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In this post, Marcus Barclay, Ashley Damiral, Will Charnock and James Barbour, who all work within the Real Estate team at CMS, comment on the decision handed down by the UK Supreme Court in the matter of Hurstwood Properties (A) Ltd and others v Rossendale Borough Council and another [2021] UKSC 16, which concerns liability for non-domestic rates for unoccupied properties leased to special purchase vehicles.

The UK Supreme Court has delivered its keenly anticipated judgment in a case concerning the validity of two business rates mitigation schemes. The schemes under scrutiny involved property owners letting unoccupied properties to special purpose vehicles (“SPVs”) which benefitted from a business rates exemption and therefore allowed both the property owners and the SPVs to avoid liability for business rates.

In its judgment of 14 May 2021, the Supreme Court allowed an appeal by the local authorities against the striking-out of their claims to unpaid business rates from the defendant landlords on the basis that the legislation governing the payment of business rates for unoccupied properties should be interpreted in the context of the intention behind it.  The Court held that if the legislation was interpreted in that way, the “owners” of the properties were the defendant landlords and not the SPVs and therefore whether the defendant companies would be liable for business rates for the duration of the leases would be a matter that would need to be decided at trial.

The judgment and uncertainty around the current viability of these schemes is expected to have a wide-ranging impact given that around 55 other similar proceedings are pending in the Liverpool District Registry of the Chancery Division, whilst these “test cases” have been decided.

Background

Business rates on unoccupied properties are an unwelcome additional liability for property owners and therefore it is little surprise that for some time now they have been exploring how the ratings reliefs/exemptions can be utilised to reduce that liability. In this case, the defendants were owners of a number of unoccupied hereditaments (the area which the valuation officer assesses for ratings purposes) and let these hereditaments to SPVs which were then either voluntarily wound-up or allowed to be struck-off as dormant companies.  The effect of doing so was to make the SPVs, rather than the property owners the party liable for business rates and allow the SPVs to either claim relief from their ratings liability as a result of their insolvent status or upon being wound-up pass that liability to another party.

Unsurprisingly, the local authorities challenged these schemes, initially, on the following grounds:-

  • that the arrangements with the SPVs were shams and therefore did not have any effect in law.
  • that the relevant legislation should be interpreted flexibly in line with the intention behind that legislation (known as the Ramsay principle); and
  • that the corporate veil should be pierced and the property owners should be held liable for the business rates.

Decisions of the lower courts

Initially, the property owners applied to strike-out the local authorities’ claims on the basis that the arguments pleaded disclosed no reasonable grounds for bringing a claim.  In the High Court, the property owners succeeded in striking out two of those grounds, namely that the schemes constituted a sham and that the legislation should be read in the context that the property owners were trying to implement a rates avoidance scheme.  However, the High Court thought there was at least an arguable case that the property owners had a sufficient degree of control over the SPVs to allow the corporate veil to be pierced and therefore refused to strike out the claims on this ground.

Both parties appealed to the Court of Appeal, which was asked to decide the issues regarding the interpretation of the legislation and the corporate veil (the sham argument was not appealed). On both issues the Court of Appeal found for the property owners.

Supreme Court Decision

The Supreme Court was also unconvinced by the local authorities’ argument that the corporate veil between the defendant companies and the SPVs should be pierced not least because the defendants were not shareholders of the SPVs.  By contrast, it considered at length the application of the Ramsay principle and how the relevant legislation should be interpreted.

The Court approached this by first considering the purpose of the relevant ratings legislation dating back to the Poor Relief Act in 1601 and how this had evolved.  Against that background it assessed whether the SPVs or the defendant companies were the true “owner” of the properties for the purpose of the Local Government and Finance Act 1988.  This was important to the viability of the schemes since only the “owner” of the properties could qualify for the relevant rating relief if it could show that it fell within the relevant exemption claimed, which in this instance was “where the owner is a company which is subject to a winding-up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act”.

By interpreting the legislation in line with the intention of deterring owners from leaving property unoccupied for their own financial advantage, the Supreme Court held that the “owners” for this purpose were  the defendant companies  rather than the SPVs because, despite the leases to the SPVs, in reality, the party entitled to possession of the properties remained at all material times the defendant landlords. By comparison, the SPVs had no real control over the properties and could have their leases terminated so as to enable the  landlord to retake possession.

In light of the Court’s refusal to strike out this ground of challenge, the issue of whether the defendants remained liable for business rates whilst the leases were in effect was held to require examination at trial.

What are the implication for property owners?

This long-awaited decision casts serious doubt upon the viability of schemes currently seeking to take advantage of the exemption from business rates by leasing a property to an SPV and then either winding-up the SPV or allowing it to be struck-off. For the schemes under scrutiny, a Court will consider the liability of the defendant landlords for business rates at a later stage at trial. Landlords who have operated a similar scheme will now need to look closely at whether there is any exemption or relief they might qualify for on the understanding that they, rather than the SPVs, will be considered the “owner” for purpose of the ratings legislation.  Unless they are able to establish a valid exemption or alternative form of relief, this is likely to result in a substantial increase in income for a government department that expects to roll-out almost £10 billion in business rates relief packages over this financial year.

Those considering implementing mitigation schemes would be well-advised to carefully consider the test of ownership and which party will be considered to be entitled to possession before an exemption will apply.

As the law continues to evolve in this area, it is possible the result of this appeal could mark a change in approach by the Courts.  Whilst they may have previously seen rates avoidance as a matter for Parliament to restrict, should it wish to do so,  this decision may signal a more purpose led interpretation of ratings legislation in years to come.