Landlord liable for empty rates on disclaimer by tenant’s liquidator

birminghamIs a property owner liable for business rates where a lease is disclaimed but the tenant’s obligations have been guaranteed? The High Court decided that it was.

Original news

Schroder Exempt Property and another v Birmingham City Council [2014] EWHC 2207 (Admin)

Schroder Exempt Property and another (SEP) were freehold owners of the property. On 5 June 2006, they granted a 10 year lease of the Property to Woodward Foodservice Limited (WFL), the tenant’s obligations being guaranteed by W F Group Holdings Limited (GHL).

The lease required the tenant to pay all outgoings, including rent on 23 July 2008, with SEP’s consent, WFL assigned the lease to W F Group Limited (GL) and WFL entered into an authorised guarantee agreement, in terms of which WFL’s liability was expressly stated not to be affected by any disclaimer of the liability of GL under the lease. GHL and GL went into liquidation, and the liquidator disclaimed all interest in the Property under the Insolvency Act 1986, s 178 (IA 1986).

SEP continued to call on WFL as guarantor under the terms of the authorised guarantee agreement to make good the default of GL and WFL had made payments of the sums demanded. Birmingham City Council (BCC) made rate demands of SEP for the period after the disclaimer. Those were not honoured and BCC was granted a liability order in the sum of approximately £590,000. SEP appealed by way of stated case.

The court had to decide whether:

  •  SEP had been entitled to immediate possession of the whole property
  • as such, whether the court in the first instance had been correct to find that SEP were the owners within the meaning of the Local Government Finance Act 1988, ss 45(1)(b) and 65(1) (LGFA 1988)

What is the law in this area?

LGFA 1988, ss 43(1) and 45(1)

Local rates were levied on an occupier for occupied premises. Where there are no actual occupiers, non-occupiers may be liable under LGFA 1988, s 45(1) which provides:

‘A person (the ratepayer) shall as regards a hereditament be subject to a non-domestic rate of a chargeable financial year if the following conditions are fulfilled in respect of any day in the year

(a) on the day none of the hereditament is occupied,

(b) on the day the ratepayer is the owner of the whole of the hereditament,

(c) the hereditament is shown for the day in a local non-domestic rating list in force for the year, and

(d) on the day the hereditament falls within a class prescribed by the Secretary of State by regulations.’

In this case, none of the property was actually occupied during the relevant period and it was accepted that conditions (a), (c) and (d) were fulfilled.

The court had to decide whether SEP was the owner for the purposes of condition (b).

LGFA 1988, s 65(1) provides that an ‘owner of a hereditament’ is ‘the person entitled to possession of it.’

IA 1986, s 178(4)

A disclaimer under this section provides that it:

‘(a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but

(b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person.’

What did the court decide?

The High Court decided SEP was liable for empty rates as it had the right to immediate possession of a property once the tenant’s liquidator had disclaimed the lease.

Quoting the principles in Hindcastle Limited v Barbara Attenborough Limited [1997] AC 70, [1996] 1 All ER 737(as confirmed in Shaw v Doleman [2009] EWCA Civ 279, [2009] All ER (D) 34 (Apr) and Chadwick LJ in Basch v Stekel [2001] L&TR 10 the court reaffirmed the principles that :

  • the effect of the disclaimer operates to terminate the lease entirely, but
  • a surety is not thereby released from his contractual liability to make good the defaults of the former tenant, because IA 1986, s 178(4)(b) operates on the basis of a fiction that the lease in fact continues for the limited purpose of ensuring that substance in the guarantor’s covenant is maintained.

Applying them to this case, the court held that after the assignment of the lease and prior to the disclaimer, GL was the tenant and the person entitled to immediate possession.

After the disclaimer, the lease ceased to exist and SEP’s reversion accelerated and as freehold owners became they became entitled to immediate possession.

WFL remained liable to make good the defaults of the former tenant, not because the lease continued in any shape or form, but because IA 1986, s 178(4) operates to ensure that the guarantor’s covenant in the event of the tenant’s default is given continued substance and the third party guarantor remains contractually liable.

WFL was therefore liable to continue to make good GL’s default in paying rent under the determined lease until SEP exercised its right to immediate possession by physically taking possession. However, SEP was entitled to immediate possession from the time of disclaimer and so was liable for the empty rates.

What are the lessons for property owners?

Liability for empty rates on disclaimer was a fait accompli for SEP. This is one factor a landlord should take into account when considering its options and liabilities on the insolvency of its tenant.

First published on LexisPSL Property. Click here for a free trial.

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