Lawbite: Landlord liable for business rates after lease disclaimed

• Real estate dispute resolution
• Real estate sector

15-07-2014

Schroder Exempt Property Unit Trust v Birmingham City Council [2014] EWHC 2207 (Admin)

Many local authorities have been in the habit of looking to landlords for payment of business rates after disclaimer of a lease by an insolvent tenant; and many landlords have accepted liability.  Until now, though, the courts have not ruled upon whether or not a landlord is liable in these circumstances.

The question is whether the landlord, following disclaimer, is “entitled to possession” of the property; under s.65(1) of the Local Government Finance Act 1988, it is the person “entitled to possession” who is liable for the rates.

Here, the tenant went into liquidation and ceased to occupy the property, and the liquidator then disclaimed all interest in the lease.  The landlord called upon the tenant’s guarantor to pay the rent, and they did so.  The landlord did not enter into physical occupation of the property.  The Council then demanded payment of the business rates from the landlord for the period after the disclaimer, and ultimately obtained a liability order.  The landlord appealed, arguing that it was not entitled to possession of the property since it had not forfeited the lease, and the guarantor could potentially claim an overriding lease under the Landlord and 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 the landlord 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.  It followed that the landlord was liable for the business rates.

This case is a useful clarification of 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 tenant insolvency.  Although liable for rates, landlords with the benefit of an authorised guarantee agreement may be able to recover this liability from the guarantor.

A landlord might also usefully look into adopting one of the various schemes for mitigation of business rates which now have widespread acceptance.