Category Archives: Rates

In public interest to wind up empty rates mitigation scheme

Section 45 of the Local Government Finance Act 1988 imposed a national non-domestic business rate (“NNDR”) upon hereditaments if 4 conditions are satisfied. For a start the hereditament must fall within a class prescribed by regulations. Regulation 3 of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (“2008 Regulations”) prescribed all non-domestic hereditaments apart from those exempted by Regulation 4. Regulation 4(k) of the 2008 Regulations exempted:

“Any hereditament…whose owner is a company which is subject to a winding up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act”.

In the High Court case of Secretary of State for Business Innovation And Skills v PAG Management Services Ltd [2015] PAG Management Services Limited (“PAG Management”) was incorporated to manage and coordinate a NNDR mitigation scheme to exploit this exemption for the benefit of associated companies in its Group and third party clients.

The scheme operated as follows:

1 PAG Management incorporated a special purpose vehicle (“SPV”);

2 PAG Management’s client companies immediately granted leases of the vacant properties to the SPV;

3 The leases were outside the business tenancy protection given by the Landlord and Tenant Act 1954. There was no premium. Usually they were for a 3 year term at a rent of £1 per annum terminable on 7 days’ notice. A director of one of the major scheme users, recognised this was “unfeasibly short” for a business tenant in actual occupation;

4 At the same time as the leases were granted the landlord waived the right to receive sums under the leases;

5 At the same time as the leases were granted the SPVs were placed in members’ voluntary liquidation. This was possible because the landlords’ waiver enabled the directors of the SPVs to make a statutory declaration of solvency;

6 The SPVs were now exempt from NNDR as companies in members’ voluntary winding up;

7 In each case PAG Management’s client company (the landlord) was not in occupation of the hereditament. The existence of the lease precluded its right to occupy;

8 The members’ voluntary liquidation proceeded slowly;

9 Under a fee agreement the Landlord paid PAG Management a percentage (15% – 40%) of the NNDR saved at a result of the lease being in place; and

10 The landlord refurbished and/or marketed the property. If a tenant was found the lease to the SPV was terminated and the new tenant took occupation, without any “empty rates” having been paid in the meanwhile.

The Secretary of State sought the winding up of PAG Management on a number of grounds. The successful one’s were an amalgam of “abuse of the insolvency legislation” and “lack of commercial probity having regard to the elements of the scheme”.

The court said the business of PAG Management necessarily involved:

– the creation of companies which existed for no purpose other than immediately going into liquidation.

– the creation of assets for no purpose other than their being held by those companies in liquidation but recoverable by the freeholder if the freeholder could turn them to advantage;

– PAG Management making arrangements for effective control over the liquidations to facilitate the maintenance in being of those assets; and

– the exercise of that control to secure that the liquidations continue rather than get concluded to shelter the assets so that PAG Management might earn fees.

This ran counter to the true purpose of liquidation which was the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlements of members.

Any adjustments legislation made to third party rights (including tax exemptions) were made to achieve that purpose.

There was a clear public interest in ensuring that the real purpose of liquidations was not subverted by treating a company in liquidation as a shelter (and seeking to prolong its continuation as such).

This misuse of the insolvency legislation demonstrated a lack of commercial probity. It its own way it also “subvert[s] the proper functioning of the law and procedures of bankruptcy”.

The business of PAG Management involved creating artificial leases incorporating elements of pretence, and the use of placemen to distance PAG Management’s owners and managers from the liquidation process. This suggested an awareness that necessary elements of PAG Management’s business might be thought improper and have to be disguised. These elements supported the court’s holding that PAG’s business lacked commercial probity.

PAG Management itself was an active and solvent business. That business involved the promotion of an NNDR mitigation scheme. Of itself the promotion of tax mitigation schemes was not an inherently objectionable activity.

But in the course of so doing:

– it used artificial leases having no commercial reality and containing some terms which were mere pretences;

– having procured that the companies it had created entered liquidation, it had delayed appointing new officeholders.

These would not of themselves be of sufficient weight to warrant a winding up. But PAG Management’s business model involved a misuse of the insolvency legislation and it was just and equitable to wind up the company. The court should exercise its discretion conferred by 124A of the insolvency Act 1986 to wind the company up.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Rates valuation officer not bound by Valuation Tribunal’s wrong facts

Once the Valuation Tribunal has decided a rateable value, that is the rateable value of the hereditament. The Valuation Officer (“VO”) cannot proceed on the basis that the rateable value is wrong, because that rateable value has been fixed in accordance with the procedures laid down by the Local Government Finance Act 1988 (“the 1988 Act”).

The way it can be established that such a rateable value is wrong is to make an appeal to the Upper Tribunal (or possibly by asking the Valuation Tribunal to review its own decision on the basis that it was reached on an erroneous understanding of the facts).

Unless a material change of circumstances provides a basis for a reconsideration of the entry in the list, the VO is bound to accept the entry whatever doubts he entertains about it, because his duty to maintain an accurate list exists inside a hierarchical framework of adjudication and appeal which he must respect.

It would undermine the whole system of appeals if the VO was entitled to impose his own view of the “correct” rateable value whenever he was satisfied that a Valuation Tribunal decision was wrong for whatever reason.

Even if out of time for an appeal a VO can appeal against the the Valuation Tribunal’s decision out of time. Such an appeal is not available, as of right, but first needs an application to the Upper Tribunal for an extension of the time for giving notice of appeal under rule 24(5) of the Tribunal Procedure (Upper Tribunal) (Lands Chamber) Rules 2010.

That application will trigger a judicial determination which may or may not allow an appeal to proceed, but that process will take account both of the VO’s desire to maintain the accuracy of the list and of the public interest in finality, and respect the statutory adjudication scheme.

No such application was made in the Upper Tribunal (Lands Chamber) Case of Mrics (Valuation Officer) Re: White Waltham Aerodrome [2014] which follows.

In 2005 the Berkshire Valuation Tribunal based the rates assessment of some aircraft hangars on an erroneous square meterage resulting in a low charge. The aircraft hangars each had an area of 910m2. But the Berkshire Tribunal decided that the area of each of the hangars was 217.9m2.

Then the ratepayer applied to the VO to add some offices to the hereditament. That resulted in a modest agreed increase.

When it came to preparing the draft 2010 revaluation the VO took the opportunity to correct the square meterage error resulting in a much higher assessment. The ratepayer tried to argue that the VO had not been entitled to reopen the low square meterage figure established by the 2005 Berkshire Valuation Tribunal. It also pointed out that some portacabins present in 2005 had left the site.

The Upper Tribunal (Lands Chamber) ruled that when the VO becomes aware of a material change of circumstances he is under a duty to alter the rating list to represent the new rateable value to reflect that change.

That gave effect to the VO’s duty to maintain an accurate list. The VO must value the hereditament in accordance with the provisions of paragraph 2 of Schedule 6 to the 1988 Act.

Contrary to the contentions of the ratepayer here, where there has been a material change of circumstances the VO is not restricted to adjusting the Valuation Tribunal’s determination by assessing the sum which must be added to or taken from the previous rateable value solely to reflect the impact of the material change, but is required to undertake the single valuation exercise of determining the rateable value of the hereditament as it now exists in light of those changed circumstances.

A mistake of fact made by the Valuation Tribunal need not be perpetuated and the VO is entitled to start from scratch, but giving appropriate weight to the Valuation Tribunal’s decision.

In most cases the starting point will be the original entry in the list, and the appropriate way to apply the statutory criteria, given the change of circumstances, would be to adjust the original figure. However, such valuation technique would be the means to implement the valuation criteria in paragraph 2 of Schedule 6, and NOT a substitute for those criteria.

However where it was obvious to the VO that the original entry in the list determined by the Valuation Tribunal was based on a mistaken understanding of the facts that would be an exceptional case entitling the VO to deviate from using the original entry in the list as his starting point.

But even if the Tribunal was wrong on this, the rateable value, which was altered by the VO on 29 October 2009, was not a rateable value determined by the Valuation Tribunal, but was rather the value agreed between the parties in July 2008, following the merger of the office building into the Airfield hereditament.

At that time the VO’s revaluation was a figure agreed by the parties, and represented the rateable value of a hereditament which, by the merger of the offices into the airfield, was itself materially different from the hereditament which had been valued by the Valuation Tribunal in its decision of 19 March 2008.

So in any event the 2010 revaluation, based on the corrected hangar square meterages, was actually an alteration to a rateable value in the rating list, which had resulted from an agreement between the VO and the ratepayer, and not from a Valuation Tribunal decision. So it did not, in any event, involve the constitutional and jurisdictional considerations which might have attended the VO interfering with a decision of the Valuation Tribunal.

So the VO’s appeal was allowed.

The blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.

Landlord liable for rates in respect of disclaimed lease

Under section 65(1) of the Local Government Finance Act 1988 (“the 1988 Act”) the owner of a hereditament or land is the person “entitled to possession of it.” So whether someone is liable for the rates during any relevant period depends on whether it was entitled to immediate possession of the whole Property during that period.

In the High Court Appeal case of Schroder Exempt Property Unit Trust & Anor v Birmingham City Council [2014] the Appellants were the freeholders of the Property. They granted a 10 year lease of the Property to Woodward Foodservice Limited (“WFL”). The lease required the tenant to pay all outgoings including rates. Clause 10.1 of the lease gave the Appellants a landlord’s right of re-entry in the event of default, which was to include a failure to pay rent or entering administration or receivership.

WFL assigned the lease to W F Group Limited, with the Appellants’ consent, but it guaranteed W F Group Limited’s obligations to the Appellants under the lease in an Authorised Guarantee Agreement.

W F Group Limited went into liquidation, and were wound up on 20 April 2011. The liquidator disclaimed all interest in the Property on the same day, under section 178 of the Insolvency Act 1986 (“the 1986 Act”).

The Appellants continued to call on WFL, as guarantor under the Authorised Guarantee Agreement, to make good the default of W F Group Limited in paying the rent, and WFL had made the payments demanded. The Appellants had not exercised any right to go into physical possession of the Property.

The Council demanded rates from the Appellants for the period after the disclaimer. These were not paid; and so the Council got a liability order for approximately £590,000. The Appellants now challenged this.

After the assignment of the lease and before the disclaimer, W F Group Limited was the tenant and the person entitled to immediate possession. After the disclaimer, the lease ceased to exist and the Appellants’ reversion was brought forward. So, the Appellants as freeholders became entitled to immediate possession.

But WFL remained liable to make good the defaults of the former tenant, not because the lease continued in any respect, but because section 178(4) of the 1986 Act operates to ensure that in the event of the tenant’s default the guarantor’s covenant continues and the third party guarantor remains contractually liable to the landlord.

So, the guarantor must continue to make good the former tenant’s default in paying rent under the disclaimed lease until the landlord exercises his right to immediate possession by physically taking possession.

In summary:

i) WFL did not “pay rent under the terms of the lease” – the lease had gone – it made payments under its contractual covenants to make good the former tenant’s default (as bound to do under the guarantee). The lease was deemed to continue for that sole purpose.

ii) When the lease was disclaimed, the Appellants’ right of re-entry under the lease disappeared with the rest of the lease.

iii) The Appellants right to immediate possession arose on disclaimer, the later re-taking of physical possession merely exercised that existing right.

iv) The respective positions of the Appellants and WFL differed. The Appellant had an immediate right to possession, which they may or may not exercise.

WFL did not have an immediate right to possession. Though, it could exercise its statutory right under section 19 of the Landlord & Tenant (Covenants) Act 1995 to call for a lease, which lease would give it an immediate right to possession, at the expense of the right currently “enjoyed” by the Landlord.

So the Appellant was the owner within the meaning of sections 45(1)(b) and 65(1) of the 1988 Act, and therefore liable for non-occupied rates for the Property.

In the High Court case of RVB Investments Ltd v Bibby [2013], a landlord (RVB) sued the guarantor under a disclaimed lease and was successful in its claim for the business rates in respect of the Property. So the presence of a guarantor may enable the landlord to recoup outlay on rates to the local authority.

This blog has been posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.

Dilapidations did not qualify Property for Empty Rate Relief

Regulation 4 of the Non-Domestic Rating (Unoccupied Property) (England) Regulations SI 2008/386 provides for Uniform Business Rate exemption for any hereditament “(c) whose owner is prohibited by law from occupying it or allowing it to be occupied” amongst other grounds.

In the High Court Appeal Case of Pall Mall Investments (London) Ltd v Gloucester City Council [2014] the appellant, Pall Mall (Investments) London Limited owned two properties at 67 and 69 London Road, Gloucester.

They were in the rating valuation list as offices. The properties were unoccupied during 2011-2013. Gloucester City Council, demanded unoccupied, non-domestic rates for those years totalling £365,835. The appellant sought exemption on the ground that non-occupation was the result of dilapidations, caused partly by vandalism so that the condition of the properties was so bad that occupation was prohibited by law.

The court ruled that it is not enough for the owner to establish that if he occupies, or permits the occupation of, the property for any purpose he will be open to prosecution under the health and safety legislation. Because at no time has the law stopped him going into the property to restore it.

He must show that the law prohibits occupation, either because:

1. the law says he must not occupy in the current circumstances, or,

2. the necessary effect of a prohibition or enforcement notice is to prohibit him from occupation.

Health and safety legislation does not prohibit occupation.

Neither the Act, nor the regulations made under it, prohibits an employer, or person in control, from occupation of the building – merely not to permit the property to be used by its employees, or to lease the property, without taking such measures as are reasonable for a building owner to take, or require of its tenant, to ensure that the workplace will be safe and compliant. Neither requirement, imposed on a property owner, constituted a prohibition of occupation of the property by law. They were prohibitions of activities rather than occupation.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.