Lawbite: Business Rates – Who pays when a company enters a CVA?

Responsibility for business rates when a company enters a CVA is of importance for landlords, insolvency practitioners and local authorities in England and Wales alike. In City of London v Robinson Webster (Holdings) Limited the High Court has provided welcome clarification on this point.

Background

Robinson Webester (Holdings) Limited (‘RWHL’) operated a portfolio of shops under the trading name Jigsaw. In 2020, RWHL entered a CVA by which the company’s retail leases were divided into 4 categories (A-D). The store that was the subject of this matter was classified as a category D store. Under the CVA, RWHL would no longer continue to occupy any of the category D stores and its rights, obligations and liabilities under those leases would end.

Following the CVA, the landlord had made it clear that they were not prepared to accept a surrender of the lease.

The local billing authority, City of London (‘CoL’) sought a liability order of £220,364.58 in respect unpaid business rates accruing since the CVA. The District Judge considered though that it was the landlord, as ‘owner’, that was responsible for the arrears. CoL appealed to the High Court.

The High Court Judgment

The High Court agreed with CoL and allowed the appeal. In doing so, the High Court provided useful guidance on the scope of the Supreme Court’s ruling on rates avoidance schemes.in Rossendale BC v Hurstwood Properties (A) Limited [2021] UKSC 16

Who was the owner?

The High Court firstly looked at the rating legislation and noted that where a property is empty, as was the case here, it is the ‘owner’ that is responsible to pay rates. The ‘owner’ is ‘the person entitled to the possession of it.’

Where a lease subsists, it is the tenant and not the landlord who has exclusive possession of the property. The tenant is therefore the ‘owner’ for purposes of business rates.

The question was whether the terms of the CVA meant that the landlord reverted back to being the ‘owner’ for purposes of business rates liability?

Was there an exclusion?

The High Court noted the rating legislation contains a list of exclusions. A number of these exclusions cater for insolvency scenarios but there is no specific exclusion as regards CVAs.

It was also noted that it is well established that a CVA cannot remove or vary a proprietary right. It was common ground in this instance that the landlord had not accepted a surrender and that, accordingly, the lease continued (even though RWHL’s rights and obligations under the lease had been extinguished by the CVA).

Did Rossendale assist RWHL?

RWHL sought to rely on the Supreme Court ruling in the Rossendale case, which concerned a rates mitigation scheme, in which a lease was granted to a SPV company that would immediately be placed into administration so as to take advantage of one of the explicit exclusions by which no rates are payable.

The Supreme Court had held that the lease granted did not confer a ‘real and practical’ entitlement on the tenant to occupy the premises as it was a shell company and there was never any intention that it should actually occupy the property pursuant to the lease. Notwithstanding the grant of the lease, it was the landlord that remained the ‘owner’ because in reality it retained control and was best placed ‘to be able to decide whether or not to bring the property back into occupation.’

RWHL argued that, the CVA meant they were no longer entitled to occupy the premises and the lease no longer conferred a real and practical entitlement for them to do so. As such, they said that they were not the ‘owner’ for purposes of business rates. Further, they said, because the landlord was able to accept the surrender of the lease, and was therefore the party in control of whether to bring the property back into occupation (which unquestionably they would do once a suitable tenant had been found), the landlord should be considered as the ‘owner’.

In disagreeing with RWHL, the High Court stated that Rossendale is intended to apply where a right to possession is conferred on a party without any real or practical ability for them to be able to exercise it and where the right was conferred for no purpose other than the avoidance of liability for rates.

In this instance, although the CVA meant that RWHL had no real or practical ability to continue to occupy the premises under the lease, the rights under the lease had not initially been conferred for the purpose of avoiding business rates. It was a genuine, arm’s length lease. Further, it is entirely legitimate for a landlord to refuse to accept a surrender and even if the only rationale for doing so is to avoid responsibility for business rates, this is not sufficient to bring the matter within the orbit of Rossendale.

Accordingly, RWHL remained the ‘owner’ for purposes of paying empty business rates.

Key points:

• The case provides useful guidance for insolvency practitioners and local authorities as to responsibility for business rates where a company enters a CVA
• The case also provides significant comfort for landlords that they will not be liable for the business rates of empty properties where the tenant enters a CVA albeit landlords do need to be careful not to explicitly or inadvertently accept a surrender of the lease
• Those involved in preparing CVAs might want to give consideration to seeking to include provisions which compromise liabilities for business rates in respect of properties that will no longer be used.
• CVAs cannot remove or vary a proprietary right or oblige the landlord to accept a surrender, although they might reduce the rent payable under a lease (and possibly extinguish rent altogether) or otherwise alter the rights and obligations under a lease,
• The case also provides useful commentary on the application of the principles arising from the Rossendale case.