It has been understood since the Hindcastle case in 1997 that a guarantor’s payment obligations under a lease survive disclaimer by an insolvent tenant’s liquidator.  What has been less clear is how that works, given that the tenant’s obligation to pay rent dies when the lease is disclaimed.

Does the guarantor’s liability continue because the lease also continues to exist in some way?  The recent case of Schroder Exempt Property Unit Trust v Birmingham CC [2014] has shed some light on this and clarified that, following disclaimer, the landlord is liable for business rates on empty properties.

What is disclaimer?

A liquidator has a statutory power under the Insolvency Act 1986 to disclaim onerous property.  The effect of this is “to determine… the rights, interests and liabilities of the company in or in respect of the property disclaimed“, thereby unburdening the insolvent estate from future liabilities in respect of property that is of no use to the liquidator.

However, disclaimer expressly “does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person“.

Hindcastle, which is still the leading authority, confirmed that a guarantor’s liabilities are not affected by disclaimer, notwithstanding that the tenant’s obligation to pay the rent has fallen away.  In order to understand this concept, some have explained the guarantor’s post-disclaimer obligations as arising out of some residual, “shadowy existence” of the lease.  The Schroder case demonstrates that to be an unhelpful analogy.

Who is liable for business rates following disclaimer?

In Schroder, the High Court had to decide whether business rates on empty property were payable by the landlord or the tenant’s guarantor, in circumstances where the lease had been disclaimed by the tenant’s liquidator but the landlord had continued demanding rent from the guarantor without taking the property back.  Rates legislation says that liability for empty properties lies with the “owner” of the premises, meaning “the person entitled to possession of it“.  The question for the Court was therefore, whether the landlord in those circumstances was entitled to possession.

In a decision that relied substantially on Hindcastle, the judge held that where a lease has been disclaimed, it has been determined.  Rights and liabilities survive not because they arise out of the residue or “shadowy existence” of the lease, but because the statutory scheme requires that to be the case.  In effect, the statute deems that those obligations should continue as though the lease still existed. If somebody seeks a vesting order in respect of a disclaimed lease then the lease is somehow recreated for that purpose but – until then – it has been determined.

From that starting point, it was relatively easy for the Court to conclude that, as disclaimer brings the lease to an end, the landlord is immediately entitled to possession and so is liable to pay empty rates.  As many landlords are still managing a number of empty properties at the tail end of the economic downturn, this decision will not be good news, but at least provides some welcome certainty.