Business rates are an unwelcome liability for a landlord, particularly when a landlord is pursued when a tenant falls into difficulty.

The High Court ruling in Schroeder Exempt Property Unit Trust and another v Birmingham City Council [2014] EWHC 2207 provides helpful clarification on the issue of liability for the payment of business rates following the liquidation of a tenant and subsequent disclaimer of a tenant’s lease, although not good news for landlords.

Under section 65(1) of the Local Government Finance Act 1988, the “person entitled to possession of the property” is the person liable to pay business rates. Until the decision in Schroder there was some doubt as to whether this meant that a landlord would become automatically liable to pay business rates following the disclaimer of a tenant’s lease.

In Schroder the tenant company went into liquidation and ceased to occupy the property. The liquidator subsequently disclaimed the lease, but the landlord did not go back into physical occupation of the property. The landlord did however continue to recover rent from the tenant’s guarantor, triggering the guarantor’s right to claim an overriding lease under the Landlord and Tenant (Covenants) Act 1995.  

Even though the landlord did not go back into physical possession of the property, the local authority demanded payment of the business rates directly from the landlord for the period after the disclaimer of the lease. The landlord refused to pay claiming that it was not liable for the rates as it had not gone back into possession of the property and also that the guarantor could now call for a lease entitling it to possession of the property. 

The High Court ruled in favour of the local authority. The Court held that once the tenant's liquidator had disclaimed the lease, the lease ceased to exist. The landlord was therefore entitled to immediate possession of the property and was liable to pay business rates for the property. The High Court also rejected the landlord’s argument that the guarantor was directly liable for the rates as the guarantor had not exercised its statutory right to call for a lease. 

Although this is unwelcome news for landlords faced with hefty bills for unpaid rates, such landlords may be able to recover this liability from any guarantors depending on the terms of any guarantee agreement. The same issue does not arise on an administration as administrators cannot disclaim leases and they are also exempt from business rates if they are not in occupation.