The law has spoken – property guardianship and business rates

From our founder, Katharine Hibbert

Until recently, the situation on business rates for buildings lived in by property guardians was clear – the buildings were exempt from the business rates which would normally be due on empty buildings, and liable for Council Tax instead.  The conclusion last month of a long-running court case has changed that.  This blog by our Founder Katharine Hibbert, explains the situation now, and gives Dot Dot Dot’s response.

What happened?

Back in 2017, London Borough of Southwark challenged the decision that a building on London’s South Bank, Ludgate House, should be exempt from business rates due to its occupation by guardians.  The first round Valuation Tribunal for England agreed with LB Southwark that rates were due.

Ludgate House’s owners appealed this decision in the Upper Tribunal, and in 2019 were successful in overturning it, returning the situation to what was the norm elsewhere i.e. that the building was not liable for business rates, and council tax was payable instead. 

However, LB Southwark appealed again, and last month the case was heard in the Court of Appeal.  We blogged about the case back in November, before the court had heard it, and you can find our previous take on the matter here.

When the case was heard in December, LB Southwark were successful, and the Court of Appeal decided that business rates rather than Council Tax are due.  This is now the final word on the case, and sets a precedent for all similar arrangements, so is significant to the property guardian sector.

The full judgement is available here, and Giles Peaker, a housing lawyer who is an expert on property guardianship, has provided an in-depth discussion of the legal reasoning behind this judgement on his blog, here. 

The central issue which shaped the judges’ view was the fact that the owners of Ludgate House retained very significant control over the building and guardians’ use of it. This meant that although guardians were using it as their home, the purpose of their being there was of direct benefit to the building’s owners.  Therefore, the judges decided that the building’s owners hadn’t given up control of it to a sufficient degree to enable it to be removed from business rates.

What didn’t happen?

Because the judges’ decision was based on fundamental points of property law, they did not consider the point made by LB Southwark’s lawyers that the property guardian scheme in question was unlawful in any case because the property guardian provider (VPS) did not have a House in Multiple Occupation (HMO) licence in place even though the building needed it.  As the judges said: “it is unwise to deliver judgments on points that do not have to be decided”.

Whilst no doubt the judges made a wise decision here, Dot Dot Dot would have welcomed examination of this issue at high level.  Existing law makes it very clear that buildings lived in by property guardians need HMO licences if they are HMOs, and Dot Dot Dot always secures such licences or others required by local authorities where relevant.  Not all property guardian companies do so, which puts property owners, property guardians and the reputation of the property guardian sector at risk – not to mention the fact that it enables property guardians to claim back fees they have paid to live in a property which should be licenced and is not.   

It was also not relevant to the judgement that the building was lived in only by a few guardians. Even if more guardians had been present, the property owners would have retained overall control of the building, meaning that rates would have been due.

Dot Dot Dot’s response

At Dot Dot Dot, we are disappointed that buildings lived in by property guardians will now be eligible for business rates and not Council Tax under current legal arrangements.  The previous situation created an extra incentive for property owners to work with property guardian companies by creating tax savings, meaning that more buildings were brought into use as homes instead of being left empty. 

It is not even likely that this judgement will create significant additional tax revenue – a wide range of other rates mitigation schemes are available, most of which have no socially positive effects but which cut revenues to the government.  For example, leasing a building to a newly created company set up purely for rates mitigation purposes, which is then liquidated, is a legitimate way to avoid the tax which benefits no one except property owners and scheme providers. 

However, rates mitigation was never a major selling point for Dot Dot Dot – most of our clients work with us because they are looking for reliable, flexible, cost-effective property security and an opportunity to make a positive difference to society.  And, in fact, the majority of buildings we manage were not eligible for rates in the first place, because they are residential or properties like halls of residence or sheltered accommodation. We have already discussed the changes with the minority of our property-owning clients who it will affect, and are working with them to find ways forward.    

The most positive part of this judgement is that it reinforces guardians’ status as licensees. Licensees have permission to live in the building in order to take care of it on behalf of the building’s owner, rather than tenants who have a right to exclusive occupation.  This distinction has always been clear, but understanding of it is growing as property guardianship becomes more common and widespread, so every further reiteration of the point – especially in the highest courts – is helpful in reducing the potential for confusion.   As Peaker says in his blog: “This judgment does, however, mean that there are greater hurdles to climb in any possession defence by guardians alleging a tenancy.”

More widely, we at Dot Dot Dot agree with those calling for wholesale reform of business rates – including, last month, the Financial Times and the Institute of Chartered Accountants in England and Wales.  Taxes shape decisions for individuals, businesses and local authorities, so we hope that any future update to the business rates regime will encourage socially worthwhile uses of buildings that would otherwise be empty. 

Update 26th January 2021:

We understand that the owners of Ludgate House are challenging the Court of Appeal’s decision in the Supreme Court, so the verdict discussed here may not be the final word on how buildings lived in by property guardians should be taxed. We will provide updates as the case moves forward.

To talk to us about how Dot Dot Dot’s brilliant property guardians could be part of your regeneration strategies, please do get in touch at partnerships@dotdotdotproperty.com.

You can also find out more about our commitment to raising standards in our industry here.