Hurstwood Properties (A) Ltd and others v Rossendale Borough Council and another [2021] UKSC 16.

Background

Hurstwood Properties (A) Ltd (“Hurstwood”) was the registered owner of various empty commercial properties (“the Empty Hereditaments”). Hurstwood granted leases to Special Purpose Vehicles (SPVs) in attempt to mitigate liability for business rates. The leases intended to pass ownership of the Empty Hereditaments to the SPVs so the SPVs would become the ‘owner’ within the meaning of s.65 LGFA 1988 and therefore liable for the NDR.

The SPVs then intended to become exempt from paying the NDR for one of two reasons set out below:

Scheme A: “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.” [33].

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 exception in regulation 4(k) [Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386)] for as long as the liquidation could be made to last without the lease being disclaimed.” [33].

Upon the appeal from the Court of Appeal in respect of a Summary Judgement application by the prospective ratepayers, the Supreme Court considered who was liable for the NDR in relation to the Empty Hereditaments pursuant to section 45, and section 65(1), of the Local Government Finance Act 1988 (“LGFA 1988”) where Scheme A and Scheme B existed.

Section 65 LGFA 1988: Owners and occupiers.

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

The Supreme Court Decision

The Supreme Court:

1. Concluded that the Ramsay Principle does apply to LGFA 1988, a “purposive approach to the interpretation of legislation” [9] is required to consider ownership pursuant to s.65(1) LGFA 1988.
2. Set a two-stage test ownership pursuant to s.65(1) LGFA 1988:

(i) Does the person, as a matter of the law of real property, have an immediate legal right to actual possession of the hereditament?

and

(ii) Does the person have a real and practical ability to either occupy the property or to put someone else in occupation of the hereditament?

The Supreme Court notes that the test may need “some further adjustment.” [61].

3. Decided, in applying the two-stage test, ownership did not pass from Hurstwood to the SPV on the billing authorities’ cases (though this is not necessarily the conclusion that will be reached at trial) under the leases, Hurstwood remained liable for the NDR because:

(a) The schemes had no purpose save for avoiding liability; and (importantly)

(b) Upon a close examination of the context of Scheme A and Scheme B as a whole, “Entitlement to Possession” could not pass from Hurstwood to the SPV.

Beyond the Supreme Court Decision: PAG3 Leases

The Supreme Court Decision in Hustwood related only to a summary judgment / strike out application and concerned one PAG scheme, Scheme B also known as a PAG2 Lease (Secretary of State for Business Innovation and Skills v PAG Management Services Limited [2015] EWHC 2404 (Ch)) (“PAG [2015]”).

PAG [2015] concluded that PAG2 leases demonstrated a lack of commercial probity and as a result Scheme 2 was determined to be a misuse of the insolvency legislation. Following the 2015 decision, PAG3 leases emerged in an attempt to overcome the deficiencies of the PAG2 scheme, so as to avoid misuse of the insolvency legislation.

The key difference between a PAG2 and PAG3 lease was “the existence of the determination premium” (Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Limited [2020] EWCA CIV 1017) (“PAG [2020]”). The determination premium was found to be a “legally effective term of the lease” and a “genuine contingent asset in the liquidation” (PAG [2020]).

One question that arises following the Supreme Court’s decision in Hurstwood is, does a PAG3 lease pass the two-stage test established in Hurstwood in relation to “Entitlement to Possession”?

Limb 1 of the test:

• Does the person, as a matter of the law of real property, have an immediate legal right to actual possession of the hereditament?

It seems likely that if there exists a properly executed PAG3 lease (that is not considered to be a sham), the PAG3 lease is likely to satisfy the first limb of the two-stage test for “Entitlement to Possession”. This is because where there is a properly executed lease there is ordinarily, as a matter of the law of real property, an immediate legal right to actual possession of a hereditament.

Limb 2 of the test:

• Does the person have a real and practical ability to either occupy the property or to put someone else in occupation of the hereditament?

Whether a PAG3 arrangement would pass the second limb remains unclear. One cannot directly apply the Supreme Court’s Judgment as a silver bullet as it was given on a summary judgment application, whereas the test is one of fact and degree in any given case. The focus must therefore be not only on the lease and what is permitted by its terms, but on what the constitution and affairs of the SPV would permit.

Whilst pursuant to a PAG3 lease the SPV will have a contingent asset, (the determination premium), the Court may conclude that a PAG3 lease also fails to satisfy the two-stage test for “Entitlement to Possession” for the following reasons:

(a) As the arrangement whereby a lease is granted to an SPV quickly followed by the SPV going into members voluntary liquidation has been considered to be “artificial and uncommercial” (Norris J in PAG 2015), the Court may conclude that the sole purpose of a PAG3 lease and more importantly the SPV itself, despite the Determination Premium, were for NDR avoidance and the SPV did not have any real and/or practical ability to occupy the hereditament or put someone else in occupation of it.

(b) Under a PAG3 lease, the registered owner of the hereditament has a right to determine the lease before the expiry of it “to enable the landlord to lease the premises to a commercial tenant if one should become available.” (PAG [2020]). The landlord’s right to determine the PAG3 lease at any point appears to prevent the SPV from having a real and/or practical ability to occupy the hereditament or put someone else in occupation of it. Instead, as was accepted by the Supreme Court, there is a possibility that the landlord retained the real and/or practical ability to occupy the hereditament or put someone else in occupation of it. That is particularly so when coupled with the financial means of an SPV and its near immediate liquidation.

The progression of the Hurstwood case, should it fail to settle, will therefore be watched with interest. In the interim, Councils are best advised to consider whether on the facts of any given matter there is a prospect that in the case of an empty hereditament, the landlord has done enough in granting a lease to transfer ownership. The more restrictive the lease and the more minimal the means of the tenant, the less likely it will pass the second limb of the test.

If you would like any assistance in looking at a particular scenario, please feel free to get in touch:

Richard.kerr@greenhalghkerr.com

Alex.worthington@greenhlaghkerr.com

Alex Worthington June 2021