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Landlords Business Rates Liability following Disclaimer of Lease

View profile for Colin Winyard
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The recent case of Schroder Exempt Property Unit Trust and another v Birmingham City Council provides a significant clarification of the law on liability for business rates on empty commercial property when a lease has been disclaimed. Colin Winyard, Commercial Property Solicitor, reviews the case and what this means for commercial property owners.

The High Court considered the following facts before coming to a ruling which although logical may not be popular with landlords of commercial property:-

In 2006 Schroder, the landlord and freehold owner of the property granted a 10 year lease to WFL. Two years later WFL assigned the lease and provided an Authorised Guarantee Agreement guaranteeing the assignee’s obligations under the lease. In 2011 the assignees went into liquidation and the liquidator disclaimed the lease.

Importantly, the premises were no longer occupied under the lease by the assignee and the Landlord did not physically occupy the premises following disclaimer of the lease.

As provided in the Authorised Guarantee Agreement WFL paid all rents due under the lease. This was unsurprising as the case of Hindcastle Limited v Barbara Attenborough Associates Limited [1996] established that disclaimers do not affect the rights and liabilities of guarantors. The case started when Birmingham City Council sought to recover payment of business rates due in respect of the property which had been empty since the disclaimer. Under a lease business rates usually fall to be paid by the Tenant and are in any event the responsibility of the occupier. The City Council sought to impose them on the Landlord as owner of the vacant property. The Landlord appealed against the Council who had obtained a liability order to enforce payment.

The Court had to decide who was liable to pay business rates for an empty property following disclaimer of lease. It was therefore necessary to determine whether the landlord was the ‘owner’ under the Local Government Finance Act 1988(LGFA) s65(1) i.e. the person entitled to possession.

The High Court decided that the landlord should be liable for payment of the business rates. It was held that following the disclaimer the lease ceased to exist. It was therefore irrelevant whether or not the landlord physically took repossession of the property following the disclaimer. The decision relied on the fact that once the lease had been disclaimed the landlord had a right to immediate possession. Whether or not the landlord chose to exercise this right had no bearing on its obligation to pay business rates for the empty premises as it was the ‘owner’ (entitled to take possession) under the LGFA 1988, s65(1). This case is of significance as in previous cases, the landlord had taken back possession following disclaimer.

The landlord also argued that it should not have to pay business rates as there was a guarantor and the disclaimer did not end the lease in all respects as the guarantor could have called for “assignment” of the lease back to it. Accordingly the Landlord was not entitled to immediate possession. That argument also failed and the Court stated that following the disclaimer the landlord was entitled to immediate possession of the property irrespective of the guarantor’s rights. The court held that the guarantor was only contractually obliged to pay rent due to the obligations laid down under the Authorised Guarantee Agreement, not the lease.

The Schroder ruling has proved to be significant as it provided clarification on an ambiguous area of law and highlights one of the risks a landlord accepts when leasing out commercial premises. This can be a serious financial risk with the business rates in this case amounting to almost £600,000. In these circumstances the landlord is faced with a choice: leave the premises empty and pay business rates, or take occupation or re-let the premises and lose the guarantee payments.

Landlords seeking rent guarantees should therefore consider including a liability for the guarantor to pay the business rates for the remainder of the term and whilst the premises remain unoccupied.

You can contact Colin or the Commercial Property team on 02380 717717 to have your queries answered.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.