Supreme Court allows councils to sue developers for unpaid rates

Wigan and Rossendale councils can sue Property Alliance Group Ltd and Hurstwood Properties (A) Ltd for alleged business rates avoidance, the Supreme Court has ruled.

A combined test case was brought after the two companies entered into schemes where special purpose vehicles took short leases and became liable for rates. However, the rates were not paid because the SPVs were dissolved or put into liquidation.

Chris Perrin, partner at Addleshaw Goddard, advised Hurstwood and PAG, alongside Kevin Prosser QC and Nicholas Trompeter QC. Perrin said: “The court has changed the well-established principle that a tenant under a valid lease is automatically the person entitled to possession and therefore the rate payer. Instead the court has said that there is a secondary test in that the Court needs to consider the parties’ ‘real and practical ability to exercise its entitlement to possession’. The outcome of this decision is that the matters will revert back to the High Court for full trials.

“However, it seems to us that this decision potentially means that no one is liable for rates since if, once the facts are determined by the court, the tenant is not liable neither is the landlord. The reason for this is that where a landlord has granted a valid and subsisting lease (which the court accepted by striking out the local authorities’ arguments of sham) the landlord has no ‘real and practical ability’ to exercise its entitlement to possession since to do so would be a breach of the lease and open them up to a damages claim from the tenant. Accordingly, this would mean that neither the tenant nor the landlord are liable for rates.”

Owners of empty commercial premises are liable to pay full business rates following the expiry of the initial grace periods of three months for offices or six months for industrial premises.

In 2017 a number of local authorities issued 55 separate claims seeking to recover approximately £10m in alleged arrears of business rates. While the claims were identical they related to three different schemes from different providers.

The defendant property owners sought to strike out the cases without a trial on the basis that they disclosed no reasonable grounds for bringing the claims.

Lord Michael Briggs, a Supreme Court justice, said in his ruling that the “whole purpose of the schemes was to avoid payment of the empty rate, rather than to transfer the responsibility for its payment. Apart from rates avoidance, the schemes had no separate business purpose of any kind.”

Matthew Whyatt of ASW Solicitiros, advising both councils, said he expected other local authorities to now pursue claims.

The case is expected to revert to the High Court for full trials.

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