Back in October 2013 we dealt with the specific question of liability for rates following the disclaimer of a lease by the liquidator (see the Q&A article on our website).

That issue has now been dealt with emphatically by the High Court in the recent case of Schroder v Birmingham CC.

Background

The appellants Schroder (“the landlord”) were the freehold owners of the property concerned. In June 2006 they granted a 10 year lease of the property to Woodward Food Service Limited (“WFL”) with WFL’s obligations being guaranteed by an associated company WF Group Holdings Limited. In July 2008 the lease was assigned by WFL to another associated company, WF Group Limited, with WFL this time providing the guarantee.

Both WF Group Holdings Limited and WF Group Limited went into liquidation in April 2011, and the liquidator disclaimed all interest in the property under the lease on the day of the liquidation, pursuant to section 178 of the Insolvency Act 1986.

Despite this, the landlord continued to call on WFL as guarantor to make good the default of the tenant in paying rent, and indeed WFL had been making the payments. It was accepted that the landlord had not exercised any right to go into physical possession of the property.

At the magistrates’ court, the council were successful in obtaining a liability order against the landlord for £590,000, being the rates accrued following the disclaimer.

Statutory background

Under section 178(4) of the 1986 Insolvency Act: “A disclaimer under this section –

• operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but
• does not, accept so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person”

Empty rates are governed by section 45(1) of the Local Government Finance Act 1988:

“A person (the rate payer) shall as regards a hereditament be subject to a non-domestic rate of a chargeable financial year if the following conditions are fulfilled in respect of any day in the year:

• On the day none of the hereditament is occupied;
• On the day the rate payer is the owner of the whole of the hereditament;
• The hereditament is shown for the day in a local non-domestic rating list in force for the year; and
• On the day the hereditament falls within a class prescribed by the Secretary of State by regulations,”

In the case, the appeal turned on section 45(1)(c), namely who was the “owner” defined in section 65(1) as “the owner of a hereditament or land is the person entitled to possession of it”

The landlord’s position

The landlord argued that whilst the disclaimer had the effect of ending the liabilities of the tenant, it did not end the lease for all purposes. It continued for certain purposes relating to third parties such as guarantors, such as was the case here. The disclaimer did not affect the rights and obligations between a landlord and guarantor. WFL as guarantor continued to be liable to pay the rent until the earlier of (a) the expiry of the term of the lease or (b) the landlord physically re-entering the property in accordance with the lease. It was argued therefore that the landlord had a right to possession of the property prior to the expiry of the term of the lease, but only if they exercised their right to re-enter the property.

The landlord therefore had the choice to re-enter and forfeit the lease as against the guarantor WFL thereby losing entitlement to rent from that company for the remainder of the term, or not to re-enter and continue receiving rent from that company, and indeed that was the course that it chose.

Decision

The court relied heavily on the case of Hindcastle v Barbara Attenborough Limited [1997] AC 70, which is the leading authority on section 178(4) IA. In circumstances where others, apart from the tenant, have liabilities in respect of the lease there is no scope for any rights or liabilities to be preserved by section 178(4). In order to achieve the statutory objective of releasing the insolvent from liability, it is necessary to determine all the rights of the landlord.

A lease either exists or it does not, and after a disclaimer, as a matter of property law, it ceases to exist. With the lease, go all the rights and obligations under the lease, such as the lessee’s obligation to pay rent. Any suggestion that the landlord had a right to re-enter the property after disclaimer is misconceived simply because there is no such right. After disclaimer, the landlord has the right to immediate possession.

Section 178(4) preserves the rights and liabilities of guarantors, but these are not property rights they are contractual rights under the guarantee.

Therefore the effect of the disclaimer operates to terminate the lease entirely, but a guarantor is not thereby released from his contractual liability to make good the defaults of the former tenant. The court clarified that WFL as guarantor was not paying rent under the terms of the lease, because that was gone, rather it was making payments under its contractual covenants to make good the former tenants default.

The appeal was therefore dismissed and the original liability order stood.

Comment

This is obviously good news for local authorities and provides clear authority for them to revert liability to the landlord of a property on the day after the date of disclaimer of the lease. This is so even when there is the added factor of there being a solvent guarantor to the lease who may still be paying sums to the landlord.

One other interesting point that arose in the course of the hearing and which is of importance when dealing with such appeals, is that the appeal to the High Court by way of case stated in the Magistrates’ Court in civil matters, is the end of the line. No further appeal (with or without permission) is permitted and the relevant authority is Farley v Child Support Agency and Secretary of State for Pensions [2005] EWCA Civ. 869.