Property guardians - council tax or business rates?

The Upper Tribunal has decided that council tax, not business rates, was payable on a building occupied by property guardians.

Background

Property guardians are individuals who temporarily live in empty property at reduced rents, ostensibly to protect it from damage and squatters pending the owner needing it back for re-letting or development. Typically, guardians are students, key workers or young professionals looking for cheap living space. Their right to occupy is usually granted by way of a ‘licence’ from a company engaged by the property owner to find guardians. The licence allows the company, at its discretion, to allocate, alter and inspect space within the property.

As vacant possession is needed on demand by the owner, it is essential that guardians have licences. Licences are easy to terminate on immediate notice. The alternative basis for occupation, likely to be assured shorthold tenancies, requires a minimum of two months’ notice to terminate

The problem is that, under English law, the label given to a document is not conclusive. Calling a document a ‘licence’ will not make it a licence if the arrangement is a lease in substance.

More complexity follows as guardianship schemes are promoted as a way of reducing liability for non-domestic or ‘business’ rates. Properties are exempt from business rates, but liable to council tax, if they are wholly or partly used “for the purposes of living accommodation”. Which tax applies depends on how the property is used.

So, if a guardian occupies property under a tenancy rather than a licence, that may achieve the purpose of reducing liability for business rates. However, tenants may be harder to evict than licensees, making it harder for the property owner to get the property back when needed. This conundrum has resulted in several cases and was most recently addressed in Ludgate House Ltd v Ricketts.

Facts

VPS (UK) Ltd, was engaged by the owner, Ludgate House Ltd, to find individuals to act as property guardians for a large office building in London. These 40-50 individuals were granted separate licences to occupy the whole building as living space. Most of the guardians selected a specific room to occupy but a few occupied an open plan floor area.

The local authority considered that the building was "essentially vacant" and sought to charge business rates on the whole building as a ‘composite hereditament’. In simple terms, a hereditament is a unit of property for rates calculation purposes and ‘composite’ means it was treated as a single hereditament despite some parts being used as domestic property and others as offices. The owner challenged that decision before the Valuation Tribunal.

The Valuation Tribunal found that the guardians occupied as licensees, not as tenants, and that the owner was still in possession of the whole building. As such business rates at an annual value of over £3m applied in full. The property owner appealed.

Decision

The Upper Tribunal allowed the appeal and found that whether the guardians had licences or tenancies was irrelevant to the question of whether business rates were payable; what mattered was how the property was used. It found the property was used wholly for the purposes of living accommodation and overturned the decision of the Valuation Tribunal by finding that council tax, not business rates, was payable.

Its reasoning was as follows:

• The case of John Laing & Sons Ltd v Kingswood Assessment Committee [1949] 1 KB 344, 250 confirmed there are four ingredients to exclusive occupation for rating purposes: there must be actual occupation; the occupation must be exclusively for the purposes of the possessor; the possession must be of some value or benefit to the possessor and the possession must not be for too transient a period.
• All four ingredients were present here. Each licensee occupied a specific room, keeping it under lock and key for 22 months. Despite shared use of communal areas, this meant they had exclusive possession over their core living space. Those occupying the open plan space were an exception to the rule and were not there when the valuation officer visited. The appearance was therefore of four sufficiently distinct units of occupation capable of being recognised as separate hereditaments. The occupation was not on behalf of the property owner, but was to the individuals’ benefit for the purpose of having somewhere to live.
• The rooms were therefore separate hereditaments, and the guardians were the rateable occupiers liable for council tax. The building was not a composite hereditament because there was no single rateable occupier.

Mention was made of the fact that there had been no application for planning permission to change the use to residential, and so using the building for living space was a breach of planning law.

Nor had there been an application for a licence to operate a house in multiple occupation (HMO). As the building was a HMO once the (at one time 46) guardians moved in, this constituted a criminal offence under the Housing Act 2004.

Comment

This case has provided some clarity on how guardian-occupied buildings should be assessed for ratings purposes. It is the use of the property that is the deciding factor, and this use cannot be for too transient a period.

It follows that, as licences are easily terminable and more likely to be perceived as transient in nature, tenancies will better ‘tick the box’ as the vehicle for ensuring property is adjudged as exempt from business rates. Although, importantly, the Upper Tribunal commented that if all the guardians had shared the open plan space and not occupied individual rooms, it may have taken a different view.

As a result, companies that provide guardians may need to rethink their business models and what they can promise property owners. To achieve the aim of reducing business rates, tenancies may be needed but, if so, it will take considerably longer to achieve vacant possession as and when the property owner wants the property back. The speed with which such schemes can be set up will also need consideration if planning applications for change of use and applications for HMO licences are needed.

Ludgate House Limited v (1) Mr Andrew Ricketts (Valuation Officer) (2) London Borough of Southwark (Valuation Tribunal Appeal [2019] UKUT 278 (LC) 

https://www.lawtel.com/UK/FullText/AC5008549UT(Lands).pdf