For as long as there have been taxes, there have been those who make their living out of devising shrewd and ever more complicated ways to legally mitigate those taxes. Empty property rates are no exception. From the Bluetooth equipment sitting on the windowsill of a disused office transmitting marketing messages to those walking past, to the handful of boxes stored in vast warehouses for 6 weeks and then moved to another equally vast location (and in one ingeniously simple instance, a warehouse used as a bouncy castle ‘testing facility’). Faced with considerable amounts of lost revenue, over the past few years Local Authorities have increasingly dedicated significant amounts of time and resources to challenging these schemes through the higher courts and have invested heavily in dedicated ratings recovery teams for this purpose. On the whole, the Local Authorities have not had much luck, with the courts regularly finding that such carefully devised rates mitigation schemes do not fall foul of the law. That is until the Supreme Court stepped in last month ruling that one type of scheme in particular – the “managed insolvency” process – does not work so as to transfer liability for rates to the “insolvent” party.
As a matter of rating law, the person with liability for non-domestic rates on a commercial property is the person “entitled to possession”. In a landlord and tenant scenario it is the tenant who is liable. The “managed insolvency” mitigation scheme sees the owner of an empty property grant a lease to a special purpose vehicle (an SPV) without any assets or business. By virtue of the grant of the lease, the SPV becomes the person entitled to possession of the property and is therefore liable for non-domestic rates. The SPV is then immediately placed into voluntary liquidation or otherwise dissolved. In a liquidation scenario, the SPV benefits from a specific exemption from liability for non-domestic rates that applies to companies in liquidation and in the dissolution scheme, the lease and the rates liability transfers to the Crown as bona vacantia. The ‘landlord’ could then avoid paying rates until they terminated the lease (because they need the property back) or the liquidator or the Crown disclaim it.
It was this type of scheme that was subject to challenge by the local authority in Hurstwood Properties (A) Ltd v Rossendale BC [2021] UKSC 16. The challenge was based in part on the premise that the lease to the SPV was ineffective to make the SPV entitled to possession of the property. The Court of Appeal struck out the claim but, undeterred, the Local Authority appealed to the Supreme Court where they found success.
The Supreme Court considered that the purpose of subjecting vacant commercial properties to non-domestic rates is to deter owners from leaving properties unoccupied and encourage them to be brought back into use by making the person entitled to possession, that is the person with the immediate legal right to actual possession, liable for rates after an initial exemption period.
The Court held that the SPVs in “managed insolvency” schemes could not properly be considered the person entitled to possession of the property as:
- the scheme was designed such that the SPVs had no real or practical ability to exercise its legal right to possession (in reality practical control of the subject properties remained with the landlord and had not been passed to the SPVs by grant of the leases); and
- the legal right to possession had been granted solely to avoid liability for rates.
The Supreme Court concluded that, properly construed, the legislation is concerned with a real and practical entitlement to occupy, which includes the ability either to occupy the property or to put someone else into occupation. To consider the SPVs in these schemes as a person “entitled to possession” of a property would defeat the whole purpose of empty rates legislation.
Furthermore, the Court found that:
- Dissolution scheme – the SPV’s directors acted contrary to their statutory and fiduciary duties by committing their company to liability for rates when they had no ability to pay.
- Liquidation scheme – there was no intention for the liquidators to collect, realise and distribute assets. The ‘liquidation’ was artificially prolonged without the lease being disclaimed so as to allow the SPV to continue benefitting from the rates exemption. This was an abuse of the insolvency legislation.
The Court considered that it could never have been the Government’s intention that an “entitlement to possession” created with the aim of inducing this type of unlawful conduct should fall within the statutory rates exemption scheme.
In all the circumstances, it was the landlord, not the SPVs, that were entitled to possession of the empty properties and therefore they who remained liable for empty rates.
This case serves as a cautious reminder to those seeking to mitigate their rates liability through these types of schemes. Local Authorities are committed to challenging them in the country’s highest courts and whilst such schemes may have succeeded countless times before, there is always a risk that a determined local authority will be looking to make an example of you.
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
