UK: Schroder Exempt Property Unit Trust V Birmingham City Council (Liability For Rates After Lease Disclaimer)

Facts

This case concerned liability to the Council for non-domestic rates in respect of a property which was unoccupied for the duration of the relevant period. The lease of the property had been disclaimed by the liquidator of the insolvent tenant company and the Council sought payment of the business rates from the landlord.

The lease required the tenant to pay all outgoings, including rates. Following an assignment of the lease, the outgoing tenant agreed to stand as guarantor to the new tenant's obligations to the landlord by way of an Authorised Guarantee Agreement.

When the new tenant company went into liquidation, the liquidator disclaimed all interest in the property. The landlord sought payment of sums due under the lease from the former tenant as guarantor, who made payments to cover the insolvent tenant's default on rent.

For the period after the disclaimer, non-domestic rate demands were made by the Council to the landlord (who had not exercised any right to go into possession of the property) and these rates went unpaid. The Council therefore sought a liability order on the basis of section 45(1) of the 1988 Local Government Finance Act.

Local rates are in general levied on an occupier. However, where there are no actual occupiers, the ratepayer is the person who meets the conditions of section 45(1). Section 45(1)(b) states that "the ratepayer is the owner of the whole of the hereditament". The issue between the parties was the identity of the "owner" following disclaimer of the lease given that "owner" is defined in section 65(1) of the 1988 Act as "the person entitled to possession". The landlord argued it was not entitled to possession as the lease had ended in respect of the liabilities of the insolvent tenant but the disclaimer did not end the lease for all purposes.

Decision on appeal

It was decided that, following the disclaimer of the lease, the landlord had the right to immediate possession. Therefore, the landlord was the "owner" within the meaning of the Local Government Finance Act 1988. As the owner, the landlord was liable for the non-domestic rates for the unoccupied property.

The Court drew a clear distinction between the existence of the lease and the liability of the guarantor. The case of Hindcastle Ltd v Barbara Attenborough Associated Ltd [1997] A.C. 70 confirmed that a disclaimer operates to terminate a lease entirely and it is because of this that the deeming provisions of section 178(4) of the Insolvency Act 1986 are necessary. These deeming provisions operate to ensure that a guarantor's covenant in the event of a tenant's default is given continued substance so that the guarantor remains contractually liable. A guarantor is therefore not released by a disclaimer from his contractual liability to make good the defaults of the relevant former tenant. Instead, the guarantor is liable for the former tenant's payments owed under the disclaimed lease until such time as the landlord exercises his right to possession by achieving physical recovery of the premises.

Since the disclaimer meant that the tenant lost the right to immediate possession and the landlord then had the right to immediate possession as the freehold owner, it was held that the district judge had been correct to find that the landlord was the "owner" of the property for the purposes of section 45(1) and section 65(1) of the 1988 Act and as such was liable for the non-domestic rates.

A liability order was made and the appeal was dismissed.

Comment

This case confirms the position on landlord liability for non-domestic rates in the event of a tenant insolvency and highlights the risk to landlords that they may become liable for these costs. It is also a reminder of the importance of Authorised Guarantee Agreements in these circumstances. Although the landlord as the "owner" may be liable for the non-domestic rates, it may be able to recover this liability from the guarantor.

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