Up until very recently, the Court has generally found in favour of companies running rates avoidance/mitigation schemes when considering whether a lease is a sham or valid transaction.

The recent decision of Isle Investments Limited v Leeds City Council CO/2677/2020 (“Isle Investments”) is a relatively rare victory for Local Authorities in this hard-fought field.

Not all rates avoidance agreements/leases are illegal or a sham. Companies often enter into valid rates avoidance/mitigation schemes to avoid paying NDR on empty hereditaments. The difficulty for Councils collecting NDR is determining which of those rates avoidance agreements/leases are valid transactions, and which of them are a sham.

This article will draw together important principles established in recent case law, with a specific focus on the recent decision of Isle Investments.

The background to Isle Investments is as follows:

• 3 x empty office units in Leeds City Centre.
• Isle Investments Limited (“the Company”) entered into leases pursuant to a Rates Mitigation Scheme with a company called Crusader.
• Several of the leases required using the units for “heliculture” or snail farming.

Definitions

• Sham

 “Whilst professing to be one thing, is in fact something else” – Snook v London and West Riding Investments Limited [1967] 2 QB 786.

“An arrangement involving an intentional mismatch between the ANR (apparent nature of relationship) and the TNR (true nature of the relationship) so as to give a false impression to third parties or a Court” – Isle Investments.

• Rates Avoidance Scheme

 A rates avoidance lease/agreement entered into between a company running Rates Avoidance Schemes and a landowner of an empty hereditament to avoid paying NDBR on the empty hereditament in full.

•  Actual Occupation

Temporary storage of documents occupying only 0.2% of a warehouse’s floor space was Actual Occupation for the purposes of NDR liability. This meant that a new period of empty rates relief applied when that occupation ended – Makro Properties Ltd v Nuneaton and Bedworth Borough Council [2012] EWHC 2250.

The tenant had taken a short-term lease for the purposes of installing Bluetooth apparatus. The Court held that the tenant’s use, though slight in terms of the extent of the space occupied, amounted to actual occupation – Sunderland City Council v Stirling Investment Properties LLP [2013] EWHC 1413 (Admin).

• Exclusive Entitlement to Occupation

A tenant has exclusive possession and control to/over the premises.

• Apparent Nature of the Relationship (“ANR”)

Nature of the relationship as portrayed by the lease/agreement.

• True Nature of the Relationship (“TRN”)

Nature of the relationship based on reality.

General Rules about sham

• The burden of proof rests on the person or party asserting sham, usually the Local Authority.
• The standard of proof is the balance of probabilities. No higher degree of evidence is required to prove sham – Broxfield Ltd v Sheffield City Council [2019] EWHC 1946 (Admin) (“Broxfield Ltd”)
• The absence of a rates avoidance lease/agreement in an NDR context is the end of the matter. A document cannot be a sham rates avoidance lease/agreement if it is not a rates avoidance lease/agreement – Broxfield Ltd.
• Presumption of regularity: There is a presumption that a rates avoidance lease/agreement will say it does what it is supposed to do. [See point 3.1 below].

“There is a strong presumption…that the parties to what appear to be perfectly proper agreements on their face intend them to be effective, and that they intend to honour and enjoy their respective obligations and rights!” – National West Minister Bank Plc v Jones [2001] 1 BCLC 98 (“Jones”)

• “The Court is slow to find that an agreement is a sham” – Rossendale Borough Council v Hurstwood Properties (A) Ltd [2017] EWHC 3461 (Ch) [2018] RA 251.

Points to consider following the decision in Isle Investments.

• There is a presumption of regularity, but the Court can consider beyond this presumption when considering whether a rates avoidance lease/agreement is a sham by considering the reality of what was created, including what subsequently happened after signing the lease/agreement.

“In the case of a document, the Court is not restricted to examining the four corners of the document. It may examine external evidence.” – Hitch v Stone [2001] EWCA Civ 63

• ‘Artificiality’ does not mean sham; artificiality is only 1 factor to be considered / taken into account when determining

 “An artificial transaction is not the same as a sham transaction” – Jones

‘Meaningful business’ does not mean ‘artificiality’; whether or not there is a ‘meaningful business’ is not determinative as to whether the rates avoidance lease/agreement is a valid transaction or a sham, but the Court should have regard to whether or not there is a ‘meaningful business’ when determining the question of ‘artificiality’.

In Isle Investments the Court held that “There was “no snail farm … in fact in existence” and “had never been snail farming in the offices”. These were “purported snail farms”…There was “no meaningful business taking place in the offices at any time”.” Because ““Crates opened were found to contain “a single snail with a covering of straw”; another “two snails, a small tub of soil, a small tub of bark and a small tub of dried grass” but “no evidence of water”; another “similar” contents. “There was no water in the boxes.” When the water supply to the Unit was checked  it was found to have been “turned off” (and there was no demand received for the water to be turned on).”

• Actual Occupation and Exclusive Entitlement to Occupy are 2 separate concepts. The question of who has EEO is not the same as who is in AO; “when determining NDR liability in an ‘unoccupied premises’ case, nobody is in AC” because the premises are unoccupied. – Isle Investments [17].

When considering sham, the key focus is on EEO.

• Effective avoidance intent alone is no basis for finding sham but nor is it inconsistent with

Cannot show that a rates avoidance lease/agreement is a sham on the sole basis of intent to avoid paying NDBR. As discussed above, a landowner can, intending to avoid paying NDBR on empty hereditaments, enter into a valid rates avoidance lease/agreement.

• Dishonesty alone does not demonstrate that a rates avoidance lease/agreement is a sham.

In Isle Investments the Court concluded that the ‘lease’ document was a piece of paper signed by the parties with no effect save for deceiving a 3^rd party or the Court to believe that the ‘lease’ was genuine. The ‘lease’ document intended to create different rights and obligations from those on the document, and create a false impression to 3^rd parties.

The Court must consider if there is an “Intentional mismatch between the ANR and TNR”? – Isle Investments [56]

Differences between the ANR and the TNR suggests the lease/agreement may be a sham.

A lease/agreement may purport to confer the EEO to the tenant (ANR), when, in reality, the EEO may not pass to the tenant (TNR). As such, the lease/agreement purports to show (ANR) something other than what, in reality, could happen (TNR) and the lease/agreement may therefore be a sham.

“A ‘sham lease’ will intend to give a false impression to third parties or a court as to the conferral of EEO, so that the ‘tenant’ is treated as liable for NDR. The ‘genuine lease’ will intend to confer EEO on the ‘tenant’ so that the ‘tenant’ is treated as liable for NDR” – Isle Investments [20]

The Court must consider the following points to determine whether there is an “intentional mismatch between the ANR and TNR”:

• What rights and obligations would the tenant have under the lease/agreement?

It is important to consider what rights and obligations the tenant would have under the lease rather than what rights and obligations the tenant could have.

• Do the rights and obligations that the tenant would have under the lease differ to the rights and obligations that the tenant could have under the lease?

“The true focus needed to be not on ‘pretence’ as to what the ‘tenant’ would do in relation to the rights and obligations, but on ‘pretence’ as to what rights and obligations it would have or, in terms of rights, what it could do.” – Isle Investments [18]

• Is it possible for the ANR to be exercised?

Taking into account any restrictions imposed by the lease i.e., restriction that lease is only for snail farming, is it possible for the ANR to be exercised?

If the ANR could never be exercised then the ANR could never be the TNR, the rates avoidance lease/agreement is likely to be a sham.

 “In my judgment, what the Judge was expressing…was a finding of practical impossibility rather than a finding of illegality. Snail farming was a practical impossibility rather than a finding of illegality….and in that sense “could not have operated there.” A use other than snail farming would not have been legitimate because it would have breached the Snail Farming Restriction. Thus, the lease “allowed no legitimate business to take place”.”– Isle Investments [30].

• If the tenant did seek to exercise the conferred entitlement under the lease/agreement, would that be inconsistent with, or a departure of, the TNR?

Conclusion

The Court has been slow to find in favour of Councils when determining sham. Isle Investments has been a great victory for Councils and, moving forward, requires the Court to consider beyond the rates avoidance lease/agreement document when considering whether a rates avoidance lease/agreement is a valid transaction or a sham. Councils should consider all of the points discussed above when considering whether a rates avoidance lease/sham is a valid transaction or a sham.

Emily Davison June 2021