When tenants become insolvent or simply disappear, landlords will often leave the lease in place until a new tenant is found. The generally accepted view was that while a lease was in place, the tenant – even if it was in liquidation, administration or had vanished – was still the "occupier" of the premises because it had the legal right to possess the premises, to the exclusion of all others.

This often frustrated various third parties, most notably local authorities who were pursuing non-domestic rates, and water licensed providers that still had to provide services to the premises without being paid.

OCCUPIER - WATER CHARGES

It is therefore unsurprising that a water licensed provider finally decided to challenge the generally accepted view. What is surprising is that it succeeded.

The Water Services etc (Scotland) Act 2005 provides that the customer, and thus the person liable for water charges, is the occupier, or if the premises are unoccupied, the owner of the premises.

If an occupier is the person entitled to possession, a premises will be occupied by the tenant for as long as there is a lease.

If, however, occupation means physical occupation, arguably the lease doesn't matter. Many landlords will disagree with that proposition.

This is what the court was asked to decide in Castle Water Limited v Kemble Estates Limited [2021] SC PER 38.  After considering the 2005 Act, the Court came to the conclusion that occupation under that Act was not the same as possession. The occupier of premises, according to the Court, is the person physically in the premises.  When the premises are physically empty, they are unoccupied.  In that situation, the 2005 Act makes the owner of the premises liable for the water rates.  

There are many questions arising from this decision, not least where the lines should be drawn on various issues. What, for example, is the position if a tenant temporarily vacates the premises for three months: does the landlord become liable for the rates for that three months period? And what constitutes physical possession? Is it enough to simply have items in the premises belonging to the tenant for them to be physically occupied?

More troubling for landlords, perhaps, is that the decision readily disregards the legal concept of possession.  That concern is compounded by a recent Supreme Court decision 

OCCUPIER - NON-DOMESTIC RATES

In Hurstwood Properties (A) & Others v Rosedale Burgh Council & Another, the Supreme Court had to decide whether tenants in liquidation were the owners for the purposes of non-domestic rates liability.

The owner under the relevant legislation is the person entitled to possession of it.  That is normally the tenant under a lease.

The tenants were SPVs that had been put in several premises under leases. That would normally mean they were the owners of the premises because they were entitled to possess them, and were thus liable for the rates.  The tenants were all dissolved shortly after the leases started.  That allowed the landlords to avoid rates liability.  

Courts don't like rates mitigation schemes - see PAG Management Services Ltd [2015] EWHC 2404, so the landlords were facing an uphill battle.

The Supreme Court said that the purpose of the non-domestic rates legislation was (1) to deter owners from leaving their property unoccupied for their own financial advantage and (2) to encourage owners to bring empty property back into use for the benefit of the community.

The Court accepted that in a normal case the owner is the person entitled to possession, and that person is the one who has the immediate legal right to actual physical possession of the property as a matter of law.  That includes tenants.  So far so good for landlords.

It said, however, that in the unusual circumstances of this case, to take that approach would defeat the purpose of the legislation. The SPVs were designed to have no real or practical ability to exercise their legal right to possession.   They existed, and the leases were granted, for no purpose other than the avoidance of rates liability. In those circumstances,  the SPVs did not become entitled to possession and therefore could not be regarded as owners. The entitlement to possession remained with the landlord as they had the practical ability to decide whether to leave the property unoccupied.  The landlord had not passed that real entitlement to the SPV's by the leases. 

The Supreme Court seems to be getting close(ish) to the attitude of the Sheriff in Castle Water.   In both cases, the legal status of a lease and the right of possession it created for the tenant was not enough to impose liability on the tenant.

It could of course be said that Hurstwood Properties is restricted to a rates mitigation scheme that involves SPVs being liquidated the moment they take on leases. However, it is not beyond the imagination of an Assessor to look at a situation where a landlord has allowed a lease to remain in place after a company has gone into administration and the administrator has disclaimed the lease, and to argue that, given the purpose of the legislation, to leave a lease in place in those circumstances defeats the purpose of the legislation.  In such an unusual situation, the person entitled to possession transfers from the tenant to the landlord, in much the same way the Sheriff in Castle Water decided that liability for water rates transfers from the occupier to the owner the moment the tenant physically leaves the premises. 

There would be many challenges with this argument, but given the sums involved and the loss in revenue from rates already suffered by local authorities, Assessors might consider it worth a shot. 

Contributors

Matt Farrell

Partner

Stephen Goldie

Head of Litigation & Partner

Gareth Hale

Partner