Property owner liable for business rates when property fell unoccupied following liquidation of tenants, rules High Court

Mr Justice Hickinbottom rejected an appeal by Schroder Exempt Property Unit Trust (SEPUT) and trustees for Schroder UK Property Fund against a previous judgment issued by Birmingham Magistrates' Court which deemed SEPUT liable for the business rates bill.

Property law expert Stuart McCann of Pinsent Masons, the law firm behind Out-Law.com, said the decision may be bad news for some landlords but had at least "provided welcome clarification to the law on this issue".

"Previously, rating authorities generally pursued landlords for payment after disclaimer of a lease and many landlords accepted liability because doing so was seen as a cheaper and easier alternative to asking the court to decide the point," McCann said. "The decision in this case confirms that this practice is correct. Landlords with the benefit of an Authorised Guarantee Agreement (AGA) might not be affected, however. Although still technically liable, they might possibly be able to recover any rates payments from the guarantor. Those without the benefit of AGAs might care to look more closely at the various schemes available to mitigate rates liability, some of which appear to be more and more widely accepted.”

In his ruling, Mr Justice Hickinbottom rejected claims by SEPUT that Woodward Foodservice Limited (WFL) was liable for payment of the bill to the council. WFL let the property from SEPUT in 2006 but assigned the lease to W F Group Limited, with SEPUT's permission, in 2008.

However, W F Group Limited and its group holding company were wound up on 20 April 2011. On the same date liquidators for the businesses "disclaimed all interest" in SEPUT's property, in accordance with UK insolvency laws, meaning the tenant at that point W F Group Limited "ceased to have any right to occupy the property, and indeed ceased to be in occupation", according to the judgment.

Between 20 April 2011 and 31 March 2013 SEPUT's property remained unoccupied, although Birmingham City Council continued to calculate business rates payable for the period. SEPUT disputed that it was liable for the bill on the basis that it had not occupied the property during the near two-year period and that ongoing leasing arrangements with WFL meant it had no right to immediate possession of the property.

Birmingham Magistrates' Court previously issued an order entitling the council to approximately £590,000 in business rates from SEPUT covering the period the property was unoccupied, but SEPUT challenged that ruling on appeal to the High Court.

The Local Government Finance Act entitles local authorities to levy business rates on non-occupiers of property in certain circumstances. The Act states that those with rights to property, a hereditament, can be charged the rates in the event of non-occupancy if certain criteria are met. This includes that the non-occupier is "the owner of the whole of the hereditament" on the dates on which the rates are being applied.

SEPUT claimed that it did not meet this criteria as it was not "entitled to possession" of the property. Under the Local Government Finance Act, the 'owner of a hereditament' is defined as "the person entitled to possession of it".

In particular it argued that although the disclaimer had been issued by the liquidator for the previous tenants, the leasing rights had not ended "for all purposes". It said that the disclaimer issued "does not affect the rights and obligations between a landlord and guarantor" and that, as guarantor for the property under the terms of its leasing agreement with SEPUT, WFL was liable for the bill until either the end of the 10 year lease or until it had physically re-entered the property.

SEPUT said it had the right to choose between continuing to receive rent from WFL for the property, as it had done so, or re-enter the property and forfeit the lease, which it had chosen not to do.

However, Mr Justice Hickinbottom ruled that the effect of the disclaimer issued by the previous tenant's liquidator was to determine the letting arrangements "for all purposes".

"With the lease, go all of the rights and obligations under the lease, such as the lessee's obligation to pay rent, and the landlord's right to rent and the right to re-enter," the judge said. "Prior to disclaimer, the tenant will of course have the right to immediate possession. After disclaimer, the former tenant has no such right; and, in the usual way, the landlord (as freehold owner, without the burden of any leasehold interests) will himself have the right to immediate possession."

Mr Justice Hickinbottom said a distinction had to be drawn between property rights and contractual rights, such as those stipulated in a guarantee. He ruled that although WFL owed SEPUT rent during the period the property was unoccupied, this had no impact on SEPUT's right to "immediate possession" of that property.

"After the assignment of the lease and prior to the disclaimer, W F Group Limited was the tenant and the person entitled to immediate possession," the judge ruled. "After the disclaimer, the lease ceased to exist and [SEPUT and trustees for Schroder UK Property Fund's] reversion accelerated. Consequently, [SEPUT and trustees for Schroder UK Property Fund] as freehold owners became entitled to immediate possession."

"WFL, however, remained liable to make good the defaults of the former tenant, not because the lease continued in any shape or form, but because [UK insolvency law] 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. Therefore, the guarantor must continue to make good the former tenant's default in paying rent under the determined lease until the landlord exercises his right to immediate possession by physically taking possession," he said.