Local councils will be pleased by the recent Court of Appeal decision that held the decisive factor in establishing who is in rateable occupation of a building was that of “general control”. It was held the Upper Tribunal was wrong to conclude that individual guardians were in rateable occupation.
The licences granted to the individual guardians stated that they had no right to exclusive occupation of any part of the licenced area and the contract between the landlord and the property services company confirmed the building owner would retain control and possession of the building. As a result, the building owner was liable to pay millions of pounds in business rates to Southwark BC.
The appeal by the building owner from the decision of the Upper Tribunal raised several issues including whether guardianship schemes should as a matter of public policy be ineffective in avoiding business rates on the ground that the building owner may be committing a criminal offence.
Granting a licence to property guardians has been one of various rate mitigation schemes used by building owners. This would usually involve property guardians occupying premises in order to allow the owner to argue that as the property has been used for residential use it ought to be removed from the rating list or that the presence of the guardians ought to reduce the value of the property thereby resulting in a lower valuation for rating purposes. Under these guardianship schemes the guardians will typically pay a licence fee to live at the property. The use by the guardians has often resulted in the Valuation Office deleting the premises from the rating list on the basis that the building is being used as a residence. The result being no liability for business rates but, instead this creates a liability for council tax. Any council tax due will be lower than the business rates for the same premises. Even if the property remains on the rating list the presence of the guardians in some parts of the building will result in the building having a lower rateable value.
At first instance the Valuation Tribunal held that in spite of the presence of the property guardians the property, which was an 11 storey 175,00 square foot building located near to Blackfriars Station in central London, was still occupied by the building owner. The decision was reversed by the Upper Tribunal, but the council were given leave to appeal on four separate grounds. One of these grounds included an argument which undermined the whole basis of these schemes being that where such premises are used in this way they should be licensed as a house in multiple occupation and on the grounds of public policy the court should not allow the building owner to rely on such a scheme. It was further submitted that to allow this scheme would amount to a criminal offence in breach of section 72 (1) of the Housing Act 2004. In this particular case it was intended that 32 people would go into occupation at the planning stage. Once five or more people occupied the premises it would be subject to mandatory licencing as a house in multiple occupation (HMO). If classed as a HMO having to comply with the minimum standards for health and safety would make such schemes unviable. Southwark submitted that the court should not allow the building owner to use the premises as an illegal HMO in order to avoid business rates.
The Court of Appeal allowed Southwark’s appeal on the grounds of the fact that the building owner retained “general control” but the court declined to consider the point as to whether the guardian scheme was unlawful.
This decision will make building owners think twice before employing guardian schemes and it looks as though one of their rate mitigation schemes has now bitten the dust.
If you have any queries relating to commercial property matters do not hesitate to contact Susanne Hinde on 01223 532728 or Stuart Simoes on 020 4526 4987 or another member of our commercial property team.