Schroder Exempt Property Unit Trust & Ors v Birmingham City Council (2014)
A landlord was the "owner" of an unoccupied property for the purpose of non-domestic rates where the liquidator of a tenant company had disclaimed the lease. The disclaimer determined the lease and gave the landlord the right to immediate possession, regardless of the existence of the guarantor's obligations. While the Insolvency Act 1986 s.178(4)(b) preserved the liabilities of the guarantor, those rights were contractual in nature, and did not give the guarantor a right to immediate possession.
In an appeal by way of case stated, the appellants (S and B) appealed against a liability order imposed by the respondent local authority for non-domestic rates in respect of a property.
S owned the property and had entered into a 10-year lease under which the lessee (W) was responsible for all outgoings, including rates. W assigned the lease to another company. W guaranteed the new tenant company's obligations under the lease. The tenant company went into liquidation on April 20, 2011 and the liquidator disclaimed all interest in the property on that date. S did not exercise its right to re-enter the property but called on W, as guarantor, to pay the rent. The local authority demanded rates from S for April 20, 2011 to March 31, 2013. The property had been unoccupied for the whole of that period and ownership had transferred from S to B during that time. The court was required to determine whether the district judge had been correct to find that S was the owner within the meaning of the Local Government Finance Act 1988 s.45(1) and s.65(1).
S and B submitted that they could not be said to be "entitled to possession" within s.65(1) because the Insolvency Act 1986 s.178(4) preserved the lease for the purposes of the guarantor's obligations, and W could seek an overriding lease under the Landlord and Tenant (Covenants) Act 1995 s.19.
(1) S and B's submissions could not stand in the light of Hindcastle Ltd v Barbara Attenborough Associates Ltd  A.C. 70 for the following reasons: (a) it was clear from the decision in Hindcastle that a disclaimer determined a lease for all purposes. It was precisely because the lease ceased to exist that a deeming provision was necessary, s.178(4)(b) meaning that the rights and obligations of others such as guarantors remained as though the determined lease had continued; (b) all other rights and obligations under the lease ceased, such as the lessee's obligation to pay rent and the landlord's right to re-enter; (c) prior to disclaimer the tenant had the right to immediate possession; after disclaimer, the former tenant had no such right and the landlord had the right to immediate possession as freehold owner without the burden of any leasehold interests, Park Air Services Plc, Re  2 A.C. 172 followed; (d) section 178(4)(b) clearly preserved the rights and liabilities of guarantors, but those were not property rights; they were contractual rights under the guarantee. Thus, if the landlord took actual possession of the property, he did not change the position with regard to property rights, including the entitlement to possession which he already had; he simply brought to an end the guarantor's contractual obligation to make payments under the guarantee. Any artificiality in that situation derived from the statutory scheme, Hindcastle, Shaw v Doleman  EWCA Civ 279,  Bus. L.R. 1175 and Basch v Stekel  L. & T.R. 1 followed. Accordingly, after the assignment of the lease and prior to the disclaimer, the tenant was the person entitled to immediate possession. After the disclaimer, the lease ceased to exist and the appellants' reversion accelerated. Consequently, S or B, as freehold owners, became entitled to immediate possession. W, however, remained liable to make good the defaults of the former tenant because of the operation of s.178(4). Therefore, W had to make good the former tenant's default in paying the rent under the determined lease until the landlord exercised his right to immediate possession by physically taking possession (see paras 16-24 of judgment). (2) The appellants had an immediate right to possession which they could choose to exercise or not. W did not have an immediate right to possession; although if it exercised its statutory right under s.19 of the 1995 Act to call for a lease then that would give it an immediate right to possession at the expense of the appellants' right, Brown v City of London Corp  1 W.L.R. 1070 considered. However, W had not sought such a lease. The district judge had therefore been correct to find that S was the owner of the property for the purposes of s.45(1) and s.65(1) of the 1988 Act (paras 25, 31-32).
LTL 15/7/2014 :  EWHC 2207 (Admin)