Rateable occupation – Unoccupied hereditament – Unpaid rates – Tenant holding lease of business premises – Guarantor covenanting to indemnify appellant landlords against tenant’s failure to perform covenants – Tenant and assignee going into liquidation – Respondent rating authority demanding unoccupied non-domestic rates from appellants – District judge upholding demand – Appellants appealing – Whether appellants entitled to immediate possession of whole property during relevant period – Appeal dismissed
The appellants were the freehold owners of commercial premises in Witton, Birmingham. In 2006, the appellants had granted a 10–year lease of the property to WFL, with WFH as guarantor. In 2008, the lease was assigned with consent to WFG, with WFL guaranteeing its obligations. WFH and WFG went into liquidation, and were wound up in April 2011. The liquidator disclaimed all interest in the property that day, under section 178 of the Insolvency Act 1986, but WFL continued to pay rent as guarantor, and the appellants did not exercise any right to physical possession of the property.
The respondent local authority made non-domestic rate demands of the appellants for the period after the disclaimer and, when these were not honoured, applied for and were granted a liability order in the sum of approximately £590,000. The appellants appealed by way of case stated against the order made by the district judge. The question for the court was whether the judge was correct to find that the appellants were the owners of the property within section 45(1)(b) and 65(1) of the Local Government Finance Act 1988. Whether the appellants were liable for the rates during the relevant period turned on whether they were entitled to immediate possession of the whole property during that period.
The appellants contended that a disclaimer under section 178(4) of the 1986 Act had the effect of ending the liabilities of a tenant, but not ending the lease for all purposes; and that the lease continued for certain purposes related to third parties, including guarantors such as WFL.
Held: The appeal was dismissed.
A disclaimer determined a lease for all purposes. A lease either existed or it did not and, after a disclaimer, as a matter of property law, it ceased to exist. The lease fell and the reversion accelerated, making it necessary to have a deeming provision section 178(4)(b) to the effect that the rights and obligations of others such as guarantors remained as though the determined lease had continued. With the lease went all of the rights and obligations under the lease, such as the lessee’s obligation to pay rent. Prior to disclaimer, the tenant would have the right to immediate possession. After disclaimer, the landlord, as freehold owner without the burden of any leasehold interests, would himself have the right to immediate possession. The rights and liabilities of guarantors clearly preserved under section 178(4)(b) were not property rights but contractual rights under the guarantee. The deeming provision was necessary, because, without it, a surety’s contractual obligation to guarantee the rent etc in the event of the tenant’s failure to make such payments and subsequent disclaimer of the lease would or might be empty, the surety having the argument that, the rights that he was guaranteeing having gone, there was nothing left for his guarantee to support: Hindcastle Ltd v Barbara Attenborough Ltd [1996] 1 EGLR 94; [1996] EGCS 32, Christopher Moran Holdings Ltd v Bairstow [1999] PLSCS 24; [1999] EGCS 17; [2000] 2 AC 172 and Shaw v Doleman [2009] 2 EGLR 35; [2009] 27 EG 92 applied.
In the present case, after the assignment of the lease and prior to the disclaimer, WFG was the tenant and the person entitled to immediate possession. After the disclaimer, the lease ceased to exist and the appellants’ reversion accelerated. Consequently, the appellants as freehold owners became entitled to immediate possession. WFL, however, remained liable to make good the defaults of the former tenant, not because the lease continued in any shape or form, but because section 178(4) operated to ensure that the guarantor’s covenant in the event of the tenant’s default was given continued substance and the third party guarantor remained contractually liable. Therefore, the guarantor had to continue to make good the former tenant’s default in paying rent under the determined lease until the landlord exercised his right to immediate possession by physically taking possession.
Reuben Taylor QC (instructed by Wragge Lawrence Graham & Co LLP) appeared for the appellants; Judith Jackson QC (instructed by Birmingham City Council Legal & Democratic Services) appeared for the respondents.
Eileen O’Grady, barrister
