London Borough of Southwark v Ludgate House Ltd [2020] EWCA Civ 1637

Summary

The Court of Appeal has decided that a property owner remained in rateable occupation of premises that were occupied by property guardians, as a result of the degree of control reserved to the owner. The consequence of this is that property guardian schemes are no longer a viable way of mitigating a property owner's liability for business rates.

This judgment removes one of the incentives for property owners to enter into property guardian schemes in a climate where there is an increase in the number of empty commercial properties.

What is a property guardian?

A property guardian is an individual who agrees to live in an empty property on the understanding that they can be forced to vacate on short notice because they are not entitled to exclusive possession. The advantage of this arrangement to the guardian is that the cost of living in what can be a central location is far less than open market rent. The advantages to the property owner include providing a level of security by reducing the risk of trespassers and potentially avoiding liability for business rates.

Facts of the case

• Ludgate House was acquired by Ludgate House Limited (LHL) in 2010. In 2013, planning permission was obtained to demolish it as part of a wider redevelopment. It was occupied by commercial tenants until 2015, following which it became empty.
• LHL entered into an agreement with VPS (UK) Ltd to allow it to arrange for 32 property guardians to occupy the property.
• In 2018, the Valuation Tribunal for England held that the property guardians were occupying the property on behalf of LHL. The consequence of this was that LHL remained in rateable occupation and was therefore liable to pay business rates.
• This decision was overturned by the Upper Tribunal (Lands Chamber) who held that LHL was not in rateable occupation, as the degree of control reserved by LHL was insufficient to amount to this.

Appeal to the Court of Appeal

Southwark LBC appealed to the Court of Appeal who held that LHL were in rateable occupation and therefore liable to pay business rates. The degree of control reserved to LHL was a factor in reaching this decision.

It is worth noting that, if LHL did not exercise a sufficient degree of control, it ran the risk that the guardians' occupation could be construed as being an assured shorthold tenancy which would result in security of tenure. This would negate the level of flexibility that made property guardian schemes attractive in the first place.

A further point of interest is that the occupation of 5 or more property guardians at Ludgate House triggered the requirement for a house in multiple occupation licence (HMO). This in turn imposes a number of statutory obligations on property owners, which is in conflict with the intended flexibility benefit to property owners. No such HMO licence as obtained. It was separately argued that the property guardian scheme was illegal due to the absence of a HMO licence and that LHL should consequentially be liable for business rates. As the Court of Appeal had already determined that LHL was liable on other grounds, it did not decide this point. However, this raises further potential pitfalls where property owners/developers intend on implementing a property guardian scheme, as most schemes will likely involve a large number of individuals which will trigger the HMO licence requirement.

Our comment

The benefit to property owners/developers of implementing a property guardian scheme is now significantly diluted, as it can no longer be used to mitigate liability for business rates. However, it does still retain its purpose of providing a level of security by reducing the risk of trespassers.

The impact of this decision could be far-reaching, especially considering that there is likely to be an increase in the level of empty commercial properties due to the coronavirus pandemic. Furthermore, property owners may be considering carrying out development works whilst lockdowns are in place.

Given that reducing the degree of control reserved to a property owner runs the risk of property guardians being deemed as assured shorthold tenants, the property guardian scheme can no longer be used as a tool to mitigate business rates liability.