The imposition of empty property rates equal to the rates payable for occupied premises has generated a range of avoidance strategies. One such strategy has been weighed in the scales by the Supreme Court and found wanting. Not just wanting but, in some variants, it’s dangerous.
In 1966 the (Labour) government proposed the payment of part rates on unoccupied properties because in “times of scarcity” it was “an affront to all right–thinking people” that property should remain empty. In a debate on the bill that became the Local Government Finance Act 1988 a (Conservative) minister said that historically, the purpose of empty property rating had been “partly to reflect that empty properties benefit from some local authority services and partly to encourage owners to bring empty property back into use”.
Fast-forward to 1 April 2008 and empty rates is no longer “part rates”, but is charged at 100% of the rates paid by an occupier. Since 2008, at least in some sectors, everything has changed; think of retail, especially in the high street. Premises are no longer scarce; supply is abundant. Nevertheless, the empty rate remains at 100%.
Who is in possession?
The 1988 Act provided that “the owner” of the whole of premises shall be subject to empty non-domestic rates. Who then is the “owner”? Section 65 defines the owner as “the person entitled to possession of the premises”. There are exceptions to empty rates. The Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 specify categories for which empty rates are not payable. There are similar exceptions in the devolved nations.
The Supreme Court has now concluded that “the aim of deterring owners from leaving property unoccupied for their own financial advantage and encouraging them to bring empty property back into use for the benefit of the community at large” was reflected by those exceptions. The thrust of the exceptions was to exclude owners who (1) may be unable to bring the property back into occupation; (2) have a reasonable excuse for not bringing the property back into occupation; or (3) may be making some other valuable contribution to society. The relevant example is where the “owner” is a company in liquidation, that is to say being wound up.
The central issue for the Supreme Court in Rossendale Borough Council and another v Hurstwood Properties (A) Ltd and others [2021] UKSC 16; [2021] PLSCS 90 was who, on the facts assumed by the court, was the person entitled to possession of the premises in question?
The SPV strategy
The reason for the assumed facts was that two local authorities, Rossendale and Wigan, had brought claims for empty rates against Hurstwood group companies and Property Alliance Group. The defendants pointed in the case of each empty property to the grant of a lease by the respective defendant to a special purpose vehicle. The defendants said that each SPV was “the person entitled to possession” of each of the premises. The councils insisted that each defendant (despite having an SPV as its tenant) was nevertheless the person so entitled. The SPV was the lynchpin of a rates mitigation scheme.
The rates mitigation scheme in question involved setting up SPV companies, which were without any assets or business, but which took leases of unoccupied properties. The aim of granting the leases was to transfer the empty rate liability from the owner of the property to the SPV. The SPV was then either put into members’ voluntary liquidation, or dissolved. Those SPVs in members’ voluntary liquidation benefited from the winding-up exemption. Where the SPV was dissolved, the lease was automatically transferred by law as bona vacantia to the Crown. The defendants said that this had the effect of relieving them from empty rates until the lease was either terminated, or disclaimed by the liquidator or by the Crown.
The defendants applied to have these claims struck out on the basis that there were no reasonable grounds for bringing them.
The Supreme Court decides
The local authorities contended that either the leases to the SPVs were ineffective in making the SPV the “owner” of the vacant property under rating legislation, or, alternatively, the separate legal identity of the SPV should be ignored for the purpose of determining rates liability. These arguments were directed towards identifying the defendants, rather than the individual SPVs, as being liable for empty rates.
The local authorities relied on a purposive interpretation of the statutes concerned, derived from the case of WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300: “the Ramsay principle”. The Ramsay principle involves consideration of both what the legislation intended to tax and whether the facts of a particular transaction fall within that scope. This required an examination of the purpose of charging unoccupied rates; hence the historical background above. This principle, which applies to all legislation, enables a transaction, or an element of a transaction, having no business purpose, to be ignored.
The 1988 Act imposes liability for empty rates on the person “entitled to possession”. A purposive interpretation of that phrase requires consideration of why the legislation is so drafted. The Supreme Court concluded that the aim of the legislation was to encourage owners to bring vacant property back into occupation. Therefore, the liability should be on the person who, in the real world, has the ability to achieve that objective. The leases to the SPVs were not sham documents; they created genuine legal rights and obligations. However, they had been entered into solely for the purpose of avoiding liability for business rates, and for no other purpose. The leases were not granted to allow the SPV to make any use of the property. On the contrary, the success of the schemes relied on the SPVs not making use of the properties. The practical ability to decide whether the property should be brought back into use continued to rest with the defendants. There was no intention that rates would, in fact, be paid. The consequence of these findings was that each of the schemes where a lease was granted involved the misuse of the legal process: either the law governing the dissolution of a company; or the liquidation process and insolvency legislation. In the case of those SPVs that were dissolved, the process was also likely to have involved committing a criminal offence of failing to notify creditors of the application to strike the SPV off the register of companies.
Applying these findings to the legislation, the court concluded that the SPVs to which the leases had been granted had not thereby become “entitled to possession” of the vacant properties. The person entitled to possession was each SPV’s landlord. This conclusion was not arrived at by ignoring the leases, but rather by an examination of their context, leading to the conclusion that they did not transfer an entitlement to possession to the SPV. The conclusion was not founded on the fact that the motive for granting the leases was rates mitigation. Instead, it was based on a purposive interpretation of the statutory provisions and an analysis of the facts of these cases in the light of that interpretation.
The Supreme Court therefore refused to strike out the claim.
The councils’ alternative argument that the separate legal identities of the SPVs should be disregarded by “lifting the corporate veil” was rejected by the Supreme Court.
What happens next?
For the parties to the case, it all depends on whether the defendants wish to challenge the facts alleged by the councils. If so, the cases will continue to a trial at which the disputed facts will be determined.
For owners of empty property in general, this decision means that the rates mitigation strategy constructed around the grant of leases to SPVs is likely to be ineffective. Finally, for HM Treasury conducting a fundamental review of business rates in a time of financial scarcity, there is an urgent need to revisit the purpose and scope of empty rates, especially on sectors in distress.
Blake Penfold is a business rates specialist and Roger Cohen is senior counsel at Bryan Cave Leighton Paisner
