18 January, 2021
London Borough of Southwark v Ludgate House Ltd & Anor (2020) EWCA Civ 1637
Ludgate House Limited (LHL), the owner of Ludgate House, has been in a longstanding dispute with Southwark over the rates to be paid on the office block.
The case started at the Valuation Tribunal in July 2018 who heard the following facts. In June 2015, LHL entered into agreement with VPS (UK) Ltd, a property guardian firm, who put 40-50 guardians into parts of the property, which was due for development. The other parts were unoccupied. LHL applied to have the property removed from the non-domestic rates register which was successful but Southwark then later re-registered the property which led to an appeal by LHL and this case.
The point to be determined was whether the building, either in whole or in part, was used "wholly for the purposes of living accommodation", which is the definition of 'domestic' in section 66(1) of the Local Governance Finance Act 1988. If so, council tax would be payable. If not, it may instead attract liability to pay business rates.
The contract between LHL and VPS provided that "LHL retained control, possession and management of Ludgate House and that VPS would not occupy, or allow a guardian (or other person) to take possession." The guardians' licences explicitly stated that no tenancy was created and there was a requirement to move rooms as requested - evidence was given that the guardians had been moved over the course of occupation.
The Tribunal considered the licences to not be ordinary residential licences. The purpose of the guardians' occupation was to provide security to Ludgate House, there was no intention to give possession. The Tribunal acknowledged that each case must be determined on its own facts "and the scale of the building and the nature of the occupational licences tipped the scales far away from LHL". The guardians had non-exclusive possession and their occupation of the building did not make it domestic, in whole or in part. The Tribunal concluded that LHL remained liable to pay business rates for the building. This decision presented a risk to commercial property owners that, even if guardians occupied the whole building, it would not be considered 'domestic' use for rateable purposes.
LHL appealed to the Upper Tribunal who reversed the VT's decision. The Upper Tribunal did not agree that the guardians were in possession on behalf of LHL - they had no contractual relationship with LHL and notice to vacate would be given by VPS. It was also considered that the guardians occupied the building in order to provide themselves with somewhere to live and exclusive occupation was enjoyed in their allocated room to which the licensee held their own key. The UT considered that the rooms were distinct units of occupation and capable of being recognised as separate domestic hereditaments (as opposed to the whole building being a single hereditament), even if the building as a whole was not used for the purposes of living accommodation. Non-domestic rates were therefore not payable and the guardians were liable to pay council tax.
This decision would benefit property guardian firms who sell their package as benefiting commercial property owners by taking the property out of business rates. However, this case involved residential and exclusive occupation of specific rooms by property guardians. Had the guardians all been living communally in one open space, the UT would have agreed with the VT's decision that separate hereditaments were not ascertainable.
The UT's decision raised concern. If it was to rely on actual and exclusive occupation by the guardians to establish that business rates were not payable, those same characteristics would suggest that the guardians benefitted from a tenancy rather than a licence.
The Court of Appeal allowed an appeal and on hearing the appeal, disagreed with the UT.
Firstly, the Court of Appeal recognised that LHL did have a part to play in the guardians' occupation. LHL had maintained significant rights of control over the building in its contract with VPS and had not given up possession of any part of the building.
The Court of Appeal considered various case authorities over rateable occupation and "paramount occupation". The question was whether LHL, in exercising its contractual rights of control, would interfere with the guardians' enjoyment of the premises. The Court of Appeal considered that the licences were not consistent with exclusive occupation - sole use is not necessarily the same as exclusive use. The UT had relied on evidence that LHL had not exercised its general control over the individual rooms but that was not, in the Court of Appeal's opinion, evidence that it could not exercise control.
Overall, the Court of Appeal considered that the UT had misappreciated the effect of the licence contract between VPS and the guardians and had wrongly concluded that the guardians were in rateable occupation of their individual rooms. The Court held that the building was a single hereditament and no part fell under domestic rates.
The grey area for property guardian firms is highlighted by this case. For guardian firms to be successful in taking commercial properties out of commercial rates, occupation of at least part of the property must be exclusive residential occupation. But if the guardians have exclusive occupation, this makes it harder for guardian firms to maintain that guardians occupy under a licence, and not a tenancy (Street v Mountford). It cannot be had both ways and guardian firms will have lost a selling point for commercial properties. It could also detriment possession cases if guardians allege a tenancy exists.
For more information contact Emily Jordan in our Construction & Infrastructure department via email or phone on 01257 240850. Alternatively send any question through to Forbes Solicitors via our online Contact Form.