Business Rates - 'Owner' of Unoccupied Properties

Author: Simon Hill
In: Article Published: Sunday 30 May 2021

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The first question to ask when determining who is liable for any national non-domestic rates (‘business rates’) for a hereditament on a particular day(s), is: on the relevant day(s), was the hereditament occupied or unoccupied?

Where the hereditament was unoccupied (colloquially referred to as ‘empty’), then the Local Government Finance Act 1988, section 45 imposed liability to pay business rates upon the ‘owner’. So the second question to ask is: on the relevant day(s), who was the ‘owner’ for the purposes of section 45? 

’Owner’ is defined by section 65(1) as follows:

‘The owner of a hereditament or land is the person entitled to possession of it.’

How this phrase is to be interpreted recently came on for consideration in the Supreme Court, in a case called Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council and anor [2021] UKSC 16 (14 May 2021) (‘Hurstwood Properties’), with Lord Briggs and Lord Leggatt giving a joint judgment (with whom Lord Reed, Lord Hodge Lord Kitchin agreed).

At a basic level, Lord Briggs/Lord Leggatt said in Hurstwood Properties that the person ‘entitled to possession’ of the hereditament for the purposes of section 65(1) is:

‘…the person who, in any tenurial chain, starting with the freeholder and working downwards, has not disposed of the entitlement to possession of the property in question’ (paragraph 49)

The focus then is on the tenurial chain, and determining whether, with each new ‘link’ (or ‘level' down from the freeholder) created (lease, sublease, sub-sublease etc), the grantor also disposed of the ‘entitlement to possession’ at the same time, to the grantee, on the level below. 

At this point, it is necessary to look at how the disposition of the entitlement to possess moves down the tenurial levels in a ‘normal’ business rates case, before considering how this might be different with an ‘unusual’ business rates mitigation case. 

‘Normal’ business rates case
In the ‘normal’ business rates case, the person ‘entitled to possession’ of the hereditament/land law depends on the application of the law of real property. In other words, the person ‘entitled to possession’ for the purposes of section 65 and so section 45, is the person who, as a matter of the law of real property, held on the relevant day(s), the immediate legal right to actual physical possession of the relevant property. In other words, for the relevant day(s), the person entitled to possession and so liable for business rates is the legal title holder of the absolute interest (i.e. the freehold or leasehold interest) which does not have any derivative absolute interests carved out of it.

In Hurstwood Properties, Lord Briggs/Lord Leggatt said, at paragraph 46:

There can be no doubt that the definition of the “owner” of a hereditament in section 65(1) of the 1988 Act as “the person entitled to possession of it” is to be interpreted as denoting in a normal case the person who as a matter of the law of real property has the immediate legal right to actual physical possession of the relevant property.[1]

Later, Lord Briggs/Lord Leggatt said, at paragraph 59:

‘In any ordinary case the test will easily be satisfied by identifying the person who is entitled to possession as matter of the law of real property.’

Lord Briggs/Lord Leggatt stated, at paragraph 28:

'The concept of a right to possession has a well settled meaning in the law of real property. The person entitled to possession of real property is the person who, as a matter of title, against the rest of the world (including any other person interested in the property such as a landlord) has the legal right to enjoy the property for the time being, whether by personal occupation or exercising the right to put others into possession or occupation, as tenants or licensees or otherwise. Such a person also, of course, has the right to decide to keep the property unoccupied.'

‘Unusual’ business rates mitigation case
In the ‘unusual’ business rates mitigation case, who is the person ‘entitled to possession’ is not simply a matter of applying the law of real property. This is because, in this scenario - which will be considered in more detail below, it is necessary to apply a purposive approach[2a] to the meaning of this phrase, otherwise the purpose of the legislation will be defeated. 

In Hurstwood Properties, Lord Briggs/Lord Leggatt said, at paragraph 47:

‘In the unusual circumstances of this case, however, identifying “the person entitled to possession” in section 65(1) of the 1988 Act as the person with the immediate legal right to possession of the property would defeat the purpose of the legislation.’

The purpose of the legislation, in danger of being defeated unless a purposive approach was adopted, was that Parliament intended[2b] to impose liability for unoccupied business rates on:

‘…the person who controls whether the property is left unoccupied and on whom the legislation is intended to place an incentive to bring the property back into use for the benefit of the community.’ (Paragraph 46)

To put this another way, when Parliament enacted the relevant sections imposing unoccupied property business rates, Parliament had determined that: (i) the community benefits from unoccupied non-domestic properties being brought back into use; and (ii) the imposition of business rates ought to incentivise this to occur. Consequently, when construing who was ‘entitled to possession’ the Court must not defeat this, and therefore, given the incentive will only be effective if business rates is imposed upon the person who actually controls whether the property is or is not brought back into use (whether by itself or by anyone else[3]), the provision must be construed so that that person is made subject to business rates. Lord Briggs/Lord Leggatt said, '...in relation to the central purpose of providing an incentive to bring unoccupied property back into use, the intention is clear. It focuses the burden of the rate precisely on the person who has the ability, in the real world, to achieve that objective.' (paragraph 29). In short, the tax is imposed upon the person with actual control of the property’s usage[4].

Lord Briggs/Lord Leggatt distilled this into a ‘real and practical entitlement’ test - of actual control over a property’s usage, with a focus on ability, at paragraph 58:  

‘…we consider that the words “entitled to possession” in section 65(1) of the 1988 Act as the badge of ownership triggering liability for business rates are properly construed as being concerned with a real and practical entitlement which carries with it in particular the ability either to occupy the property in question, or to confer a right to its occupation on someone else, and thereby to decide whether or not to bring it back into occupation. The fact that the property is by definition unoccupied means, as Henderson LJ said, that there is no scope for identifying as the owner anyone in actual occupation. But it does not preclude asking the question whether a lease granted as part of a scheme for tax avoidance … confers an entitlement to possession in the relevant real and practical sense, so as to identify the lessee as the owner for the purposes of the liability for business rates. If it does not do so, in particular because, under the scheme, there is no question of the SPV being able to exercise any of the attributes of a person with an entitlement to possession, and in particular to bring the premises back into occupation by itself or by anyone else, then the lessee under that lease will not be the owner. The landlord, as grantor of the lease, will be the owner, because the landlord will not by the grant of the lease have transferred to the lessee a real entitlement to possession.’[5]

An argument that the purposive approach to intrepreting section 65(1) would produce a test that was insufficiently certain, was rejected[6]. Though the Court did state that ‘[I]t may be that other factual situations may demonstrate that this test needs some further adjustment.’ (Paragraph 60)

The issue then on the (assumed[7]) facts in Hurstwood Properties was:

(1) whether the defendant alleged ratepayers, that is, the land owners claimed against by the Billing Authorities, had the requisite control over whether the property was brought back into use, such that they held the ‘entitlement to possession’ under section 65(1) on the relevant days; or alternatively, 

(2) the defendant alleged ratepayers/land owners had passed on the ‘entitlement to possession’ to their lessees (and beyond) under the business rates mitigation scheme executed. 

The Hurstwood Properties Business Rates Mitigation Scheme
The ‘unusual’ business rates mitigation scheme scenario in Hurstwood Properties involved land owners of unoccupied properties granting genuine (i.e. not sham[8]) leases to limited companies (called Special Purpose Vehicles - ‘SPVs’) in order that, it was hoped, the SPV would be liable for the business rates: 'The registered owner grants 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 for business rates.' (paragraph 2)

The lease was formed and the legal right the lease conferred on the SPV was bestowed for no purpose other than the avoidance of liability for rates.

There were 2 versions/variants of the general scheme:

(1) The Dissolution Version - Scheme A;
(2) The Liquidation Version - Scheme B.

Before considering how they were different, Lord Briggs/Lord Leggatt noted their common features, at paragraph 31:

‘The common features are: (i) the setting up of an SPV without any assets or any actual or intended business; and (ii) the grant of a lease by the registered owner of the unoccupied property to the SPV which, as a matter of real property law, is framed so as to confer an entitlement to possession of the property upon the SPV, but on terms which enable the lessor promptly to terminate the lease and so re-acquire entitlement to possession, if and when it identifies an occupational use or business tenant for the property.’

Lord Briggs/Lord Leggatt then said, at paragraph 32:

‘The features which distinguish the two versions of the scheme are those which affect the life of the SPV thereafter. Under the variant employed by the Hurstwood companies (Scheme A), the SPV was dissolved without any prior liquidation process, so that the liability for rates passed from the SPV to the Crown upon the vesting of the lease in the Crown as bona vacantia. Under the variant used by Property Alliance Group Ltd (Scheme B), the SPV was placed in members’ voluntary liquidation within a few days of the grant of the lease so as to trigger the winding-up exemption in regulation 4(k) for as long as the liquidation could be made to last without the lease being disclaimed. In both cases the SPV was set up and (to the minimal extent required) operated by the promoter of the scheme for a fee consisting of a substantial part of the rates saved by the then owner of the property (“the landlord”). The SPV was not directly owned by the landlord, and it is a triable issue whether it was even beneficially owned or controlled by it. All the landlord had to do was grant the lease and, if rates were demanded by the local authority, direct the authority to the SPV as the person entitled to possession of the empty property.’

[The reference to regulation 4(k) is to regulation 4(k) in the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386) (the ‘2008 Regulations’)]

Under ‘summary of relevant facts’, Lord Briggs/Lord Leggatt said, at paragraph 45, ‘…the following may be said about the scheme leases and the entitlement to possession which the leases conferred on the SPVs nominated as the tenants of the unoccupied properties:

‘iii) The leases were not granted with the intention of allowing the SPV to make any use of the property, or giving the SPV any role in its being brought back into use. To the contrary, it was an inherent part of the schemes that the SPV would have no ability to do so. The SPVs were constituted in such a way that they could do nothing with their rights under the lease, having neither the monetary nor human resources with which to do so, nor any business of which such an activity could form a part. Those rights were accordingly of no value or benefit to the SPV. Furthermore, the SPVs were intended either to go into immediate liquidation (under Scheme B) or to be dissolved after a period of inactivity which was to begin upon the grant of the lease (under Scheme A).

iv) By the same token, the schemes were designed so that the practical ability to decide whether to continue to leave the property unoccupied remained with the defendant landlord. If at any time the defendant found a tenant or acquired a use for the property, it could simply terminate the lease. In Lord Denning MR’s phrase (see para 29 above), it was the defendant who really had control of letting the property.

v) Although the leases were granted with the object of imposing the legal liability for business rates initially at least upon the SPV in exoneration of the defendant, it was not intended that any business rates would actually be paid by the SPV. Nor was there any possibility that the SPV would in fact pay those rates, once demanded. It had no assets from which to do so. Under Scheme A the plan was that the liability for business rates would just accumulate, unpaid, until the SPV was dissolved, following which the further accruing liability would be incurred by the Crown, until the Crown disclaimed the lease and the liability was extinguished. Under Scheme B the plan was for the SPV to be placed immediately in liquidation to claim the shelter of the regulation 4(k) exemption and stay there for as long as could be engineered. Both schemes were managed so as to prolong the period before the disclaimer of the leases, and therefore the hiatus in payment of rates, for as long as possible.

vi) Each scheme pursuant to which the leases were granted involved as an integral part the misuse of a legal process: namely, the dissolution of a company and the law governing dissolution in the case of Scheme A and the liquidation process and the insolvency legislation in the case of Scheme B. Furthermore, Scheme A (if effective) involved an inevitable breach of statutory and fiduciary duty by the directors of the SPVs in the very acceptance of the leases, and the section 1003 variant is likely to have involved the commission by those directors of criminal offences.’ [Bold added][9]

Lord Briggs/Lord Leggatt branded both schemes an '...abuse of legal process' (paragraphs 4), and seemingly agreed, at paragraph 43, with the 1st instance judge’s view that Scheme B constituted ‘…an abuse of the insolvency legislation…’ and demonstrated ‘…a lack of commercial probity.[10]

Applying these facts to the test distilled, Lord Briggs/Lord Leggatt said, at paragraph 47:

‘…the schemes were designed in such a way as to ensure that the SPV to whom a lease was granted had no real or practical control over whether the property was occupied or not and that such control remained at all times with the landlord.’

They continued, at paragraphs 48 to 50:

In our view, Parliament cannot sensibly be taken to have intended that “the person entitled to possession” of an unoccupied property on whom the liability for rates is imposed should encompass a company which has no real or practical ability to exercise its legal right to possession and on which that legal right has been conferred for no purpose other than the avoidance of liability for rates. Still less can Parliament 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, on the agreed and assumed facts, the SPVs to which leases were granted as part of either of the schemes we have described did not thereby become “entitled to possession” of the demised property for the purposes of the 1988 Act. Rather, throughout the term of the lease that person remained the defendant landlord. This does not involve ignoring the leases, in the way that an intermediate element in a circular transaction might be ignored under the Ramsay doctrine. Rather it involves their close examination in their context, and a conclusion that they did not transfer to the SPVs the entitlement to possession required by the Act as the badge of ownership. If the defendants did not thereby transfer their entitlement to possession it necessarily remained, for the purposes of the Act, with them. The Act requires someone to be identified as the owner. That will be the person who, in any tenurial chain, starting with the freeholder and working downwards, has not disposed of the entitlement to possession of the property in question.

We emphasise that this conclusion is not founded on the fact that the defendant’s only motive in granting the lease was to avoid paying business rates, although that was undoubtedly so. If the leases entered into by the defendants had the effect that they were not liable for business rates, their motive for granting the leases is irrelevant. Nor does it illuminate the legal issues to use words such as “artificial” or “contrived” to describe the leases, when it is now accepted that they created genuine legal rights and obligations and were not shams. Our conclusion is based squarely and solely on a purposive interpretation of the relevant statutory provisions and an analysis of the facts in the light of the provisions so construed.’

Parent Company and Subsidiary Company
One example was given where, though management of the affairs of the lessee rested with the lessor, the 'real and practical entitlement' to determine hereditament usage would still rest with lessee (so the lessee would be liable for business rates). Lord Briggs/Lord Leggatt said, at paragraph 60:

‘…the letting of unoccupied business property by a parent company to a wholly owned and controlled subsidiary would not of itself cause the subsidiary to fail to satisfy the ownership test merely because the management of the affairs of the subsidiary (including whether to bring the premises back into occupation) rested with the parent’s board.’

Conclusion
For unoccupied hereditaments, Parliament placed the liability to pay business rates on the ‘owner’, meaning the person ‘entitled to possession’ of the hereditament/land. In a normal business rates case, this will simply involve the application of the law of real property. 

In an ‘unusual’ business rates case, the law of real property ‘…may not prove a reliable guide…’ (paragraph 60). In such a case, a purposive construction is to be given to the meaning of ‘entitled to possession’ in section 65(1), notwithstanding that this brings with it an element of legal uncertainty. That phrase is concerned with the ‘…real and practical entitlement…’ (paragraph 58), the ‘real or practical control’ (paragraph 47) and/or the ‘real or practical ability’ (paragraph 48), ‘…either to occupy the property in question, or to confer a right to its occupation on someone else, and thereby to decide whether or not to bring it back into occupation.’ (Paragraph 58). 

Determining who is the (legal or natural) person liable, requires a close analysis of the tax mitigation structure. In a scenario like in Hurstwood Properties, this will involve close consideration of the overall allocation of real and practical control over the hereditament’s use, as between the participants (lessor and lessee), looking in particular at the lessee’s abilities, assets, intended role and function. Asking, overall, who, in a real and practical sense, determines the hereditaments ‘use’. 

On the assumed facts in Hurstwood Properties, ‘the person entitled to possession’ of the hereditaments ‘…remained at all material times the …landlords’ (paragraph 61). Consequently, the Billing Authorities’ claims against the landlords, rather than the SPVs, ought not to have been struck out. There was (at least) a triable issue that the landlords where the party 'entitled to possession’ and so the matter should have been allowed to go to trial.

SIMON HILL © 2021

BARRISTER

33 BEDFORD ROW

S.HILL@33BEDFORDROW.CO.UK

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.

[1] In Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council and anor [2021] UKSC 16, in support of the conclusion that, in a normal case, who is ‘entitled to possession’ depends on who, as a matter of the law of real property, has the immediate legal right to actual physical possession of the relevant property, Lord Briggs/Lord Leggatt said, at paragraph 46:

‘Arden J so held in Brown v City of London Corpn [1996] 1 WLR 1070 as a reason for concluding that the right of a receiver under a debenture to exercise a power to displace the possession of the company which was the tenant of an unoccupied property did not make the receiver the “owner” of the property for the purposes of section 65(1) and thereby liable for business rates. It has not been suggested that that conclusion was wrong. Furthermore, such an interpretation generally accords with the legislative purpose of imposing the liability for business rates on the person who controls whether the property is left unoccupied and on whom the legislation is intended to place an incentive to bring the property back into use for the benefit of the community.’

[2a] The 'purposive' approach to statutory interpretation/construction is often referred to as the 'Ramsay principle or doctrine' (paragraph 9), from the case of WT Ramsay Ltd v Inland Revenue Comrs [1982] AC 300. Lord Briggs/Lord Leggatt set out the law in this area, from paragraphs 9 to 17.

For brevity, only the last part is provided here:

'13.The decision of the House of Lords in [Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51; [2005] 1 AC 684] made it clear beyond dispute that the approach for which the Ramsay line of cases is authority is an application of general principles of statutory interpretation. Lord Nicholls of Birkenhead, delivering the joint opinion of the appellate committee (which also comprised Lord Steyn, Lord Hoffmann, Lord Hope of Craighead and Lord Walker of Gestingthorpe), identified the “essence” of the approach (at para 32) as being:

“to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.”

Lord Nicholls also quoted with approval (at para 36) the statement of Ribeiro PJ in Arrowtown, para 35, that:

“the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

14. Almost all statements of principle, however broadly framed, tend to be responsive to the particular facts under review. The above statements refer to “the transaction” and most of the leading expositions of the Ramsay doctrine do the same. This is because most of the provisions being considered taxed, or as the case may be exempted, transactions. But not all do. Some involve a tax (such as stamp duty) on instruments. Others impose charges by reference to the status of a person, or their rights in relation to specified property, such as the owner of unoccupied non-domestic property in the present case. The Ramsay doctrine is no less applicable in such cases. In MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6; [2003] 1 AC 311, 320, para 8, Lord Nicholls said:

“The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.”

No statement of the principle could be more general than that.

15. In the task of ascertaining whether a particular statutory provision imposes a charge, or grants an exemption from a charge, the Ramsay approach is generally described - as it is in the statements quoted above - as involving two components or stages. The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they “answer to the statutory description” (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required.

16. Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material.

17. Likewise, the facts must be also be looked at in the round. In Inland Revenue Comrs v McGuckian [1997] 1 WLR 991 , 999, Lord Steyn explained that it was the formalistic insistence on examining steps in a composite scheme separately that allowed tax avoidance schemes to flourish. Sometimes looking at a composite scheme as a whole allows particular steps which have no commercial purpose to be ignored. But the requirement to look at the facts in the round is not limited to such cases. Thus, in Scottish Provident where the taxing statute granted an allowance which depended upon the taxpayer having an entitlement to a specified type of property (gilts), a view of the facts in the round enabled the House of Lords to conclude that a legal entitlement to gilts generated by one element in a larger scheme failed to qualify because the entitlement was intended and expected to be cancelled out by an equal and opposite transaction.'

[2b]This Parliamentary purpose was identified by Lord Briggs/Lord Leggatt, in Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council [2021] UKSC 16, at paragraphs 22 to 24:

Provision for levying rates on unoccupied property was first made by sections 20 to 22 of the Local Government Act 1966, and then in similar terms in the General Rate Act 1967 (the “1967 Act”). In its February 1966 Command Paper, Local Government Finance England and Wales (Cmnd 2923), which preceded the introduction of the legislation, the Government proposed to “provide for the payment of part rates on properties which remain unoccupied for more than a limited period”. This reform was said to be necessary because the notion “that properties should remain empty and available for occupation for long periods in conditions of scarcity is an affront to all right-thinking people”. Making rates payable on empty property should also “reduce the present waste of accommodation”.

In Hastings Borough Council v Tarmac Properties Ltd [1985] 1 EGLR 161 Lawton LJ said that the mischief with which the relevant statutory provisions were intended to deal “can be clearly identified. Parliament wanted to stop the owners of premises … leaving them unoccupied to suit their own convenience and to their own financial advantage”.

The statutory regime remained largely intact until further reforms made by the 1988 Act, the main underlying purpose of which was to replace the domestic rate with the (then) community charge, subsequently itself replaced by the council tax. Rates on non-domestic property survived as the rump of the old general rating system, with its central rationale unchanged. During the passage through Parliament of the Bill which became the 1988 Act the Government made it clear that it was not seeking to modify the justification underpinning the rates regime. When the Bill was considered in committee in the House of Lords, the Earl of Caithness (then Minister of State for the Environment whose department was responsible for the Bill) acknowledged that:

“historically, the purpose of empty property rating has been partly to reflect the fact that empty properties do benefit from some local authority services - police, fire and so forth - and partly to encourage owners to bring empty property back into use.”

Fortifying this conclusion, Lord Briggs/Lord Leggatt referred to the exceptions to Business Rates liability, the existence and categories of which, reinforced their conclusion as to the underlying purpose behind the legislation. They said, at paragraphs 25 to 27:

'The aim of deterring owners from leaving property unoccupied for their own financial advantage and encouraging them to bring empty property back into use for the benefit of the community at large is further reflected in the exceptions to liability listed in regulation 4 of the 2008 Regulations, and also in the zero-rating scheme for charities and community amateur sports clubs in section 45A of the 1988 Act (added by the Rating (Empty Properties) Act 2007). The thrust of the exceptions is to exclude properties where, for varying reasons, the owner either (i) may be unable to bring the property back into occupation, or (ii) may be regarded as having a reasonable excuse for not doing so, or (iii) may be making some other valuable contribution to society by being the owner, in lieu of paying rates.

Thus, within the first of these categories, regulation 4(c) provides an exemption where occupying the property is unlawful. In the second category regulation 4(d) does so where property is kept vacant ahead of planned compulsory acquisition, and regulation 4(e) does so where the property is subject to a building preservation notice or listed as such. Regulation 4(h) to (m) exclude properties whose owner is an office holder, whether a personal representative, trustee in bankruptcy, liquidator or administrator, in each case subject to duties (eg to realise by sale) which will or may conflict with securing early occupation. More generally, regulation 4(a) and (b) exclude properties which have only been unoccupied for short periods. Within the third category is regulation 4(f), which exempts ancient monuments or archaeological sites, and the zero-rating scheme for charities and community clubs, where the property is temporarily vacant prior to occupational use for public benefit.

Some of these exceptions date back to when rates were first imposed on empty property: see paragraph 2 of Schedule 1 to the 1967 Act. Others have been added over time, but they all tend to reinforce the purposes underlying the legislation as described above.'

They added, at paragraph 28:

'The imposition of empty property rates on owners, and the identification of the owner as the person entitled to possession of the relevant hereditament, is also as old as the legislative scheme itself: see paragraphs 1(1) and 15 of Schedule 1 to the 1967 Act.'

[3] This bit in parenthesis comes from Lord Briggs/Lord Leggatt, Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council [2021] UKSC 16, at paragraph 58, where they state the Court can ask the question:

‘…whether a lease granted as part of a scheme for tax avoidance … confers an entitlement to possession in the relevant real and practical sense, so as to identify the lessee as the owner for the purposes of the liability for business rates. If it does not do so, in particular because, under the scheme, there is no question of the SPV being able to exercise any of the attributes of a person with an entitlement to possession, and in particular to bring the premises back into occupation by itself or by anyone else, then the lessee under that lease will not be the owner.’

[4] Although the Supreme Court did not do this, one might label this person as the ‘real and practical use controller’, or ‘real or practical use controller’ in light of slightly different wording adopted by Lord Briggs/Lord Leggatt, at paragraph 47, where they said:

‘…the schemes were designed in such a way as to ensure that the SPV to whom a lease was granted had no real or practical control over whether the property was occupied or not and that such control remained at all times with the landlord.’

Lord Briggs/Lord Leggatt focused on ability in this paragraph, paragraph 48:

In our view, Parliament cannot sensibly be taken to have intended that “the person entitled to possession” of an unoccupied property on whom the liability for rates is imposed should encompass a company which has no real or practical ability to exercise its legal right to possession and on which that legal right has been conferred for no purpose other than the avoidance of liability for rates.’

[5] Two things here:

(1) The reference to what Henderson LJ said, is a reference to his judgment in the Court of Appeal below: Hurstwood Properties (A) Ltd v Rossendale BC [2019] EWCA Civ 364; and

(2) To fortify why it was appropriate to construe ‘entitled to possession’ as being concerned with a real and practical entitlement, Lord Briggs/Lord Leggatt made reference to Inland Revenue Comrs v Scottish Provident Institution [2004] UKHL 52; [2004] 1 WLR 3172 (‘Scottish Provident’), in particular, the speech of Lord Nicholls. Lord Briggs/Lord Leggatt said, at paragraph 57:

…. in Scottish Provident. The question … depended on what the taxing statute meant by “a contract under which … a qualifying company has any entitlement … to become party to a loan relationship”, the latter term being defined as including a government security. The concept of “entitlement” is of course the concept used in section 65(1) of the 1988 Act… In Scottish Provident…the House of Lords was not deterred by the “legal” nature of the concept from giving it a practical meaning. It was held that the provision did not apply to a legal entitlement which was intended and expected to be cancelled by an equal and opposite obligation, as there was in these circumstances no entitlement to gilts “in a practical sense” (para 19). As Lord Reed observed in [UBS AG v Revenue and Customs Comrs [2016] UKSC 13; [2016] 1 WLR 1005] at para 71, the statutory provision was therefore construed as being concerned with a real and practical entitlement.'

[6] In Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council [2021] UKSC 16, Lord Briggs/Lord Leggatt rejected the argument that the law should not adopt a purposive interpretation to ‘entitled to possession’ because the resultant legal test would be too uncertain to apply. Lord Briggs/Lord Leggatt said, at paragraph 60:

We would…reject the criticism that the test is insufficiently certain. In any ordinary case the test will easily be satisfied by identifying the person who is entitled to possession as matter of the law of real property. The fact that the law of real property may not prove a reliable guide in an unusual case of the present kind is not in our view an objection to our preferred interpretation. The value of legal certainty does not extend to construing legislation in a way which will guarantee the effectiveness of transactions undertaken solely to avoid the liability which the legislation seeks to impose.’

They said, at paragraph 59:

'...a recognition that section 65(1) is speaking of an entitlement to possession which vests in the person concerned a real and practical ability either to occupy the property or to put someone else into occupation of it, is a purposive interpretation which achieves some coherence between the language of the statute and its purpose in identifying the “owner” of an unoccupied non-domestic property as the person who is liable for business rates.'

The Court did recognise however that other factual situations may call for further adjustment to the test. Lord Briggs/Lord Leggatt said, at paragraph 60:

‘It may be that other factual situations may demonstrate that this test needs some further adjustment.’

[7] The facts were assumed as the appeal was against the 1st instance judge’s order summarily striking out the claimant billing authorities' particulars of claim. This is clear from Lord Briggs/Lord Leggatt, at paragraphs 7 and 8:

In their particulars of claim in these proceedings the local authorities have alleged, in relation to each property in respect of which they are claiming unpaid rates: (i) that the lease to the SPV, if not a sham, was ineffective to make the SPV the “owner” of the unoccupied property within the meaning of the applicable legislation; alternatively, (ii) that the separate legal personality of the SPV should itself be ignored for this purpose. By either technique they seek to identify the defendant as the entity liable for the unpaid business rates.

On the defendants’ application to have the particulars of claim struck out on the basis that they disclose no reasonable grounds for bringing the claims, the judge (Judge Hodge QC) ruled in the defendants’ favour on the first point but not in relation to the alternative case based on “piercing the corporate veil”: [2017] EWHC 3461 (Ch). The Court of Appeal (David Richards, Henderson and Baker LJJ) decided both issues in the defendants’ favour and struck out all the claims: [2019] EWCA Civ 364; [2019] 1 WLR 4567. The local authorities appeal to this court on both points.’

As well as assumed facts, there were some agreed facts. See paragraph 61.

[8] In Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council [2021] UKSC 16, Lord Briggs/Lord Leggatt stated, at paragraph 35:

‘The particulars of claim originally included allegations that the leases were a sham….The judge … ordered the allegations of sham to be struck out from the particulars of claim. There has been no appeal against that part of the judge’s order. In any event, it seems plain that the parties to the leases did indeed intend that the leases should confer a legal entitlement to possession on the SPV, so as to seek to bring the SPV within the definition of the “owner” of the property in section 65(1) of the 1988 Act.’

Earlier, at paragraph 34, Lord Briggs/Lord Leggatt stated defined what a lease is:

‘A lease confers a right to possession on the tenant as a proprietary interest in the demised premises by virtue of the grant of exclusive possession for a term and at a rent…’

[9] The reference to Lord Denning MR at paragraph 29 above is a reference to Lord Denning in Westminster City Council v Haymarket Publishing Ltd [1981] 1 WLR 677. After Lord Briggs/Lord Leggatt said 'In Westminster City Council v Haymarket Publishing Ltd [1981] 1 WLR 677 the question arose as to whether a mortgagor or mortgagee was the “owner” of an unoccupied property for the purpose of the liability to pay rates under the 1967 Act', they quote Lord Denning saying, at 680:

“The first question is: who is liable to pay the rates? Who is the ‘owner’? Who is ‘entitled to possession’ when it is a question between mortgagor and mortgagee? It is quite plain to my mind that unless and until the mortgagee enters into possession, in accordance with the mortgage law, and takes the rents and profits, the mortgagor is the person entitled to possession. He is the person who is entitled to put up advertisements, to let and do all that is necessary to let - unless and until the mortgagee interferes. It seems to me that the owner … is not two, three or more people. It is the one who really has control of the letting.” (Emphasis added)' [underlying showing emphasis in original; emphasis in original in italics]

Lord Briggs/Lord Leggatt gave another description of the (assumed) facts in the case, in an earlier part of the judgment, as part of their introduction. At paragraphs 2 to 5, Lord Briggs/Lord Leggatt said:

'Both schemes involve setting up a special purpose vehicle (“SPV”) in the form of a company without any assets or business. The registered owner grants 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 for business rates. 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 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 (or, as appropriate, to the Duchy of Lancaster or Cornwall). Meanwhile the registered owner is relieved from paying business rates, either until it terminates the lease because it has a tenant or other use for the property or until the lease is disclaimed by the liquidator or by the Crown.

On the assumption that the schemes work at all, both versions rely for their effectiveness over time upon administrative inertia. In the liquidation version of the scheme, the period until the necessarily onerous leases are disclaimed by the liquidator is deliberately prolonged. In the dissolution version, there may be delay before the SPV is dissolved; thereafter the scheme relies upon the unlikelihood that the local authority will find out about the dissolution for a considerable time, and then prompt the unsuspecting Crown to disclaim the lease. In either version of the scheme, if and when the relevant lease is disclaimed so that the registered owner regains its entitlement to possession, the scheme can simply be repeated using a fresh SPV.

The liquidation version of the scheme (in the form described in this judgment) has already been judicially branded an abuse of the insolvency legislation in proceedings for the winding up in the public interest of a company which promoted and managed such a scheme: see In re PAG Management Services Ltd [2015] EWHC 2404 (Ch) ; [2015] BCC 720. As will appear, the dissolution version of the scheme is no less an abuse of legal process and may in certain circumstances involve the commission of a criminal offence.

It is common ground that the schemes have no business or other “real world” purpose and that their sole purpose is to avoid liability to pay business rates. But, subject to one new point, dealt with below, it is also now common ground that the leases granted to the SPVs were not shams so that, as a matter of the law of real property, they conferred an entitlement to possession upon the SPVs. An argument that the leases were shams was rejected at first instance and has not been resurrected on appeal.'

[10] In Hurstwood Properties (A) Ltd and ors v Rossendale Borough Council and anor [2021] UKSC 16 (14 May 2021), when describing Scheme B - the Liquidation Version, Lord Briggs/Lord Leggatt referred to Norris J’s decision in In re PAG Management Services Ltd [2015] EWHC 2404 (Ch); [2015] BCC 720. Lord Briggs/Lord Leggatt said, at paragraphs 43 and 44:

’43…In PAG Management Services, following a detailed forensic examination of other examples of the operation of Scheme B, Norris J found that there was no collection, realisation and distribution of assets intended or effected in the voluntary liquidations: see PAG Management Services, para 65. The liquidators were effectively nominal liquidators who dragged their feet and were eventually removed and not immediately replaced. The liquidations were artificially prolonged solely to shelter the leases, which were of no commercial value, in order to allow the empty commercial property to continue to be owned by the SPV. This was found to constitute an abuse of the insolvency legislation and to demonstrate a lack of commercial probity. Norris J said at para 67:

“For me it is the use of the company in liquidation as an asset shelter and the inherent bias towards prolongation of the liquidation that is subversive of the true purpose and proper functioning of insolvency law.”

Accordingly, he ordered the promoter of the schemes (a company connected with Property Alliance Group Ltd) to be wound up compulsorily in the public interest under section 124A of the Insolvency Act 1986.

44. In the present case the judge treated the examples of Scheme B which are the subject of the claim by Wigan Council as in substance the same as those reviewed by Norris J in PAG Management Services. It has not been suggested that he was wrong to do so, nor that there was any relevant difference in how the scheme was operated in each case.’