COVID-19 is undoubtedly continuing to pose difficult challenges for landlords involved in the commercial property market. The 2020/2021 business rates holiday has mitigated liabilities for those with unoccupied premises designated for retail, hospitality and leisure. However, landlords of other empty commercial buildings, particularly offices, have not benefited.
Property guardianship schemes have been marketed as an alternative way of mitigating tax liabilities. We discussed the schemes in our blog back in April 2020.
Such schemes involve licencing (rather than leasing) a commercial property as accommodation to property guardians. The guardians pay a below-market “rent” and secure the property. Consequently, it was understood that provided the primary use of the property became a residential dwelling, residential rates (council tax), rather than business rates, would apply.
However, the recent ruling (4 December 2020) of the Court of Appeal in Ludgate House Ltd v Ricketts would appear to make guardianship schemes significantly less attractive to landlords who are looking to minimise their tax liabilities, as opposed to those who are looking to secure the premises.
Ludgate House Ltd v Ricketts
The landlord of a vacant office building in the London Borough of Southwark had obtained planning permission to redevelop it into a mixed-use office, retail and residential complex. In order to secure the building during the pre-development phase and to mitigate its tax liabilities, the landlord engaged a property guardianship agency who granted licences to 46 guardians, most of whom occupied single rooms. The landlord retained possession, management and control of the building to ensure that any licence could not be construed as a lease.
The landlord asserted that council tax was payable. However, Southwark Council and the Valuation Tribunal contended that the landlord was effectively in rateable occupation and business rates should still apply.
The dispute was taken to the Upper Tribunal, where it was found that each of the individual rooms occupied by the guardians were separate rateable hereditaments and the primary purpose of occupation was to meet the guardians’ own accommodation needs. Therefore, occupation was not undertaken on behalf of the landlord. On this basis, it was deemed that the guardians were the rateable occupiers and council tax was payable.
Court of Appeal Decision
The Court of Appeal overturned the Upper Tribunal’s decision. The Court emphasised that the contractual purpose of the guardians’ occupation was to ensure that the guardianship agency provided its services to the landlord. The landlord had contractually retained occupation and possession of the building to realise the benefit of this.
Therefore, because the landlord had retained general control of the building, it remained in rateable occupation and business rates were chargeable.
The ruling potentially undermines the viability of guardianship schemes as a tax-saving device. This is because any participating landlord will want to ensure that they retain possession to avoid unintentionally granting leases (and associated legal rights) to any guardians. However, by retaining general control, the landlord will continue to be liable for business rates.
It is therefore advisable for landlords who have engaged a guardianship agency (or are thinking of doing so) to consider the following points:
- Has the agency, or the agreement with the agency, accounted for the Court of Appeal’s decision?
- What rights of occupation have been, or will be, granted to guardians?
- What degree of control/possession will be retained over the building?
- Will occupation by property guardians constitute a breach of planning or HMO rules?