Will guardian schemes survive the Court of Appeal’s decision in Ludgate House?

Richard Clayton QC of Kings Chambers and Exchequer Chambers, and Faisel Sadiq discuss the upcoming appeal in Ludgate House Ltd v Ricketts (VO), in which they are instructed to represent the appellant (London Borough of Southwark), and how it is likely to play a significant role in the future of property guardian schemes.

In November 2020 the Court of Appeal will have its first opportunity to examine whether property guardianship schemes are effective to mitigate a property owner’s liability to pay business rates. Southwark’s appeal against the decision of the Upper Tribunal (Lands Chamber) in Ludgate House Ltd v Ricketts (VO) [2019] UKUT 278 (LC) raises several issues of principle including whether guardianship schemes should, as a matter of public policy, be ineffective in avoiding liability for business rates on the ground that they may often involve committing a criminal offence.

Various different rate mitigation schemes are available.  These include:

• granting a lease to a company which then then goes into liquidation – see Rossendale BC v Hurstwood Properties [2019] 1 WLR 4567
• granting a lease to a company which uses the premises for storage for six weeks so as to give rise to beneficial occupation with the property then being vacated so as to benefit from the rates holiday of three months afford to empty properties (six months for industrial and warehouse premises) – see R(Principled Offsite Logistics) v Trafford Council [2018] EWHC 1987 Admin
• granting licences to property guardians to occupy premises with a view to allowing the owner to argue that as the property is being used for residential use it ought to be removed from the rating list or that the presence of the guardians ought to reduce the value of the property and result in a lower valuation for rating purposes

Utilising guardian schemes has some particular attractions. Most rates mitigation schemes involve the building owner paying a fee to the provider of the mitigation product – often a percentage of the monies saved by the mitigation scheme. Under guardianship schemes, the property guardians will typically pay a licence fee (in essence, rent) to live at the property. Normally, the operator of the scheme will share part of the licence fees with the building owner. Consequently, the building owner may actually make a profit whilst reducing or extinguishing their rates liability.

The criminalising of trespassing on residential premises by section 144 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, has had the effect of increasing the incidence of trespass to empty commercial buildings. This has often meant that the owners of empty commercial buildings will need to contract with security firms to secure their premises against trespassers. In the case of guardianship schemes, the guardians’ licence will typically place on them obligations to monitor the premises and take steps to notify the scheme provider or the building owner if they suspect trespassers are seeking to gain access to the building. This may reduce the need for the building owner to hire security staff and results in a further costs saving. The presence of guardians will often deter vandalism of the building too. Frequently, the use by guardians of premises as a residence has often resulted in the Valuation Office deleting those premises from the rating list on the basis that the building is wholly used as a residence.  As a result, this does not give rise to a liability to business rates but, instead, creates a liability to pay council tax. Any council tax payable is likely to be significantly lower than business rates for the same premises. Finally, even if the premises remain in the rating list the Valuation Office may well accept that the presence of the guardians in some parts of the building will result in the building having a lower rateable value and so reduce the rates payable if the property remains liable for business rates. In Ludgate House the Valuation Tribunal for England decided that, in spite of the presence of property guardians at the property, an 11 storey 175,000 square feet building close to Blackfriars Underground in central London, it was occupied by Ludgate House Ltd. Accordingly,  Ludgate House Ltd was liable to pay millions of pounds in business rates.    That decision was reversed by the Upper Tribunal, but the Court of Appeal has granted Southwark permission to appeal on four grounds.  These grounds of appeal include an argument which fundamentally undermines guardian schemes – that where the guardianship scheme use premises  in such a way that they should be licensed as a house in multiple occupation, and no license is, in fact, obtained, the Court should, on grounds of public policy, decline to allow the building owner to rely on that scheme.  Southwark submit that the scheme to mitigate their business rates liability amount to a criminal offence contrary to s.72(1) of the Housing Act 2004.

Many guardianship schemes will, therefore, become ineffective if Southwark’s submission prevails.  In Ludgate House the Upper Tribunal decision found that at the planning stage it was envisage that 32 people would go into occupation of Ludgate House as property guardians.  Once 5 or more people occupied Ludgate House, the premises became subject to mandatory licencing as a house in multiple occupation (HMO) in accordance with Part 2 of the Housing Act 2004.   Neither the company which organised the guardian scheme or Ludgate House Limited, itself, had ever applied for the necessary HMO licences.

Had an HMO application been made to Southwark, Ludgate House Limited (or the company which set up the guardian scheme) would have had to satisfy Southwark that they had complied with the minimum HMO standards which the 2004 Act imposes via subordinate legislation.  Instead, the unlicenced arrangements constituted a criminal offence breaching s  72(1) of the Housing Act 2004, which states that “a person commits an offence if he is a person having control of or managing an HMO which is required to be licensed under this Part (see section 61(1)) but is not so licensed”.

The 2004 Act was enacted as a result of the 1999 Consultation Paper, Licensing of Houses in Multiple Occupation.  That Consultation Paper stressed that occupiers of unlicenced HMOs were exposed to a number of specific and serious health and safety risks.  Southwark argue that it is legitimate for the Courts to look at this Consultation Paper when interpreting s 72: see R v T  [2009] 1 AC 1310.

Southwark, therefore, submits that the Court of Appeal, should in accordance with the Supreme Court decision in Patel v Mirza [2017] AC 467,-  assess whether the public interest would be harmed by enforcing the illegal agreement.  The Court must, therefore, consider (a) the underlying purpose of the prohibition breached and whether that purpose would be enhanced by denying the claim, (b) any other relevant public policy which denying the claim would affect and (c) whether denying the claim would be a proportionate, bearing in mind that punishment is a matter for the criminal courts.  In Patel v Mirza, the Supreme Court concluded that the basic rationale for illegality doctrine is that it would be contrary to the public interest to enforce a claim, if this would be harmful to the legal system’s integrity.

Southwark says that the Court  should refuse to allow Ludgate House Ltd to use the premises as an illegal HMO to avoid business rates.  Their scheme harms the public interest by undermining the HMO licensing legislation. In any case, there is no countervailing public policy which justifies Ludgate House Ltd’s arrangements and rejecting its scheme is a proportionate response to the illegality in question.

Southwark raises a profound  objection which applies to a significant number of guardianship schemes. If Southwark succeeds, the need to obtain HMO licences and thereby comply with minimum standards as respects health and safety will make many such schemes unviable.   The Court of Appeal’s decision will, therefore, be closely watched by those interested in rate mitigation schemes.

Richard Clayton QC and Faisel Sadiq are instructed by London Borough of Southwark in the upcoming appeal.

This article first appeared in the Practical Law Property Litigation column.