Schroder Exempt Property Unit Trust and another v. Birmingham City Council [2014] EWHC 2207

Summary

A landlord is liable for business rates where a tenant's lease is disclaimed, even if the landlord does not take possession of the property following a disclaimer.

Background

When a liquidator disclaims a lease, the disclaimer operates to determine the rights, interests and liabilities of the tenant in the disclaimed lease. However, the disclaimer does not affect the rights or liabilities of guarantors pursuant to the lease (section 178 of the Insolvency Act 1986, Hindcastle Limited v. Barbara Attenborough Associates Limited [1996]).

Therefore, in the event of a disclaimer, a landlord can still seek to recover rent from (for example) a former tenant of a new lease who provided an Authorised Guarantee Agreement (AGA) guaranteeing the insolvent tenant's performance of a new lease.

What then is the position in respect of disclaimer and rates? Absent the disclaimer, the tenant is the person with liability for business rates as the person entitled to possession of the property (sections 45(1) and 65(1) of the Local Government Finance Act 1988). In the event of tenant insolvency and the property being vacated during administration or liquidation, an empty rates exemption will apply, otherwise rates will be payable as an expense of the administration or liquidation.

Focusing on the point at which the lease is disclaimed, in Schroder it has been held that the landlord is the person with liability for payment of rates.

Facts

The facts of Schroder are straightforward. A lease was granted to a tenant who assigned the lease and provided an AGA guaranteeing the assignee's obligations pursuant to the lease. The assignee was ultimately liquidated and the lease was disclaimed. The assignee was not in occupation of the property the subject of the lease when the lease was disclaimed.

The landlord recovered rent on a continuing basis from the original tenant pursuant to the tenant's AGA. The local authority sought to recover rates following the disclaimer from the landlord and obtained a liability order. The local authority appealed - the issue to be determined being whether the landlord was entitled to immediate possession of the property following the disclaimer.

Decision

The court held that this was the case and the landlord was therefore directly liable for the rates, and not the former tenant who guaranteed the assignee. It was confirmed that the disclaimer extinguishes the lease and accelerates the landlord's reversion. The effect of this is that the landlord has an immediate right to possession. The guarantor remained liable to pay sums equivalent to the rent that would otherwise have been payable pursuant to the lease, pursuant to the AGA. The guarantor does not pay rent as rent under the lease as there is no longer any lease following a disclaimer. Therefore, the guarantor does not somehow step into the shoes of the assignee, save in respect of possession of the property.

Any right on the part of the guarantor to demand an over riding lease is subsequent to the landlord's more immediate right to possession. Therefore, the fact that a guarantor can end up in possession does not constitute an immediate right and the guarantor is required to elect to exercise its right. This is different from the situation the landlord finds itself in, as the landlord has no election to make - it simply has the immediate right to possession upon the disclaimer (and the liability for rates that comes with this 'right').

Analysis

The case confirms what many considered the correct legal position to have been. There is a logic in the landlord being directly liable as the lease is at an end and the landlord is entitled to possession at that point in time. To hold otherwise would likely offend policy and prevent recovery of rates by local authorities.

The landlord is also not left without remedy in many situations. It would be expected that any original tenant providing an AGA or any other guarantor of a tenant in occupation would be liable for all liabilities that fall due pursuant to the lease. In the event of default, e.g. non-payment of rates, the guarantor is responsible for this. As a result, whilst the local authority need only pursue the landlord following disclaimer, the landlord may well have a remedy against another party in any event to off set the liability to the local authority.

The landlord may not be so fortunate in cases where a guarantee is void or insufficiently wide, or where there is no guarantee at all. Where that is the case, the landlord should seek to mitigate its position by relying on any empty rates exemptions and adopting other methods to preserve itself against an unwelcome bill from the local authority.