10 November 2014 #Commercial Real Estate
The High Court has clarified the position on who is responsible for business rates following disclaimer of a lease in Schroder Exempt Property Unit Trust and another v Birmingham City Council .
In this case the freehold owner, Schroder, granted a ten-year lease to X who in turn assigned to Y, and X became Y`s guarantor. Y then went into liquidation and was wound up. The liquidator disclaimed all interest in the property under section 178 of the Insolvency Act 1986 and Y ceased to occupy the property.
Shroder called on X, as Y`s guarantor, to make good Y`s default in paying rent and X dutifully paid the sums demanded. X, however, did not take physical occupation of the property.
Birmingham City Council demanded payment of business rates from Schroder for the period after the disclaimer. Schroder failed to pay, and the council obtained a liability order. Schroder appealed. It was common ground between the parties that Schroder`s liability for the rates during the relevant period depended on whether Schroder was entitled to immediate possession of the property during that period.
The court held that Schroder was liable for business rates after the disclaimer of the lease due to the fact that after the lease was disclaimed it ceased to exist and so the reversion reverted to Schroder as the freehold owner and as such Schroder were entitled to immediate possession.
It was held that despite X making payments under its obligation as guarantor to make good Y`s default and having a statutory right to call for an overriding lease this did not override Schroder’s immediate right to possession.
In summary, Landlords need to be aware of their liability to pay business rates following the disclaimer of a lease, even where there is a guarantor who has paid the disclaimed tenant’s overdue rental payments.