Lease of equipment — Council premises — Installation of equipment which became fixture — Whether lessor entitled to capital allowances in relation to leasing agreements — Whether equipment belonging to lessor — House of Lords confirming that equipment did not
Five members of Mercantile Group plc (BMI) entered into 180 agreements for the installation of central heating in council houses occupied by tenants. A further 21 leases related to the installation of other plant on land occupied by the local authority. The leases contained a clause specifying that the equipment would remain personal or movable property and should continue in the ownership of BMI, notwithstanding that it was fixed to the ground. Items other than central heating included a swimming pool, a sheltered housing alarm system in 500 council flats, two refurbished lifts and boiler equipment in council premises. BMI appealed against corporation tax assessments disallowing capital allowances.
The High Court held that: (1) all the items of plant and machinery became fixtures on installation; (2) despite that, all the items installed in premises which the local authorities continued to occupy (ie all the items except central heating equipment, etc installed in council flats) continued to belong to the companies; and (3) the central heating equipment and entry phone or alarm systems installed in council flats ceased to belong to the companies when the flats were let because each weekly tenant took a legal estate in his flat, including the fixtures, without notice of any equitable or merely contractual rights of BMI. Therefore, as against the tenant in occupation, BMI had no right to enter and remove the central heating equipment, etc: see [1994] EGCS 16.
The Court of Appeal held that the judge was right on issues (1) and (3): see [1994] EGCS 147.
Held BMI’s appeals dismissed.
1. The sole question was whether the plant which had at all times been affixed to land owned by the local authorities “belonged” to BMI.
2. The concept of a fixture which remained personal or removable property was a contradiction in terms and an impossibility in law. The future right to remove equipment at the expiry of the term or in the event of a default by the local authority did not mean that the equipment “belonged” to BMI so long as it remained attached to the realty.
3. BMI had never been the owner of the equipment, whether in law or in equity; it became a fixture (and therefore the property of the local authority) before the lease was entered into. Unless and until the local authority was in default or decided not to renew the lease, BMI had no right to possession of the equipment or to direct how it should be used. Its only property right was a contingent right to become the owner at a future date. In the meantime the property was owned exclusively by the local authority.
4. Even if otherwise the equipment belonged to the local authority, as soon as they granted a tenancy of a council house the equipment could not thereafter belong to BMI so long as the tenancy continued. The tenant would be a purchaser for value of a legal estate without notice and would take free of the contractual and equitable rights of BMI under the master lease.
5. The right to enter the house and remove the central heating would not be exercisable against the tenant.
James Munby QC and Timothy Brennan (instructed by the Solicitor to the Inland Revenue) appeared for Mr Melluish (HMIT); Graham Aaronson QC, Paul Morgan QC and Stephen Jourdan (instructed by Denton Hall) appeared for BMI.