Property week piece - Rates exposure

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The Message:

A landlord was liable for rates following tenant disclaimer.

The Case:

Schroder Exempt Property Unit Trust v Birmingham City Council [10 July 2014] concerned the impact of the disclaimer of a tenant's interest in a lease and whether, as a consequence, the landlord, as owner, became liable for the non-domestic rates.

Schroder was the freehold owner of a property and granted a lease to a company, which required the tenant to pay all outgoings including rates. Subsequently, the lease was assigned and the outgoing company provided an authorised guarantee agreement (AGA) for the landlord's benefit. In 2011, the then tenant went into liquidation and the liquidator disclaimed all interest in the property under section 178 of the Insolvency Act 1986.

Schroder continued to call on the guarantor under the AGA to make good breaches by the now wound up tenant, but Schroder did not exercise any right to go into physical possession of the property by forfeiting the lease. Birmingham City Council made rate demands of Schroder for the almost two years' period after the disclaimer which were not honoured and the Council sought a liability order claiming some £590,000.

Under section 178, a disclaimer operates so as to determine (or end), from the date of the disclaimer, the rights, interests and liabilities of the tenant company in respect of the property disclaimed, but does not affect the rights or liabilities of any other person. So following the disclaimer, the tenant ceased to have any right to occupy the property and ceased to be in occupation. For the period after the disclaimer, the property had no actual occupier.

While occupiers are liable for rates, if there are no actual occupiers, the owner will be liable. "Owner" is defined by the rating legislation as the person entitled to possession of the land. Schroder would be liable for the rates if it was entitled to immediate possession of the entire property during the relevant period after disclaimer. That was the heart of the dispute. Schroder contended that it was not entitled to immediate possession, while the Council argued Schroder was in possession.

The High Court stated that the leading authority on this subject, the case of Hindcastle Limited v Barbara Attenborough Limited [1997], provided that a disclaimer determines a lease for all purposes. It is precisely because the lease has ceased to exist that section 178 provides that the rights and obligations of others such as guarantors remain as though the lease had continued.

Prior to disclaimer, the tenant had the right to immediate possession, but after disclaimer, the former tenant had no such right since the lease had ceased to exist and the landlord owner would have the right to immediate possession of the property.

Due to section 178, the guarantor under the AGA was obliged to continue to remedy the former tenant's failure to pay rent under the determined lease and this would carry on until the landlord exercised its existing right to immediate possession by physically taking possession.

Schroder, therefore, had the right to immediate possession once the lease of the property had been disclaimed. It was, therefore, the "owner" within the meaning of the rating legislation and liable for the £590,000 rates for the property.