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The effect of disclaimer in rating

Money iStock 000008683901XSmall 146x219Can land be neither owned nor occupied for non-domestic rating purposes? That was the question which came up recently before the High Court by way of case stated. Judith Jackson QC analyses its findings.

In Schroder Exempt Property Unit Trust (“SEPUT”) v Birmingham City Council (“the Council”) SEPUT was the freehold owner of the premises. SEPUT had granted a Lease for 10 years of the premises to company A. Thus, SEPUT was the landlord and A the original tenant under the Lease. A assigned the Lease to an associated company, B, and under the terms of a licence to assign, B’s liabilities to its landlord under the Lease were guaranteed by A, who entered into an Authorised Guarantee Agreement (“AGA”) with SEPUT. B went into liquidation and was wound up in April 2011 and the liquidator of B disclaimed the Lease at about the same time. B ceased to occupy the premises and it was agreed that the premises were at all material times unoccupied. SEPUT had continued to receive ‘rent’ from A as the guarantor under the terms of the AGA.

Rates were demanded for the period after the disclaimer of the Lease and the liquidation of B, against SEPUT as the “owner” under s 45(1)(b) and s 65(1) of the Local Government Finance Act 1988 (“the 1988 Act”). The Magistrates Court had made a liability order against SEPUT as the owner of the premises.

The statutory provisions

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Section 45(1) of the 1988 Act provides (so far as material) that:

"(1) A person (the ratepayer) shall as regards a hereditament be subject to a non-domestic rate in respect of a chargeable financial year if the following conditions are fulfilled in respect of any day in the year-

(a) On the day none of the hereditament is occupied,

(b) On the day the ratepayer is the owner of the whole of the hereditament"

Section 65 provides that:

"(1) The owner of a hereditament or land is the person entitled to possession of it."

Section 178 of the Insolvency Act 1986 (“ the IA”) enables the liquidator of a company to disclaim onerous property and subsection (4) describes the effect of disclaimer:

"(4) A disclaimer under this section—

(a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but

(b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person."

Section 19 of the Landlord and Tenant (Covenants) Act 1995 enables the guarantor of the obligations of a former tenant under a lease, who has been called upon and has made good the default of the tenant in paying rent to the tenant’s landlord, to demand an overriding lease from the landlord.

SEPUT’s contention

The meaning of “entitled to possession” and the interaction of s 178(4) of the IA and s 19 of the 1995 Act formed the heart of SEPUT’s argument on its appeal by way of case stated to the High Court. In Brown v City of London Corporation (Re Solomon) [1996] 1 WLR 1070 Arden J had had to consider the meaning of “entitled to possession” in s 65 of the 1988 Act. That case concerned whether receivers appointed as agents of a company which owned commercial rateable premises, were liable for rates as persons “entitled to possession” of the premises. Arden J  held that, although under the powers contained in the debenture under which they were appointed, the receivers had a power to go into possession, unless and until they decided to exercise that power, they were not “entitled to   possession” within the meaning of s 65.

SEPUT sought to argue that until the guarantor, A, called for an overriding lease under s 19 of the 1995 Act, or the freeholder otherwise chose to relet the premises, SEPUT was not entitled to possession; it had a power to relet but until that was exercised it was not “entitled to possession” within the meaning of s. 65 of the 1988 Act. It contended that at the material times there was no “owner” within the meaning of s 45 of the 1988 Act.

The decision

The Judge rejected that submission and accepted the Council’s argument that SEPUT’s submissions were contrary to and had been answered conclusively by the House of Lords’ decision in Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70. The principles contained in that case are that (i) as between the landlord and tenant, the lease is determined, ceases to exist, and the landlord’s reversion is accelerated under s 178(2)(a); (ii) where third parties are involved, such as guarantors, the liability of the guarantor’s liability does not cease under s 178(2)(b); and (iii) section 178(2)(b) is not inconsistent with the notion of the lease determining under s 178(2)(a); subsection (b) operates as a deeming provision.

“Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined” per Lord Nicholls at p. 88H.

Hindcastle was considered in the context of an AGA given after the coming into force of the 1995 Act  in Shaw v Doleman [2009] EWCA Civ 279,  where the former lease was referred to as a “fictional lease”. Hindcastle was also applied by the HL in Christopher Moran Holdings Ltd v Bairstow & Anor (In Re Park Air Service plc) [2000] 2 AC 172.

“Where (as in the present case) these are the only parties involved, the disclaimer operates to determine the lease altogether with the result that the landlord’s reversion is accelerated: see Hindcastle Ltd v Barbara Attenborough Associates Ltd, per Lord Nicholls of Birkenhead. This is because the subsection expressly provides that the tenant’s rights and liabilities in respect of the leasehold property are determined. These include its right to possession and its liability to pay rent. Once these are determined, the landlord is entitled to immediate possession and has no right to any further payment of rent. In Hindcastle v Barbara Attenborough Associates Ltd, your Lordships explained that the disclaimer has the same effect even where third parties such as sureties are involved. When the lease is disclaimed it is determined and the reversion accelerated, but the effect of subsection (4)(b) is to preserve the rights and liabilities of others, such as guarantors and original tenants, as though the lease continued” per Lord Millett at p. 183D-F (emphasis supplied).

Applying these principles to the facts of the case: when the Lease was assigned, and until the disclaimer, B was the tenant and the person entitled to immediate possession. Upon disclaimer, the Lease ceased to exist and determined as between SEPUT and B and SEPUT’s reversion was accelerated. SEPUT as the freehold owner thereupon became the person entitled to possession. SEPUT as the former landlord was entitled to continue to call upon the guarantor to make good the former tenant’s default in paying the rent, as if the Lease had continued. Those were the simple propositions which the Judge, Hickinbottom J., accepted.

The position of the receivers in Brown was fundamentally different because the company in receivership was entltled to possession unless and until the receivers exercised their power to go into possession. The company was therefore the “owner” for the purposes of s 65 of the 1988 Act, but that was no comfort to the local authority who  simply ranked as an unsecured creditor for the unpaid rates.  

Two points arose in the course of the hearing which are of some interest and importance for practitioners. First, it may be a moot point whether after disclaimer of a lease, a guarantor retains the right to call for a reversionary lease under s 19 of the 1995 Act. The guarantor might be limited to the right to seek a vesting order under s. 181 of the Insolvency Act 1986: see McLoughlin on Commercial Leases & Insolvency. Secondly, the appeal to the High Court by way of case stated from the Magistrates Court in civil matters, is the end of the line. No further appeal (with or without permission) is permitted: see Farley v Child Support Agency and Sec of State for Pensions [2005] EWCA Civ 869.

Judith Jackson QC is a member of Maitland Chambers and acted for Birmingham City Council in the above case. She can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..

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