The Court of Appeal has ruled that a building is not split into individual hereditaments for rating purposes just because it has property guardians’ resident. This article addresses the outcome of the case and how this is likely to seriously impact the property guardianship model.
BUSINESS RATES and WHO PAYS THEM?
In England, business rates apply to all non-domestic properties consisting of land or buildings that are not specifically exempt from rating and are paid by the occupiers of properties, (or owners, if they are one and the same). The property owner is liable for business rates where properties are unoccupied.
The purpose of business rates is to raise revenue to fund public services in England. Business rates provide a significant level of revenue and are an important source of funding for key local services. Therefore efforts to mitigate or avoid liability are often robustly challenged by local authorities.
MITIGATION SCHEMES
Where a property is vacant, there are various schemes[1] available that may mitigate the property owner’s exposure to business rates. These include:
- Granting a lease to a company which then enters liquidation and thus benefits from the rates exemption (Rossendale BC v Hurstwood Properties)
- Granting a lease to a company which uses the premises for some purpose (e.g. storage) for six weeks (usually for minimal rent). This gives rise to beneficial occupation, with the company then vacating the property and benefitting from rates relief for the next 3/6 months (depending on the type of unit) (R(Principled Offsite Logistics) v Trafford Council).
- Granting licences to Property Guardians.
THE PROPERTY GUARDIANSHIP MODEL
Property guardianship is an arrangement, which typically sees property owners enter into an agreement with a ‘property guardian’ company, which in turn grants licences to individuals allowing them to occupy parts of the otherwise empty premises at a reduced rent (2). Ostensibly, this protects the building against the risk of trespassers and criminal damage but it also allows the property owner to mitigate the rates due on the empty building on the basis that it is being used for residential use.
The Result
The property is removed from the rating list by the Valuation Office (VO), resulting in no liability for business rates and instead, as it is used for the purpose of living accommodation, is subject to council tax rather than business rates, resulting in significant savings for the property owner.
This type of mitigation scheme worked well and had even survived challenge in the Upper Tribunal until the recent decision in the Court of Appeal in respect of the Ludgate House Limited (“LHL”) v Ricketts (VO) and London Borough of Southwark (“Southwark Council”) [2020] EWCA Civ 1637; when the scheme was brought into question:
THE LUDGATE HOUSE CASE
LHL, the owners of a vacant 11 storey office building near Blackfriars Bridge in London, comprising 173,633 sq ft, entered into an arrangement with scheme provider, VPS who in turn, granted licences to occupy to individual guardians saving LHL from a multi-million pound bill for business rates. The licences expressly provided that the individual guardians had no right to exclusive occupation of any part of the building. The agreement between LHL and VPS, provided that control, possession and management of the building remained with LHL.
The Valuation Office Decision
The VO found that irrespective of the presence of the guardians (around 40-50 on inspection at any one time), the building was not used wholly for the purposes of living accommodation and therefore was a single non-domestic hereditament (apparently influenced by the size of the building in comparison to the relatively small space actually occupied by the guardians) LHL were consequently ordered to pay business rates.
The Upper Tribunal (UT) Decision
The UT reversed the VO’s decision on the basis that, regardless of the terms of the individual licences, in practice, each of the guardians had exclusive possession of their own dedicated room for sleeping (in addition to using the communal ‘living’ areas of the building) and, as such, each of those ‘bedrooms’ was in rateable occupation by the individual guardian and was sufficiently identifiable as a unit of property so as to form a separate rateable hereditament. The UT held that, whilst LHL did derive a benefit from the guardians’ occupation, in that they provided security for the building, the relevant question for determining who was in occupation for rating purposes was what was each guardian’s own purpose for occupying their room? In the circumstances, the UT held that it was to provide each guardian with living accommodation and since that purpose could not be attributed to LHL, the guardians were not in occupation for LHL’s benefit but their own. Accordingly, LHL was not in occupation of the ‘bedrooms’ and thus building, as a whole, was subject to council tax rather than the business rates regime. The UT considered that rates mitigation was a consequence of the occupation rather than the purpose (looking at it from the guardians’ perspective).
The Court of Appeal (CA) Decision
The CA allowed Southwark Council’s appeal and found that LHL retained “general control” of the building which was enough to leave LHL with liability for empty property business rates.
The CA held that the fact that one could draw a red-line around a certain part of a building that an individual has sole occupation of, does not necessarily equate to that area being regarded as separate from or, on the other hand, part of a rateable hereditament consisting of a larger area. All of the circumstances need to be considered.
In this case the UT had been wrong to conclude that, whilst there was no direct contractual relationship between each guardian and LHL, the guardians’ occupation of their bedrooms could not be attributed to LHL. The guardians were the means by which VPS provided their services to LHL and the contractual arrangements made it clear that LHL retained control and possession of the building. All of the guardians understood this and that the reason for their occupation was to provide services to LHL. The fact that, in practice, in each guardian had a key to their own bedroom (around which one can draw a red-line) did not circumvent this.
The CA relied in part on previous case law relating to lodgers, which held that a ‘lodging house’ is treated as a single hereditament in the occupation of the landlord even though his control of the premises does not interfere with, but supports, the enjoyment by the lodgers of their own rooms for their own purposes. The fact this was not enough to amount to separate rateable occupation by a lodger supported the CA’s decision that the guardians were not in separate rateable occupation.
One of the other arguments raised by Southwark Council was that, where premises are used in such a way, they should be licensed as a house in multiple occupation (HMO) and where no actual licence is obtained, then the owner of such premises must not be allowed to rely upon such a scheme to mitigate its rates liability (on the ground of public policy). Given the CA’s decision on Southwark’s primary argument the CA did not consider this argument.
Comment
The outcome of the LHL case has severely undermined the use of property guardianship schemes to mitigate business rates and, subject to appeal to the Supreme Court, it seems unlikely that the current property guardian model will survive this decision. Property owners will not want to cede control of their buildings to property guardians residing in their building, who will then likely obtain the benefit of protections afforded by assured shorthold tenancies and HMO licences, in order to benefit from mitigating rates. Especially where, in cases such as those involving Ludgate House, the owner is looking to redevelop the building.
The Government announced in their July 2020 review that the next revaluation will take effect in 2023; it will be clear that property owners will be looking for fundamental reform of business rates liability.
[1] Please see my colleague Anthony Krensel’s article on other schemes here: https://www.brecher.co.uk/articles/business-rates-mitigation-yes-you-can/
[2] The London Assembly, based on dated from the University of York, state that the average monthly payment in London is £475pm
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.
