Changes to empty rates relief have prompted ratepayers to try out different schemes to mitigate liability for business rates. In Hurstwood Properties (A) Ltd v Rossendale Borough Council [2021] UKSC 16; [2021] PLSCS 90, the owners of empty property had granted leases to special purpose vehicles, which did not have any assets or liabilities and did not trade. In due course, the SPVs were put into voluntary liquidation – a state of affairs which, it was suggested, had then been artificially prolonged in order to shelter the leases – leaving the council unable to recover the business rates due in respect of the properties. Alternatively, the SPVs were dissolved, leaving the liability for rates to vest, with the leases, in the Crown. Meanwhile, the owners of the empty properties simply sat on their hands, although they had break rights that were exercisable if another tenant were to come forward.
The council decided to attack the rates avoidance scheme but lost its case in the Court of Appeal. The court accepted that the leases might have no purpose, other than the avoidance of liability for business rates. However, the leases were not shams because the SPVs had a legal right to possession of the properties. But 55 similar cases were waiting in the wings, relating to sums varying from a few thousand to millions of pounds. So the council appealed to the Supreme Court.
The council argued that, although section 65(1) of the Local Government Finance Act 1988 provides that the “owner” of an unoccupied hereditament is the person entitled to possession of it, the leases were ineffective to make the SPVs the “owners” of the properties in question.
The Supreme Court began by expressing the view that the scheme misused legal processes relating to insolvency and dissolution. It suggested that the directors of the SPVs were in breach of statutory and fiduciary duties, and could also have committed criminal offences under section 1003 of the Companies Act 2006, if they had applied for an SPV to be struck off without ensuring that every creditor was notified within seven days.
The rates avoidance scheme had been designed to ensure that the SPVs had no real or practical control over the properties. Such control remained with the landlord at all times. Identifying “the person entitled to possession” in section 65(1) of the 1988 Act as the person with the immediate legal right to possession of the property would defeat the purpose of the legislation providing for the payment of rates on empty properties – which is to encourage owners to bring empty property back into use. And it was inconceivable that parliament had intended that unlawful and abusive procedures provided by company and insolvency law should fall within section 65(1).
Consequently, the court had no difficulty in applying a purposive approach to interpretation and concluding that the leases had not transferred the requisite entitlement to possession, which the court described as “the badge of ownership triggering liability for business rates”, to the SPVs. But the litigation is not over yet. The Supreme Court was asked to opine on an assumed set of facts – and the case will now go back to the High Court for a full examination of facts.
Allyson Colby, property law consultant
