The High Court ruling in Schroder Exempt Property Unit Trust and another v Birmingham City Council [2014] 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.

Background

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.

Facts

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.

Decision

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.

Comment

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.