The High Court ruling in Schroder Exempt Property Unit Trust and another v Birmingham City Council  EWHC 2207 provides helpful clarification on whether or not a landlord is liable to pay business rates on an empty property following the liquidation of a tenant and the subsequent disclaimer of the lease.
Business rates are payable by the occupier of a property. However when the property is unoccupied, the owner of the property – which is the person entitled to possession of it – will be liable to pay the rates under sections 45(1) and 65(1) of the Local Government Finance Act 1988 (the “Act”).
In this case, the Court was asked to determine whether the landlord was entitled to possession of the property, and therefore the owner of the property for the purposes of the Act and payment of business rates.
The tenant’s liquidator disclaimed the tenant’s interest in the property but the landlord did not exercise its right to take up physical occupation of the property following the disclaimer. Rather, the landlord chose to demand payment of rent from the tenant’s guarantor under the terms of its authorised guarantee agreement, and the guarantor made payment of the sums demanded.
The local authority thereafter demanded payment of business rates from the landlord for the period following disclaimer. The landlord refused to pay the rates and the local authority was granted a liability order in the sum of approximately GBP 590,000.
The landlord appealed the liability order. It said that it was not liable to pay the business rates as it could not be said to be “entitled to possession” of the property. This is because the Insolvency Act 1986 preserved the lease for the purposes of the guarantor’s obligations, and the guarantor was entitled to call for an overriding lease of the property under the Landlord and Tenant (Covenants) Act 1995. This entitled the guarantor to possession of the property.
The High Court ruled in favour of the local authority and held that the landlord was liable to pay the business rates for the period following the disclaimer. Once the tenant’s liquidator had disclaimed the lease, the lease ceased to exist and the landlord became entitled to immediate possession of the property.
Conversely, the guarantor did not have an immediate right to possession of the property. It would only be entitled to possession of the property if it exercised its statutory right to call for an overriding lease, and the guarantor had not done so in this case.
The guarantor would remain liable to make good the former tenant’s default in paying the rent under the determined lease until such time as the landlord exercised its right to immediate possession by physically taking possession of the property. This was not because the lease continued in any shape or form, however, but because of the effects of section 178 of the Insolvency Act 1986 which operates to ensure that the guarantor will remain contractually liable.
Accordingly, the landlord was liable to pay the empty business rates for the property.
Although the decision is not welcome news for landlords, it does at least provide some certainty, and will no doubt be a factor many landlords will wish to take into consideration when considering their re-letting strategy prior to or following the disclaimer of a lease.