenants are responsible for the rates anyway under their leases. Is there anything I can do about this?

A. There are two key changes in the new rating legislation, which is the Local Government (Rating) Act 2002 applying since July 1 last year.

The first change is that the rating unit is now based on certificates of title - freehold, cross-lease or unit title - rather than separate occupation.

In general terms, each certificate of title is a rating unit, irrespective of how the unit is used - even if, as in your case, it is separately leased to three different tenants.

In the past, your land would have been three rating units because there were three distinct units of occupation. Now it is one rating unit because it is in one certificate of title.

The second key change is a shift from occupier liability to owner liability. In the past, rates bills were sent to occupiers, who included tenants with leases of a year or more, and your tenants would have been the "ratepayers" for that reason.

Under the new act, with limited exceptions the owner is the ratepayer. So the rates bill for the entire unit goes to you.

None of these changes affects your tenants' liability under their leases to pay rates. It just means you are the recognised ratepayer and primarily liable to the council. You can still "recover" those rates from your tenants, assuming that's what your leases say, and arrange with your tenants for their proportion of the rates to be paid directly to the council.

One practical issue arising under the new act is that because there is now only one bill based on the value of the property as a whole, it may not be clear how it is to be split up between each of the tenants.

Again, it will be a contractual issue how the landlord carries out that split, but it will presumably be based on the rent paid by each tenant or, in some cases, the proportion of the total area leased by each tenant. For the future, leases should specifically provide for that split and how it is to be calculated.

It is possible for a tenant to be listed as the ratepayer and therefore receive the rates bills, but only if the tenant has a registered lease for a term (including renewals) of at least 10 years for the whole rating unit and not just part of it (so this wouldn't be available in your case), and if the lease specifically provides for the tenant to be recorded as the ratepayer.

Again, for the future, leases should be written so as to cover this situation, if that's what is intended.

The new act also provides for tenants who were ratepayers before the new act to continue to be so, in certain cases.

This gives some protection to landlords who might otherwise be prejudiced by the shift to owner liability - if they aren't then able to recover those rates from their tenants.

Generally speaking, for this to apply the lease must have been entered into before August 8, 2001, and remain in force, and it must be either registered, or in its terms preclude the renegotiation of the rent, so that the owner could be reimbursed for the direct rating liability.

Finally, the rating unit in question must be substantially the same as the rating unit under the previous act. In your case, because the rating unit has changed considerably, this provision would not be available.

Apart from those limited exceptions, the owner, and not the tenant, will be the ratepayer. If a rating unit has just one tenant, the owner could give that tenant's address as the postal address for the rates bills.

This arrangement, however, would not change the fact that it is still the owner who is primarily liable for the rates and if the tenant doesn't pay, then the owner will be legally in default.

Also, because the council will use that tenant's address for all correspondence, debt could be accruing without the owner being aware of it. Unless the tenant is known to be reliable, this could therefore leave the owner exposed.

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Each week the Commercial Property Group at Simpson Grierson will answer questions on commercial property issues. The information in this column is intended to provide general information in summary form current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in relation to specific issues.