In applications to set aside Magistrates Court liability orders made for unpaid National Non-Domestic Rates (commonly known as business rates), the applicant must satisfy the 3 conditionsset down in The Queen on the Application of Brighton and Hove City Council v Brighton and Hove Justices v Michael Hamdan  R.A. 277 (Hamdan’). The first condition is a substantive merits-based test – the applicant must show that there is, at least, a ‘genuine and arguable dispute’ as to whether he has in fact been correctly identified as the person liable for business rates in respect to the relevant hereditament property for the relevant period.
Where an application for a set aside order is issued by a freeholder, who contends that he is not liable because the hereditament property was sublet to his tenant during the relevant period, but the respondent billing authority claims the ‘lease’ to be a sham, manufactured by the applicant freeholder to avoid paying business rates, the Court hearing the application will have to carefully analyze the evidence, in order to determine whether there is, at least, a genuine and arguable basis for finding that the parties to the 'lease' intended a true lease. In such a scenario, the Court will look for some cogent evidence to suggest that both parties intended a true lease, otherwise the ‘genuine and arguable dispute’ condition will not be satisfied and the set aside application will be dismissed.
This scenario arose in the case of Anami Holdings Ltd v Sandwell MBC  EWHC 1913 (Admin) (‘Anami’), a matter that reached the Divisional Court (McCombe LJ and William Davis J) on an appeal by way of case stated. In Anami, an applicant freeholder(‘AHL’) applied to set aside 3 liability orders on the basis that the relevant hereditament property has been let to another company (‘GFL’), a company within the same family of companies as AHL, during the relevant business rates periods. Accordingly, AHL contended that the law did not impose liability for business rates upon it, but that liability fell on GFL. To evidence the landlord and tenant relationship said to exist, AHL’s director had exhibited a counterpart to the alleged lease. The counterpart was said to evidence that a lease of 7 years had been granted by AHL to GFL, commencing at a date unspecified, but entered into on a date part way through the first liability order period.
The billing authority claimed the lease to be a sham, ‘…being a document executed by the parties with the sole intention of allowing [AHL] to avoid the payment of business rates, rather than with any real intention to allow the purported tenant to occupy the property’ (paragraph 9). The lease not being a true lease, the billing authority claimed AHL was still the ‘owner’ within section 65(1) of the Local Government Finance Act 1988 (‘1988 Act’) (as '...the person entitled to possession of it'), and so liable under section 45(1)(b) of the 1988 Act for the applicable business rates.
At first instance, the District Judge (Magistrates Court) dismissed the set aside application, holding that the condition required the applicant freeholder '...to provide some evidence on which to hang the hat of a genuinely arguable case' (paragraph 17). That the applicant freeholder’s evidence ‘…did not get anywhere close to establishing that it had a genuine and arguable case, however low the bar is set.’ (paragraph 19). That ‘…the purported lease appeared to be a sham and no sufficient issue had been raised to demonstrate that it was not’ (as summarized by McCombe LJ, at paragraph 15).
On appeal, Divisional Court heard argument as to:
(a) the nature of the evidential process required when determining whether there was ‘genuine and arguable dispute’ as to liability. It was said that parallels might be drawn with the evidential process involved when determining, under the Civil Procedure Rules (‘CPR’), applications to set aside judgments in default (of filing Acknowledgements or Defences), or summary judgments (defence has no real prospects of success), and the evidential process required to prove ‘genuine and arguable dispute’; and
(b) what must be shown to establish a transaction is a sham. Argument included reference to the well-known statement of Diplock LJ in Snook v London & West Riding Investments  2 QB, at 801:
‘As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a 'sham,' it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.’
And Megarry J, in Miles v Bull  1 QB 258, where he said both:
‘On the other hand a transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it.’
‘Mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth.’
Evidential Process to show ‘Genuine and Arguable Dispute’
This aspect can be dealt with briefly as the Court side-stepped providing an illuminating exegesis as the evidential process for determining the ‘genuine and arguable dispute’ condition. The Divisional Court was only willing to assume, without deciding, that the ‘genuine and arguable’ bar was analogous to similar applications under the CPR. McCombe LJ, stated, at paragraph 27 and 28:
‘Assuming in favour of [applicant freeholder] that the bar to relief on the application was to show a good, arguable case by analogy to similar applications under the Civil Procedure Rules that there was a true lease intended by the apparent parties to it, it seem to me that…’
‘If the test to be applied is akin to that for, say, resistance to summary judgment, or to achieve the setting aside of a default judgment, then I consider…’ [bold added to both quotes]
Assuming, but not deciding, leaves the matter open and still awaiting conclusive determination.
Quality of Evidence
Where the case is more illuminating is as to the kinds of evidence the Court will expect to see where the central issue is whether or not the hereditament property was truly sublet or not. As will become apparent, AHL did a woeful job of preparing its evidence for the set aside application, showing, in a way, how not to go about demonstrating that a 'lease' is genuine:
Firstly, AHL’s witness, its director, was not tendered for oral evidence, thereby both undermining the weight to be given to his written statement and its assertion that there had been a genuine lease, and also raising a (implicitly unfavourable) question as to why the director was not called.
AHL’s director’s first witness statement was accompanied by a section 2 of the Civil Evidence Act 1995 notice (‘Hearsay Notice’), stating AHL’s intention to rely on the statement as hearsay evidence at the set aside application hearing; AHL stated that the evidence was ‘considered to be uncontroversial and […] not capable of significant challenge.’ After the billing authority filed its evidence, asserting that the lease was a sham, AHL’s director filed a further witness statement, again accompanied by a Hearsay Notice, contenting again that the director’s evidence was uncontroversial and not capable of significant challenge. As McCombe LJ said, at paragraph 10:
‘This latter statement is perhaps somewhat surprising given the contents of the second statement which was clearly designed to refute [the billing authority’s witness’s] clear assertion that the lease appeared to be a sham. No one could seriously have thought that the evidence was either uncontroversial or not capable of significant challenge, which lends one to question the decision of AHL not to produce [AHL’s director] for cross-examination at the hearing of the applications.’
Secondly, true landlord and tenant relationships generate actions, decisions and documentation. There will have been negotiations leading up to the execution of the lease, lease formalities to complete following execution, and the lease obligations would then be performed/occupation of the hereditament property enjoyed - all these phases generate actions/decisions and so evidence. Some involve interactions beyond the two parties immediately concerned - with third parties; such third party interactions typically generating evidence, evidence that will show there is real substance to the ‘outward and visible form’. The Court expects such evidence to be produced, to take the evidential process beyond mere assertion.
Where was the evidence of the negotiations leading up to the final executed lease? McCombe LJ said, at paragraph 18:
‘…[the DJ] had been provided with no details as to the negotiations leading to the grant of the lease. He asked himself where were the copy letters and files from the applicant AHL and GFL? Were there agents involved? Were there diligence checks carried out by the tenant? Did solicitors act on either side, and, if so, where are their documents? If there were no solicitors, he asked, who drafted the lease?
Moveover, post lease execution, stamp duty tax ought to have been paid, but there was no evidence tendered that it had been; nor had the lease been registered at the Land Registry, as it ought to have been given the lease term was 7 years. McCombe LJ said, at paragraph 18:
‘There was no evidence [the DJ] could see of payment of stamp duty, and, whereas the lease had been granted for seven years and would normally have been registered with the Land Registry, it had clearly not been done.
Similarly, the freehold was subject to a mortgage, and so there was a mortgagee. Yet there was no evidence that the mortgagee had been asked, or consented, to the apparent subletting; ‘…there was no evidence of a mortgagee's consent to the letting.’ (paragraph 18).
Had GFL been a genuine tenant operating from the hereditament property, GFL would have generated evidence of this occupation, evidence that could have been produced for the Court. But the DJ:
‘…had been given no evidence whatsoever of GFL's actual occupation of the Property by way of evidence as to the nature of its business, by way of trading invoices, publicity documents, a website or the like. Nor was there evidence of payment for use of the utilities.
The 'lease' contained rent obligations, payable in advance on the usual quarter days (paragraph 6). Yet ‘[t]here was no satisfactory evidence of rental payments either’ (paragraph 18).
Thirdly, McCombe LJ observed, at paragraph 18, that the DJ had noted that ‘as the lease is supposed to be a counterpart, why was the original not produced, or at least a copy of the landlord's part?’
Fourthly, there was also the fact that the counterpart document had been produced only late in the correspondence/litigation process. It was first disclosed as an exhibit to AHL’s director’s first witness statement. McCombe LJ noted, at paragraph 7, that this was '...notwithstanding correspondence going to the issue of liability extending back over a number of years.’
On the quality of the evidence actually presented, there were also issues. There were ‘…a number of features of the lease’ that the DJ found to be ‘curious’ (paragraph 18). McCombe LJ gave some basic details, at paragraph 7:
‘The final page of the lease document bears spaces for signature by two parties "acting by a director in the presence of […]". The first space, to be normally signed by the landlord, bears a manuscript signature, which [counsel for AHL] has helpfully translated for us this morning as being [GFL], and the witnessing signature of one "J Singh", described as an accountant....’
At paragraph 18, McCombe LJ recorded that the DJ had noted:
‘…the attestation and the absence of a company seal....whereas a director may sign a document on behalf of the company, this had not occurred here: it had been signed in the name of the company itself. The signature that appeared on the document appeared first in the space where the landlord, i.e. AHL, would usually sign, not the tenant.’
In addition, the alleged tenant was also unlikely to be a tenant. In the Stated Case, the DJ summarised his conclusion on this, as:
'…GFL was, to all intents and purposes, a dormant company. No explanation was provided to me as to how on earth it would have been in a position to pay the Business Rates comprising the Liability Orders, over £42,000.'
1st Instance Conclusion
Drawing these strings together, at first instance the DJ had concluded, that:
‘There was so much wrong with the argument that the Applicant had genuinely leased the Property to GFL. There was so much missing from the evidence of [AHL’s director], such evidence not being tested in cross-examination. There was no possible room for doubt, in my mind. The presumption postulated by Neuberger J […] had been rebutted. This arrangement was clearly a sham…’
Divisional Court Decline to Interfere
In light of this analysis, the Divisional Court was invited to interfere. It declined. McCombe LJ said, at paragraphs 27 and 28:
‘…the judge was fully entitled to say that it was necessary to find evidence upon which one would "hang the hat of a truly arguable case". Mere assertion by AHL that the property was let to GFL clearly would not do. The statements of [AHL's director] amounted to little if anything more than this. There needed on AHL's case to be some cogent evidence to suggest that both parties intended a true lease. The apparent tenant was of the most tenuous character and had been dormant at all material times. There was no evidence from GFL that it intended to take a lease at the property from an associated company (inaudible) that might have been expected. The only thing that was produced was the very strange lease document produced for the first time in the evidence in support of the applications, with all the strange attributes that the learned judge identified, and the two unsigned letters dated 25 September and 18 November 2014, on stationery headed as being that of GFL, stating that it was the tenant but anonymously unsigned. It is strange, as clearly the judge was entitled to find, that that lease document did not see the light of day until the application to set aside was made.
To justify what Stanley Burnton J characterised as this "exceptional" jurisdiction, there needed to be at least something to suggest a true landlord-and-tenant relationship. All the features to which the judge pointed were strong grounds for thinking that the lease document was nothing more than a mask to conceal the reality and to bolster the mere assertions that had been made in the witness statement, without any substance behind it at all. If the test to be applied is akin to that for, say, resistance to summary judgment, or to achieve the setting aside of a default judgment, then I consider that the judge was entitled to find that AFL's evidence did not come close to passing that test. There was nothing in substance adduced to back up an entirely shadowy case of tenancy with nothing of reality behind it.’
The appeal was dismissed.
Recoverability of Costs
Though not the focus of this article, it is worth briefly noting that the Divisional Court in Anami addressed another salient point, on the jurisdiction of the Magistrates Court under section 64 of the Magistrates Court Act 1980, to impose costs orders at the conclusion of the set aside application. On this issue, the Divisional Court in Anami decided to follow Cockerill J in R. (on the application of Khan) v Feltham Magistrates' Court  EWHC 3042 (Admin) and hold that section 64 does empower the Magistrates Court to make costs orders after determining a set aside application. At paragraph 30 of Anami, McCombe LJ stated ‘…I find Cockerill J's reasoning persuasive and I would follow it in this case.’
Unoccupied hereditament business rates are imposed upon the ‘owner’ as defined by section 65 (1) of the Local Government Finance Act 1988. Where a freeholder has genuinely sublet, then the tenant will be the ‘owner’ and so liable. Where the billing authority dispute this, contending that the freeholder is liable because the alleged lease is a sham, the ‘inward and substantial truth’ of the alleged landlord and tenant relationship will have to be investigated to see if the ‘outward and visible form’ reflects it accurately.
Where the billing authority has already obtained a liabilty order against the freeholder, the onus will be on the freeholder to apply to Court for an order setting aside the impugned liability order. On such an application, the applicant/alleged ratepayer will need to show the 3 Hamdan conditions are satisfied, including that he has at least a genuine and arguable dispute that he is not liable. The decision and reasoning in Anami should act as an illistrative guide to the types of evidence the Court will expect to see from the applicant/alleged ratepayer, before it will be satisifed that there is a genuine and arguable dispute as to whether the applicant is liable for the relevant business rates. The Court will be unimpressed by mere assertions made in hearsay evidence, uncorroborated with any of the usual evidence the Court might expect to see if the lease was actioned in the real world. Late production of documents with 'curious' unexplained features will not help. The critical decision in Anami should act as a warning to would-be set aside applicants, the application will not be successful unless an allegation of sham lease is properly met with comprehensive countervailing evidence, showing the the lease existed in the real world. McCombe LJ said, at paragraph 25 ‘…what was required to be demonstrated on this application was what the inward and substantial truth may have been; all that was produced was the outward and visible form’.
SIMON HILL © 2018
33 BEDFORD ROW
NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.
The 3 conditions were set down by Stanley Burnton J (as he then was), at paragraph 31 of The Queen on the Application of Brighton and Hove City Council v Brighton and Hove Justices v Michael Hamdan. Stanley Burnton J said the jurisdiction:
‘cannot be exercised simply because the defendant disputes his liability to pay the NNDR in question. That there is a genuine and arguable dispute as to that liability is a necessary condition for a decision by justices to set aside a liability order, but it is not a sufficient condition. The power of a magistrates' court to set aside a liability order it has made is an exceptional one, to be exercised cautiously. In my judgment, in general a magistrates' court should not set aside a liability order unless it is satisfied, in addition to there being a genuine and arguable dispute as to the defendant's liability for the rates in question, that:
(a) the order was made as a result of a substantial procedural error, defect or mishap; and
(b) the application to the justices for the order to be set aside is made promptly after the defendant learns that it has been made or has notice that an order may have been made.’
AHL was at all material times, the freehold legal title holder. By all material times, what is meant is for the period covered by the disputed liability orders. The 3 liabilty order periods were: (i) 9.12.13 to 31.3.14; (ii) 1.4.14 to 31.3.15; and (iii) 1.4.15 to 21.12.15. AHL transferred its freehold on 21.12.15.