Section 32 of the Local Government Reform Act 2014 (“the 2014 Act”) introduces two important amendments to the law. First, it has the effect that assignees of rateable property are no longer automatically liable for rates arrears of the previous tenant and instead, rates must be discharged by the assignor (“the Liability Crystallisation”). Second, it introduces a new notification obligation on an owner of rateable property where there has been a transfer of any interest in that property and imposes a penalty where there is a failure to notify and the rates are not discharged by the assignor (“the Notification Obligation”). These amendments will have a significant impact in the commercial property sector, particularly on landlords and receivers. This article explores the impact of these changes.
Section 32 of the 2014 Act
Section 32 of the 2014 Act was enacted on 1 July 2014 by SI No 146/14. The overall Act represents an effort to modernise local authorities, while Section 32 in particular is widely seen as a measure to boost the commercial property sector.
The Valuation Act 2001 contains most of the current legislation on rates. For instance, it replaced previous terms such as “hereditaments” and “tenements” with a single term of “relevant property”, of which a comprehensive list is provided by Schedule 3 of that Act, while Schedule 4 thereof provides for the exemptions from “relevant property”, including charities. The 2014 Act continues the use of the “relevant property” term and Section 32(1) thereof provides that “relevant property” shall be construed in accordance with Schedule 3 of the 2001 Act.
Prior to the enactment of the 2014 Act, subsequent occupiers were liable to pay rates arrears, pursuant to Section 71 of the Poor Relief (Ireland) Act 1838 (“the 1838 Act”), which provided as follows:
“every rate made under the authority of this Act shall be paid to the person authorised to collect the same by the person in the actual occupation of the rateable property at the time of the rate made, and on his default then by the person subsequently in the occupation of the rateable property from whom such rate shall be demanded.”
The Liability Crystallisation
The usual practice was that rates were recoverable from subsequent occupiers in amounts of up to two years’ arrears. Section 32(2)(b) now provides that, if there is a pre-existing liability to pay rates on the part of “the person transferring the property being either the occupier or the owner”, that person must now pay those rates “at the date of the transfer”. Schedule 2 of the 2014 Act also amends a sentence fragment from Section 71 of the Poor Relief (Ireland) Act 1838 to delete “and on his default then by the person subsequently in the occupation of the rateable property from whom such rate shall be demanded”.
The Notification Obligation
Section 32(2)(a) provides that the existing owner, where there is a change of rated occupier—whether or not the owner is in occupation or indeed aware of an assignment or its actual date—must provide written notification of the transfer to the rating authority within two weeks of the transfer date. This gives rise to practical problems as an owner landlord is not usually represented at completion of an assignment. Pursuant to Section 32(4), failing discharge of rates and timely notification, the owner becomes “liable for a charge equivalent to no more than two years of the outstanding rates”. For an owner-occupier, this liability is in addition to the existing liability to pay rates. The wording—“no more than two years”—suggests that the amount of the charge is discretionary. It may, however, also mean that the charge will amount to all the outstanding rates, provided that these do not exceed two years’ arrears. As is considered further below, the ambiguity of this wording is undesirable. It is perhaps also worth noting that Dublin City Council interprets this charge as being a penalty payable by the landlord as owner, regardless of whether the tenant later settles their liability in respect of rates.
Enforcing the Liability Crystallisation and Notification Obligation
It is also important to note that, where the arrears are owed by the owner—as opposed to a mere occupier—the liability becomes a charge on the property, likewise the penalty. Section 32(3) provides that rates due by an owner “shall remain a charge on the relevant property” which, as against a good-faith purchaser for value, may last for up to 12 years. This applies regardless of whether the owner has provided the notification on time. Section 32(5) deals with the penalty charge, and also provides that the charge will remain a charge on the relevant property, save as against a good-faith purchaser for value after 12 years. These charges are, according to Section 32(6), without prejudice to the right of the rating authority to pursue the previous occupier, with primary liability. Significantly, though, it appears clear that a landlord, giving timely notification, will not become liable for rates that have not been paid by an occupier; nor are such rates capable of becoming a charge on the property.
The Impact of the Liability Crystallisation
An “occupier” is defined in Section 32 as “every person in the immediate use or enjoyment of the property”. The obligation to pay rates falls on “the person transferring the property being either the occupier or the owner”.
It is useful to consider whether this provision has any impact on the position of receivers and liquidators. At common law, the position of receivers and liquidators is that they are agents of a company in rateable occupation and that they are not therefore personally liable for rates, save in certain circumstances. In Ratford v Northavon Rural District Council, Slade LJ commented that“any occupation of the relevant premises enjoyed by a receiver will normally be enjoyed by him in his capacity as agent for some other party”, and this was echoed by Arden J in Brown v City of London, who added that occupation as agents for the company in receivership was not sufficient to make receivers occupiers for rating purposes. Guidance as to the circumstances in which receivers will be occupiers is provided by Ratford, in which it was held that the company remained in rateable occupation as the terms of the debenture did not oblige possession and they provided that the receivers were to be treated as agents of the company and where it had not been shown that the receivers had dispossessed the property or that the quality of the possession was other than that of an agent.
It is not apparent that Section 32 is tended to displace this usual position. However, clearly, where it will have an impact on receivers and liquidators is where they are selling property; they will no longer be able to follow the current practice whereby rates arrears are dealt with on the basis that the purchaser is liable to pay them. The rates due by an owner will now need to be paid before the sale in order to prevent charges being imposed on the property. It is very important, therefore, that receivers and liquidators establish which party is liable to pay rates at the date that a sale is completed, as this will be a new function that will have to be performed before transfer.
The Impact of the Notification Obligation
Turning to the Notification Obligation, for the purposes of Section 32, an “owner” is defined as a person other than a mortgagee not in possession “who, whether in that person’s own right or as trustee or agent for any other person, is entitled to receive the rent of the property or, where the property is not let, would be so entitled if it were so let”.
This is a broad definition. Clearly, a landlord will be an “owner”, and will be affected by the Notification Obligation and it will be particularly problematic if an assignment or sublease is arranged without his or her knowledge (and therefore he or she has not had a chance to make the notification), becoming personally liable for a charge under Section 32(4) (of an unknown value) if the tenant’s rates arrears are unpaid.
However, also affected by the Notification Obligation will be receivers, banks and liquidators who, as already set out above, generally act as agents of the owner company and who are usually entitled to receive the rent of the property, and seem accordingly to be within the meaning of Section 32. They too must be cognisant of the Notification Obligation.
Problems with the New Regime
The Liability Crystallisation
As noted above, the aim of the Liability Transfer was to boost the commercial property market; however, it may ultimately deliver mixed results. On the one hand, compliance with the new regime will indeed encourage buyers as they will take property free of the obligation to pay its rates arrears. On the other hand, viewed in its totality, the purchaser’s onus under the old regime to pay the rates over two years may have been less burdensome than the administrative obligation on owners (broadly understood) to comply with the Notification Obligation (in particular given the short time frame for notification) and the possibility of both rates and a penalty becoming charges on the property.
It is interesting to note that an amendment was proposed to Section 32 in the Dáil at the second stage to eliminate Section 32(2)-(6), substituting a provision that a Chief Executive might waive the rates due by a subsequent occupier on the basis of submissions put to him or her by the new occupier, if the Chief Executive was “satisfied, based on his local knowledge of the local market and the vacancy rates, in the area concerned or for the category of property concerned, that in the absence of his waiver the subsequent occupier will not occupy the relevant property”. This amendment was later abandoned, possibly in view of the fact that this alternative regime would have imposed further administrative burdens on purchasers for whom the outstanding rates were a deal breaker and who were likely to go elsewhere, rendering such a provision ultimately pointless. Now, however, even purchasers who would have been willing to take a property subject to the rates arrears are freed of this requirement, to the (arguably greater) detriment of those selling the property.
The Notification Obligation
The ambiguity in the description of the penalty charge (“no more than 2 years outstanding rates”) as a result of non-compliance with the Notification Obligation is undesirable in a taxation statute. A tax must be “imposed expressly and in clear and unambiguous terms”. The ambiguity in the penalty is undesirable also from a commercial perspective. Even in circumstances in which all parties are properly advised, an owner or occupier’s inability to pay outstanding rates will likely lead to an abandonment of the transaction in the case of a sale, or a delay in appointing a receiver or a liquidator, both of which are absurd results for a statute which purports to jolt the commercial property market.
An enactment which was intended to boost the commercial property sector may end up penalizing commercial landlords. The new regime is quite punitive, giving a short (2 weeks) time for notification, or else incur up to two charges on the property; it is also not clear whether the penalties imposed by Section 32 are discretionary and so this is an area urgently requiring clarification. Agents of a company such as receivers and liquidators who seek to sell the company should be particularly prudent in ensuring the new requirements are properly met.