Real Estate Focus - July 2021

Rates mitigation schemes in the spotlight again

Non-domestic rates (NDR, also referred to as business rates) have been in the headlines, not least as they are such an onerous liability and seen in many quarters as a potential killer blow for struggling businesses, particularly retail. 

NDR have also been in the courts, with Hurstwood Properties (A) Ltd and others v Rossendale Borough Council and another [2021] UKSC 16 going all the way to the Supreme Court.

The question before the Supreme Court was whether the appellant local authorities had grounds for claiming NDR on certain properties from the respondent companies. 

Under the Local Government Finance Act 1988 (1988 Act), NDR are charged on the occupier of a non-domestic property or, if it is unoccupied, on the owner, subject to certain exceptions. The “owner”  is defined as the person entitled to possession of the property.

The respondents were  the registered owners of various unoccupied commercial properties and sought to avoid liability for NDR by means of one or other of two closely-related schemes. Both schemes involved setting up a special purpose vehicle (SPV) in the form of a company without any assets or business. The registered owner then granted a short lease of the unoccupied property to the SPV. 

The premise of the schemes is that the SPV thereupon becomes the “owner” of the property for the purpose of the liability to pay NDR. The SPV is immediately put into members’ voluntary liquidation or, alternatively, is dissolved. In the liquidation version of the scheme, reliance is then placed for as long as possible on the NDR exemption which applies where the owner of the property is being wound up. The dissolution version of the scheme relies on the fact that, upon dissolution, the lease and associated liability for rates is automatically transferred by law as bona vacantia to the Crown. Meanwhile the registered owner is relieved from paying NDR, until either it terminates the lease or the lease is disclaimed.

The local authorities’ case was that the SPVs should be disregarded, leaving the respondent owners liable for the payment of NDR. They put forward two arguments: first, that the separate legal personality of the SPVs should itself be ignored for this purpose under the doctrine of “piercing the corporate veil” as they were set up for the sole purpose of avoiding liability for NDR; secondly, that the leases to the SPVs were ineffective to make the SPVs the “owner” of the unoccupied property within the meaning of the 1988 Act.

The Supreme Court unanimously rejected the first argument but accepted the second, holding that parliament cannot “rationally be taken to have intended that an entitlement created with the aim of acting unlawfully and abusing procedures provided by company and insolvency law should fall within the statutory description…...  In these circumstances we have no difficulty in concluding that …. the SPVs to which leases were granted did not thereby become “entitled to possession” of the demised property for the purposes of the 1988 Act.” This left the registered owners liable to pay the NDR.

Apparently this was a test case, with over 50 cases waiting in the wings for its outcome, with the values of the claims for unpaid NDR in these cases varying from a few thousand pounds to millions of pounds. Such is the prevalence of rates mitigation schemes at the moment. 

High Court considers lawful use rights after immunity from planning enforcement achieved

In R (on the application of Ocado Retail Ltd) v Islington London Borough Council [2021] EWHC 1509 (Admin) the High Court decided that the Council’s revocation of Ocado’s certificate of lawfulness of existing use or development (CLEUD) was lawful. Whilst the High Court provided insight on circumstances in which CLEUD’s can be revoked, the case has wider significance in discussing the position of lawful use rights after immunity from planning enforcement has been achieved.

Statute provides that a period of ten years must elapse before a change of use or breach of planning condition is lawful beginning with the date of breach. However, in the Ocado case the High Court held that the use does not have to be continuous after the ten year period has elapsed (i.e. once immunity from planning enforcement is achieved). From then on the test is whether the use has been abandoned, there is a subsequent change of use or a new planning unit is created. Therefore if a property does not have express permission to be used for its current use, or is being used in breach of conditions in its planning permission, but it can be established that it has been used for a continuous ten year period for that use or in breach of condition, then the use is lawful and immune from enforcement action. The ten year period can be any ten year period; if a property has stood empty for a few years after the expiry of the ten year period, that is irrelevant. The use can be resumed and remains lawful.

The judgment also highlights the necessity of carefully researching the immunity period and ensuring the evidence is reliable and free of gaps if making a CLEUD application. If information contained in a CLEUD application is false or information is withheld, there is a risk the CLEUD will be revoked. The onus is on the applicant to ensure the accuracy of its evidence; that the local authority’s records might hold complete reliable information is irrelevant.

For further information, please contact Sarah Fitzpatrick, Head of Planning.

The Government's Grenfell response: Building Safety Bill makes its way through Parliament

The long-awaited draft Building Safety Bill was published by the Government last summer in response to the Grenfell disaster. Following scrutiny of the draft Bill by a Parliamentary Select Committee, the Government has introduced the Building Safety Bill to Parliament this month. Some of its provisions are summarised below.

• The limitation period for claims against construction parties is extended from six to 15 years with retrospective effect. This means that claims may be brought for buildings that were completed up to 15 years before the provision comes into force as well as future construction. This provision was not included in the draft Bill published last summer.
• There is scope for a new levy to be imposed on developers wishing to construct certain high-rise buildings. The Bill in its current form will allow the Government to introduce the new levy through secondary legislation. This levy is not to be confused with the residential property developer tax discussed in our May Focus.
• There will be a new Building Safety Regulator. The intention is for the regulator to oversee a more rigorous regime for higher-risk buildings and enhance safety and performance in all (not just higher-risk) buildings. It will also oversee building control bodies, building inspectors and building control approvers.
• Greater protections for leaseholders? Costs for historic defects will not be included in a new building safety charge, payable by leaseholders, but rather the charge will be used to cover ongoing building safety costs. Landlords will also be obliged to take reasonable steps to ascertain whether remediation works can be paid by alternative means (for example, by way of a grant or from a third party under guarantee, indemnity or insurance policy) rather than being recouped from leaseholders. There has however been concern that the Bill doesn’t go far enough, with one Conservative MP describing it as a “sticking plaster, instead of a solution”. The Bill’s explanatory notes admit that the Bill doesn’t fundamentally change leaseholders’ existing liability to pay for building safety works.

The Bill will no doubt be subject to amendment and debate as it makes its way through Parliament and is likely to have a ripple effect on the insurance market. Increased safety standards should reduce the number of insurance claims made under buildings and construction policies, however underwriters may want to reassess their risk appetite in light of the increased obligations on insureds in respect of higher-risk buildings.

Consultation on regulations reforming the Electronic Communications Code

The Electronic Communications Code (the Code) governs the relationship between network operators and site occupiers in respect of access rights to install and keep electronic communications apparatus on public and private land.

As discussed in our March Focus, the Code was intended to encourage such access by way of commercial negotiation and voluntary agreements. However, operators continue to face difficulties installing apparatus in apartment blocks because landlords often ignore requests for access. New powers under the Telecommunications Infrastructure (Leasehold Property) Act 2021 (the Act) seek to address this problem by granting operators interim Code rights to access “multiple dwelling buildings” where landlords are genuinely unresponsive and there is a request for a service from a tenant. Operators will need to (a) provide sufficient evidence that they have tried and failed to communicate with the landlord and (b) continue liaising with the landlord to negotiate long-term access as interim Code rights are currently proposed to expire after 18 months. 

The new powers will not come into force until supporting regulations are made and, on June 9, 2021, the Government published a Consultation in respect of such regulations. The Consultation is split into three parts and seeks views on:

• the terms that will accompany the interim Code rights;
• the duration for which the interim Code rights should remain valid and the process of making an application to the Tribunal; and
• (perhaps most worryingly for some commercial landlords) the extension of such powers to other property types such as business parks and office blocks.

Some of the Government’s proposed terms include the requirement for any interim Code right operator to have sufficient insurance cover or provide indemnification to a landlord to a minimum value of £5 million to cover any damage that may occur. It is also proposed that details of proposed works are sent to a landlord at least five working days prior to installation. As part of the Consultation, we may see landlords trying to extend this notice period.

The closing date for comments is August 4, 2021. Although the Act currently only applies to multiple dwelling buildings, commercial landlords will want to keep a close eye to see if the Act’s reach is extended.