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Lawbite: Business Rates – sham leases revisited (again)

  • United Kingdom
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

03-03-2021

Isle Investments Ltd v Leeds City Council [2021] EWHC 345

When is an ‘artificial ‘ lease a sham and when is an ‘artificial’ lease not a sham?

The answer, in this particular instance, seems to have something to do with snail farming.

The question is one that has come before the courts on a number of occasions in recent years and is important in the context of certain rates mitigation schemes. There are a number of companies that offer to mitigate business rates with the use of ‘off-the-shelf’ companies known as special purpose vehicles (SPVs). There are variations in the details of such schemes, but the basic premise is that a lease of an empty property is granted to an SPV, usually at a nominal rent. Although the SPV never goes into actual occupation, given that it is the entity that has the legal right to occupy the property pursuant to the lease, it is also the entity that has the obligation to pay the business rates. The SPV will not however have the means to pay the business rates and will invariably be placed into administration upon business rates being demanded.

There has been extensive litigation as regards such schemes.  Local authorities usually argue, amongst other things, that leases granted to SPVs pursuant to such schemes should be regarded as shams and therefore of no legal effect (with the result that the ‘landlord’ remains responsible for paying the rates). Such arguments have generally failed. What the courts have consistently said is that just because such a lease is artificial in nature (given its contrived nature), and just because the sole intention of the parties in entering into the lease may be to avoid business rates, that does not of itself make it a sham lease. It is, and is intended to be, a legally valid lease that grants the SPV exclusive occupation in exchange for a rent.

For a document to be considered a sham there has to be a common intention by the parties when entering into it that the document does not create the legal rights and obligations which it purports to do. In essence, the document needs to have been created with the intention of misleading others.

In the recent decision of Isle Investments Ltd V Leeds City Council the court found that 8 leases granted to various SPVs were shams, resulting in the ‘landlord’ having an unanticipated rates liability in excess of £100,000.

The Judge decided that the leases in question were shams on the basis that, she considered, there was no intention to ever grant exclusive occupation to the SPVs. In reaching this conclusion, the Judge was heavily influenced by the fact that 5 of the 8 leases had user provisions which restricted use to the operation of a snail farm. The premises in question were units in an office block.

The Judge was of the view that it was not practically possible to operate snail farms from the premises and that for the parties to enter into leases by which no legitimate, practical use could be made of the premises indicated a sufficient degree of pretence to enable her to find the leases to be shams. The decision has been upheld on appeal.

Key points

  • this is a rare victory for local authorities as regards the use of SPVs to mitigate rates liability. It should certainly not be seen as signalling the death knoll for such schemes – the weight of court authority remains very much against local authorities (albeit a Supreme Court ruling in the case of Rossendale BC v Hurstwood Properties is currently awaited).  Whether this decision signals an increasingly fine distinction between when artificial leases will be considered as shams and when they will not, or whether it is simply a decision which is ‘against the run of play’ and which turns on its own particular facts, remains to be seen
  • if you are currently engaged in an SPV scheme or are about to enter into one, it is worth reviewing the lease to ensure that its terms are consistent with the nature of the premises