by John Adams
Inclusive rents are mainly found in three areas of residential letting — (1) short-term, often furnished, lettings or licenses (both those licences which turn out, on challenge, to be tenancies and those which do not), (2) public-sector lettings, and (3) some job-related accommodation. The impending change from domestic rating in England and Wales to community charge or poll tax calls for scrutiny of the effect of the change on inclusive rents. In general terms, one should distinguish existing agreements, those to be entered into before April 1 1990 and those to be made after that date.
Transactions before April 1 1990
The best starting point is the middle group, those to be made between now and the change-over date. A landlord can fix an inclusive rent, do nothing next April, and so obtain the bonus of retaining the portion of the rent which had formerly covered rates for as long as the arrangement lasts. The tenant will be contractually bound to continue to pay the full amount and statutorily bound to pay his poll tax, to the council, on top. We will shortly look at his possible remedies. Second, the landlord and tenant could agree, now, that following April 1 1990 the inclusive rent will fall by an amount equal to (i) the rates payable by the landlord in 1989-90, (ii) the poll tax payable by the tenant or (iii) whichever of them is the lower, so preserving the net return to the landlord. If (ii) or (iii) is chosen, care is needed to limit the poll tax adjustment to only one deduction if the letting, or licence, is to co-occupiers. Moreover, if a poll tax deduction is allowed, it should be limited to the personal community charge level, or the landlord’s generosity may prove ill-chosen if the particular tenant or licensee pays at the higher standard rate, by reason of having two homes or some other attribute. Every well-advised prospective tenant or licensee should look to have a provision for reduction written into any new agreement which may last into the new regime. It is a matter for negotiation whether it is to be a one-off reduction or an annual adjustment. The former is the more likely, but, again, the drafting must be watched.
Transactions after April 1 1990
As to post-April 1 1990 lettings or licences, it will surely be assumed that the rent or “rental” (however labelled) has been settled in the light of the abolition of domestic rates and none of the remedies discussed in this article would then apply. The prospects of successfully raising an issue of mistake, so as to obtain rectification or rescission, seem slight or, indeed, remote, but might theoretically arise in relevant circumstances.
Existing agreements
With existing tenancies or licences, the bonus to the owner will ensue if nothing is done, and subject to the possible remedies. This stringent approach will not appeal to all landlords, not least because overburdened occupiers will sooner or later be more likely to lapse into arrears: vacant possession will, eventually, follow, but recovery of arrears and costs, even with formal judgment, may be less certain, especially having regard to the relatively mobile sector of the population most often found in that type of accommodation commanding inclusive rents. In relation to claims for possession under the Rent Act 1977 Case 1 (Schedule 15) and the Housing Act 1988 Grounds 10 or 11 (Schedule 2) (but not Ground 8 where it is applicable), the attitude of many county court judges on reasonableness might well come down against a landlord’s insisting on his pound of flesh notwithstanding that, fortuitously, an ounce or more of it is no longer needed to pay the rating authority. Where landlords do decide to make some adjustment, the factors discussed above on the exact terms of the adjustment need to be borne in mind and should be explicitly recorded.
Multi-occupied short-stay properties
Quite a number of occupiers at an inclusive sum, tenants or licensees, stay for only short periods. If the local authority registration officer decides that a building is wholly or mainly the sole or main residence of short-term residents and it would probably be difficult to maintain the register in respect of, and collect payments from, the residents, he can designate it under section 5 of the Local Government Finance Act 1988. Thereupon a collective community charge is payable by the freeholder, unless there is a single lease of the whole between him and the occupiers, or by the holder of the single lease “nearest” to the occupiers if one or more single leases exist. He pays the local authority and then collects contributions to it from all adult, non-exempt, non-student residents. This is arrived at on a daily basis; collection is to be in accordance with regulations. However, in practice it seems likely that the contributions will be either part of or subsumed tacitly into inclusive payments, for the complications of other methods hardly bear thinking about. The various choices discussed above will surely be irrelevant, too, given the setting of the relationships. However, the regulations may require the payer of the collective charge to give to each occupier details of the contribution exacted and to give receipts.
Remedies for aggrieved occupiers
Assume that a landlord does not voluntarily proffer, or negotiate, a reduction to reflect the new situation, the occupier is not without hope of some remedy. Various categories must be distinguished.
Regulated tenants
If the tenancy is a protected or a statutory tenancy (ie a regulated tenancy), the statutory provisions relating to fair rents can be invoked. The registered fair rent is the maximum rent legally recoverable under section 44 of the Rent Act and, within limits, over-payments can be recovered by action or deduction from future payments under section 57 of the Act. Fair rents are settled excluding rates borne by the landlord and those rates are added to the limit — section 71(3); it seems unarguable that if rates cease to be borne by the landlord, there is nothing to add to the limit created by the registered fair rent. Where no rent is registered, any variation in rates payable automatically leads to adjustment of the contractual rent, without notice for decrease, by reason of section 46.
Restricted contracts
The position for some restricted contracts is similar. Any registered rent excludes rates borne by the lessor, or superior lessor, and the fact of such payment is noted on the register — section 79(3) of the Rent Act. The limit for recoverable rent is to be increased by the amount of the rates for that period (section 81(2)); as with section 71(3) the grammatical meaning of the wording “the rates” seems to be “those rates”, ie those borne by the landlord. So, as in respect of all regulated tenancies, for restricted contracts where a rent is registered automatic reduction will occur. Taking excess rent is a criminal offence under section 81(4), and local authorities, who alone can prosecure (section 81(5)), may well be more active for this possible form of overcharging than is general. Over-payments can also be recovered, although there is no statutory right of deduction. Restricted contracts — resident landlord lettings, any pre-1974 furnished tenancies or licences with the provision of services among them — frequently attract inclusive rents. Those whose rents are not registered ought to apply quickly for registration to guard against over-payments in the future, unless they can negotiate now with their landlords for a post-April 1 1990 reduction.
Assured tenants — shorthold
If the tenancy is an assured tenancy, the statutory provisions are less helpful to the tenant. Under an assured shorthold then, provided both that he has not already exhausted his once-only right of challenge, under section 22, of the Housing Act 1988, and he is within his initial contractual tenancy, and not a renewal or heldover periodic tenancy, the tenant can invoke that right of challenge. A freely negotiated inclusive rent might well satisfy the test of being significantly higher than that which the landlord reasonably might expect to recover on an assured letting, as required by section 22, once the landlord has no longer to meet rates from it. Of course, the second obstacle — a sufficiency of similar premises in the locality let on an assured tenancy — remains, but rent assessment committees may find it possible to take a sympathetic view on that criterion where a landlord is simply reaping where the legislature has sown.
Assured tenants — generally
For other assured tenancies (including assured shortholds where the tenant has had his one permitted section 22 shot or it is a second or subsequent tenancy), the tenant’s only chance is to use his section 13 rights to refer any increase of rent notified by the landlord to the rent assessment committee. Astute landlords will not run the risk of loss of the enhanced level of return from the inclusive rent by serving notice of increase at least until the market level for rate-free rents has overtaken the former market level of rates-susceptible inclusive rents. Other landlords who have already side-stepped the machinery of sections 13 and 14 by including rent revision machinery in their agreements need not fear the risk of referral anyway; they can decide whether or not to operate it, especially where, as is usual, the procedure is for upward-only revision. If the machinery is indexation to, say, the RPI, the landlord can simply sit back and see not only the basic rent but also the built-in increment formerly related to rates revised upwards. The ratchet-effect if the change from domestic rates to poll tax increases the RPI could be considerable, although of course the inclusive-rent population is quite mobile and if a tenant caught in this trap moves out the same incremental windfall will not apply to his replacement.
A common law remedy for all?
Is there hope, however, for either tenant or licensee who does not wish to leave and who cannot invoke the statutory measures? This would cover post-January 15 1989 company lets or second-home tenants, “holiday lets” (unless held to be “shams” or “pretences”) and so on. Just possibly there could be. In Pole Properties Ltd v Feinberg (1981) 43 P&CR 121, 259 EG 417 the Court of Appeal rewrote service-charge provisions in a lease because of an unforeseen and significant change of circumstances. There the addition to the heating system of the next house, which his landlords purchased, made nonsense of the formula for allocating heating costs. The court rewrote the formula (incidentally by substituting one devised by the professor who was a mathematician as well as an appellant in person!). The analogy with the change of circumstances from tenant paying inclusive rent and landlord paying rates to tenant paying same total rent and poll tax and landlord free from liability for rates is close. Two caveats are necessary. First, no later case of application of the doctrine has been reported to the writer’s knowledge, and indeed only one obviously similar case earlier. So the remedy is largely untried. Second, the change must be unexpected. As the community charge legislation, and the abolition of domestic rates, came closer and closer to fruition so the switch became increasingly foreseeable; for agreements after July 29 1988, the day of Royal Assent, the prospect had become certainty even if then seeming a little distant. It would thus require not merely acceptance of the 1981 decision but its extension to allow those agreements to be rewritten, which is highly speculative. Perhaps a brave occupier will litigate the issue none the less.
Public-sector rents
Although public sector rents are nearly always collected on an inclusive basis, the rates component is separately identified in a way far from common in the private sector. The writer believes it is virtually unthinkable that public landlords will take advantage of the technicality; many may decide to collect poll tax through the rent collection as a matter of administrative convenience, but none will, unless by inadvertence, seek to pocket the element in the composite payment currently representing domestic rates. Whether the wording of the conditions of tenancy needs to be amended will, of course, depend on what they say at present.
Job-related accommodation
The position for job-related accommodation is complex.
Rated separately
At present, the accommodation may be separately rated as domestic property. The position then falls within the categories already discussed. There is no obligation on the landlord to make any voluntary adjustment, although, as employers, many will. Some of the accommodation may be occupied under regulated or assured tenancies or under a restricted contract with the consequences discussed above, but much will not.
Part of mixed hereditament
Second, the accommodation, typically a flat over a shop, may form part of a mixed hereditament, with a single rateable value. Again, the employer landlord may do nothing, so leaving the employee to bear the additional burden of poll tax from his net wages as well as keeping up his full rent payment. If the tenancy is regulated, a rare situation in this context, the rates attributable to the premises, as part of the whole, are to be agreed between the parties or, in default, settled by the county court, under section 75(2) of the Rent Act 1977. There is nothing, it seems, to prevent a decision as to what such rates were in 1989-90 for adjustment of the rent limit in 1990-91 or beyond. A similar provision in relation to restricted contracts with registered rents is in section 85(4). As discussed, reduction is automatic in those two cases, once the rates element is isolated. For others, negotiation for a reduction involves agreement on the apportionment of the total rates bill before a reduction can be settled. Failing adjustment, it seems to be a possible Pole Properties claim, “industrial action” or nothing.
April 1990 changes
After April 1 1990 the rules alter considerably. Each occupier, unless exempt, will pay poll tax, subject to some reduction for the lower paid. Where the residential portion is capable of independent beneficial occupation, a proposal should be made to redefine the hereditament so as to exclude the domestic element, so avoiding the problems of “composite hereditaments”. Rates will not be levied on the hived-off domestic accommodation. The employee may still be bound to pay the inclusive rent, unless the terms of his occupation excuse him the rates element; the negotiations discussed above are then possible. Once more, employer landlords may decide to assist, say by an increase of wages to make good the difference between the rent reduction and the poll tax payable by the tenant, if not his co-occupiers; the amount of the increase could be grossed up for income tax and national insurance.
Rent-free accommodation
A wage increase equal to the grossed-up equivalent of the poll tax may also be thought appropriate by employer landlords for those cases (for example, tied agricultural cottages) of rent-free accommodation, an issue which has already surfaced in Scotland. Increased wages may cause loss of welfare benefits, affect contributions to pension schemes and so on. The Agricultural Wages Board apparently refused to make a general recommendation on the issue for Scotland, and various employer bodies similarly kept quiet.
Composite hereditaments
Where separate assessment is not practicable, or, it would seem, where it is but is not affected, one has to deal with the “composite hereditament”, the label replacing the former “mixed hereditament”. The occupier(s) will pay poll tax. An allowance will be made against the new assessment to reflect the domestic elements of the building. Accordingly, if any rent adjustment is to be negotiated, an additional formula presents itself for consideration. Instead of a deduction, as discussed, from the amount of rent of the share of the 1989-90 rates attributable to domestic parts, one could calculate a figure of the amount allowed for those parts in the new assessment multiplied by the uniform business rate, and deduct that from the inclusive rent. Various transitional “cushioning” allowances will unfortunately complicate the picture. A further decision on whether then to top up the wages by the excess of the poll tax over that rent reduction can then be taken. Other adjustments, as discussed in this article or on some other basis, can be made or nothing need be done. The picture on composite hereditament valuation is still changing, with consultation documents flying and further legislation possible, so final decisions too quickly may not be wise. There is, for example, mention of a new statutory definition of “domestic hereditament”. (Incidentally, what a pity that “hereditament” is retained, in any event.)
However, the time is short for property owners and their advisers to start to address the many problems thrown up by the impending changeover in this instance as in all the others discussed in this article.
