Landlords have been experiencing a rough time of late with both the introduction of the Commercial Rent Arrears Recovery provisions and court rulings on various issues surrounding landlords and tenants.
It is a common occurrence that a liquidator will disclaim a lease under section 178 Insolvency Act 1986. A disclaimer does not prohibit a landlord pursuing any guarantors (who remain liable) but what about the landlord’s liabilities for business rates? This question formed the basis of the latest reported case from The High Court in Schroder Exempt Property Unit Trust and another v Birmingham City Council  EWHC 2207.
Business rates are payable by the occupier of a property. When that property is unoccupied, the owner of the property (who is also the person entitled to possession of the property) is liable to pay the rates under sections 45(1) and 65(1) of the Local Government Finance Act 1988 (the “Act”).
In “Schroder” the tenant went into liquidation and liquidator subsequently disclaimed the tenant’s interest in the property. The landlord did not exercise its right to take up physical occupation of the property following the disclaimer, although they did proceed to demand payment of rent from the guarantor who made payment of the sums demanded.
The local authority 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 for some £590,000. The landlord appealed.
At the appeal, the Landlord 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 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.
In dismissing the appeal, the High Court held 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.
The court went further to say 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. However, the guarantor remained liable to make good the former tenant’s default in paying the rent until such time as the landlord exercised its right to immediate possession by physically taking possession of the property. This was because of the effects of section 178 Insolvency Act 1986 which operates to ensure that the guarantor will remain contractually liable.
This is not a good decision for landlords who may wish to take into consideration the implications of a failed tenant when considering their re-letting strategy prior to (or following) the disclaimer of a lease. A solicitor may correct me but it appears the court have taken the view that if a landlord continues to receive rent (regardless of the source) then he has (by implication) taken possession of the property and accordingly, is liable to pay business rates. The decision may have been different if there was not a guarantor that could pay the tenant’s obligations under the lease.