An important precedent has been created says commercial property agent Prop-Search, following a High Court ruling which makes property owners liable for business rates of unoccupied properties following the liquidation of its tenant.
The High Court has recently rejected an appeal by Schroders Exempt Property Unit Trust (SEPUT) versus Birmingham City Council against a previous judgement that deemed SEPUT liable for a £600,000 business rates bill.
Chris Billson, a Director of Prop-Search, said: “Whilst this decision is bad news for many landlords, at least it provides useful clarification as to who is responsible for business rates following disclaimer of a lease and a timely reminder to landlords that they may become liable for business rates in the event of a tenant insolvency.”
The facts of this case are relatively straightforward. A lease was granted to a tenant who then assigned the lease and provided an Authorised Guarantee Agreement (AGA), guaranteeing the assignee’s obligations pursuant to the lease. The assignee was ultimately liquidated and the lease was disclaimed. The assignee was not in occupation of the property, the subject of the lease, when the lease was disclaimed.
Whilst the landlord continued to recover rent on a continuing basis from the original tenant in line with the guarantee agreement, the local authority demanded payment of the business rates from the landlord for the period after the disclaimer, and ultimately obtained a liability order. SEPUT appealed, arguing that it was not entitled to possession of the property since it had not forfeited the lease, and that the guarantor could potentially claim an overriding lease under the Landlord & Tenant (Covenants) Act 1995, which would entitle the guarantor to possession.
The High Court held that the consequence of disclaimer was that the lease ceased to exist and that SEPUT became entitled to immediate possession. The guarantor remained liable to make good the tenant’s defaults, not because the lease subsisted but because it was contractually liable to do so. The Court therefore concluded that SEPUT as landlord was liable for payment of the business rates.
Chris Billson added: “Unfortunately, there is logic in the landlord being directly liable to pay the business rates as the lease is ultimately at an end and the landlord entitled to possession. The guarantor does not somehow step into the shoes of the assignee, save in respect of possession of the property.”
However, landlords are not necessarily without remedy. It would be expected that any original tenant providing an AGA or any other guarantee for a tenant in occupation would be liable for all liabilities that fall due pursuant to the lease. In the event of default - such as non-payment of rates - the guarantor is responsible for this. As a result, whilst the local authority need only pursue the landlord following the disclaimer, the landlord may well have a remedy against another party in any event to off-set the liability to the local authority.
Further information or advice can be obtained from Prop-Search - Tel: 01933 223300 / 01604 492000 or its website: www.prop-search.com