A landlord may be deterred from forfeiting the lease of a defaulting tenant because of the cost of business rates liability. What is the position where a lease has been disclaimed?
On disclaimer, the landlord has taken no voluntary action to end the lease and may have intentionally avoided taking steps to recover possession.
In Schroder Exempt Property Unit Trust v Birmingham City Council, the High Court has decided that a landlord will be responsible for business rates following disclaimer - notwithstanding that it had not exercised its right to take possession.
In the case, a lease was disclaimed by the liquidator of an insolvent tenant. The lease had been assigned to that tenant a few years previously and the landlord had the benefit of a guarantee given by the original tenant.
The insolvent tenant ceased occupation of the property and the landlord - rather than exercising its right to enter the property - claimed payment of the rents and outgoings due under the lease from the original tenant under its guarantee.
The local authority demanded payment of business rates from the landlord for the period after the disclaimer. When the landlord failed to pay the rates the council sought and obtained a liability order.
The landlord appealed against the order.
The parties were agreed that whether or not the landlord was liable for the rates turned on whether it was entitled to immediate possession of the property after the disclaimer.
The landlord argued that it was not. Its case was that the insolvent tenant's liability had been disclaimed but that the lease continued for the purpose of continuing the original tenant's obligations under its guarantee. This would end at the expiration of the lease term or when the landlord retook possession. Its right to retake possession had not been exercised and so it was not entitled to immediate possession. The original tenant could claim immediate possession by way of its statutory right to claim an overriding lease under the Landlord and Tenant (Covenants) Act 1995.
The High Court rejected the landlord's argument. Whilst the original tenant remained liable to make good the insolvent tenant's default, that liability existed under the contractual covenants contained in the guarantee and not under the lease.
The consequence of disclaimer is that a lease ceases to exist. This means that a landlord becomes entitled to immediate possession.
The deemed continuation of the lease exists solely for the purpose of allowing the liabilities of guarantors to continue. The fact that a landlord might choose not to exercise its right to immediate possession does not alter the underlying position and so does not affect the landlord's liability for business rates.
What does this mean?
A landlord is not excluded from liability for business rates on the disclaimer of a lease and the fact that it has not exercised its right to possession does not exclude it from this liability.
If, however, a landlord has not exercised its right to possession, it can enforce the ongoing liability of a guarantor. So it could seek to recover the cost of its rates liability from that guarantor under the terms of the guarantee.