Property guardians as a business rates mitigation measure

Empty properties qualify for empty rates relief for a short period, after which they are liable to full business rates. And, given that business rates total approximately 50% of the annual rent on a commercial property, it is small wonder that landowners often look for ways to mitigate liability for empty property rates. Enter stage left, property guardianship schemes. In addition to providing the companies that operate them with an income, individual guardians with living accommodation at cheaper rates than market rents, and owners of empty premises with a measure of protection against vandalism and squatting, the fact that buildings are occupied by property guardians has been known to persuade valuation officers to alter rating lists. As a result, some buildings have benefited from substantial reductions in rateable values. Others, “used wholly for the purposes of living accommodation”, have been deleted from rating lists altogether, creating a liability for council tax instead. Ludgate House The question that arose in London Borough of Southwark v Ludgate House Ltd [2020] EWCA Civ 1637; [2020] PLSCS 221 was whether use of a property guardianship scheme relieved the owner of multi-storey offices in London, comprising 173,633 sq ft, from a multi-million-pound bill for business rates. The tenant vacated the building in 2015, before its redevelopment as part of a large office, residential and retail complex. But demolition work did not begin until 2017. So the landowner, LHL, entered into an arrangement with VPS, a company that specialised in providing property guardians. The guardians signed agreements with VPS, which were described as “licences”, stating that they would not have exclusive possession or occupation of any part of the building. They could share the living space and communal facilities, which included toilets, showers and kitchens. But the extent of the living space might vary from time to time, and, although guardians might have a room to themselves, with a lockable door, they could be required to move, on request. Roller-coaster The vice president of the Valuation Tribunal, who inspected the building, was struck by the vast scale of its floors and the enormity of open space and unadapted office areas that would, in practice, have been unused by the 40-50 guardians usually present at any one time. And she was not satisfied that Ludgate House, or any part of it, was used wholly for the purposes of living accommodation. The Upper Tribunal (Lands Chamber)disagreed. It explained that liability for business rates depends on how premises are used, and not on their physical design or configuration. Furthermore, a property may be wholly used for a particular purpose, even though not all of it is so used. The guardians had exclusive occupation of their own rooms, despite any overspill into communal areas. They wanted somewhere to live, did not have any contractual relationship with or provide any services to LHL, other than as a by-product of their residence, and were not in occupation on LHL’s behalf. Control The Court of Appeal has overturned the decision. It reasoned that, if an occupier does not have possession, he will not be in rateable occupation and, citing Lord Carnwath in Cardtronics Europe Ltd and others v Sykes (VO) and others [2020] UKSC 21; [2020] EGLR 26, observed that, where a person in possession of premises gives another possession of part, he does not cease to be liable to business rates “if that possession be not exclusive”. Sole use is not necessarily exclusive use and the mere fact that someone lives in a unit of property, around which a continuous red line can be drawn, does not necessarily mean that he is in rateable occupation. Where it is necessary to decide which of two or more candidates is in rateable occupation, the answer will depend on the position and rights of the parties in respect of the premises. And if their rights are contractual, the court must examine the terms and consider the purposes for which the premises are occupied. The decisive factor was who exercised “general control” over Ludgate House. The guardians did not have keys to the building itself and the terms on which they occupied were heavily restricted. Neither LHL or VPS had parted with possession, or indeed occupation, and the guardians could be compared with lodgers (who are not in rateable occupation because the owners of lodging houses retain general control of them, even though their lodgers may have keys and occupy their rooms for their own purposes). Lack of interference in the day-to-day running of a business does not equate to lack of control, and the contractual arrangements between the parties indicated that LHL had general control over Ludgate House. No one had suggested that the agreements were “shams” and the UT had wrongly focused on the rights actually exercised, rather than assessing their effect, if exercised. It had also highlighted the guardians’ motives, discounting LHL’s purpose and overlooking the fact that, as in Cardtronics, the purposes of all those involved in the guardianship scheme were complementary and mutually reinforcing. Illegality The court refused to consider whether the guardianship scheme was unlawful because it involved the use of the property as an unlicensed house in multiple occupation. The point could have serious implications for such schemes. But it did not need to be addressed and the court refused to clutter up the law reports with comments that could create difficulties in the future, if and when the question does arise. Key points The Court of Appeal has ruled that property guardians were not in rateable occupation of a building The decision turned on who had “general control” of the property, for the purposes of which contractual control was enough So the premises should not have been removed from the rating list and the landowner was liable for business rates Allyson Colby is a property law consultant