One of the effects of the recent economic climate has been an increase in the number of tenants going into liquidation. Consequently, many landlords have found themselves on the receiving end of a notice of disclaimer from liquidators relating to their property.
Responsibility for business rates on an empty property is “the personal entitled to possession of the property” according to the Local Government Finance Act 1988. Ultimately, this will be the freehold owner as the recent case of Schroder Exempt Property Unit Trust & another v. Birmingham City Council has highlighted. The case involved an appeal to the high court from a liability order for business rates issued by the local authority.
The freehold owner had granted a 10 year lease of the property to WFL. The lease provided that:
- The tenant would pay rent and rates; and
- The landlord had a right of re-entry if the tenant entered into administration or receivership.
Two years later, WFL assigned the lease to WF Group. WFL entered into an authorised guarantee agreement (AGA) in which WFL guaranteed WF Group’s obligations under the lease.
In 2011 WF Group went into liquidation and the liquidator disclaimed all interest in the property and WF Group ceased to occupy the property. The freehold owner did not re-enter the property, instead it sought payment for rent and all outgoings, including the rates, from WFL as guarantor under the AGA.
On receiving demands for business rates following the disclaimer of the lease, the freehold owner argued that it should not have to pay the rates. This is because it had not re-entered the property and therefore was not entitled to possession of the property. The argument failed.
The judge turned to the case of Hincastle Ltd. V. Barbara Attenborough Associates Ltd. This case deals with the effect of disclaimer on the relationship of landlord and tenant and also any former tenant or guarantor. The House of Lords held in Hindcastle that disclaimer determines the tenant’s interest in the property. The leasehold estate ceases to exist but the obligations of guarantors remain as though the lease had continued and their liabilities to the landlord continue. The high court held that despite the fact that the landlord could recover the rent and sums paid out in respect of rates from WF Group after disclaimer under the terms of the AGA, this deemed continuation does not take away from the fact that the disclaimer, as a matter of property law, ended the lease. Liability for the business rates reverted to the landlord.