Ludgate House Ltd v Ricketts (VO) & Anor (RATING – HEREDITAMENT) (2019) UKUT 278 (LC)

This was the appeal of the Valuation Tribunal’s decision that we reported here. And, while the Upper Tribunal overturns the VT’s decision, it does so in ways that may be significant for property guardian forms and indeed property guardians. While this is about commercial rates v council tax, it is also about the nature of occupation – and in several ways, exactly about the grey areas that property guardian firms occupy.

The Valuation Tribunal had held that the office building at issue constituted a single ‘hereditament’ and that occupation by property guardians did not make it domestic, in whole or in part. The property was therefore liable for non-domestic rates.

This was appealed to Upper Tribunal.

The Upper Tribunal reversed the decision.

The nature of the guardian’s occupation was effectively residential, rather than supplying security services.

98. The VTE considered that the licensees were not in actual occupation, but were in occupation on behalf of LHL. We disagree. The licensees were in no contractual relationship with LHL, they provided no service to it, other than as a by-product of their residence, and they could not be removed from the building except on notice given by VPS.

99. To be rateable, occupation must be “exclusive for the particular purposes of the possessor”. There was a debate about the purpose for which the licensees were in occupation, it being suggested by the respondents that it was as much for the security of the building and the discouragement of squatters as it was for their own residential purposes. Just as the contractor, White’s, purpose in occupying the site in Wimborne was its own purpose of extracting gravel, rather than its employer’s purpose of creating fish ponds, it is the licensee’s purpose which is important.

100. We have no doubt that from the perspective of the licensees themselves the purpose of their occupation was to provide themselves with somewhere to live. Their occupation for that purpose was exclusive as no other person was entitled to use the individual rooms allocated to each licensee the space for the same or any other purpose. The clearest demonstration of the exclusivity of their occupation is the provision of a key to each licensee for their own room. It is true that in order to secure accommodation the licensees entered into agreements which obliged them to remain physically present in the building on a daily basis, and limited their absences. But those obligations were in no sense inconsistent with their residential use of the building, nor were the other terms of the licenses. It is certainly unusual to see an obligation to challenge intruders included in a contract for the occupation of residential property, but a residential occupier would expect to do the same out of self-interest rather than obligation.

Inasmuch as at least the first 4 guardians in the property (key for the relevant valuation date) were each in occupation of an individual room, of which they were exclusive occupiers, these amounted to four distinct units of occupation capable of being recognised as separate hereditaments. They exhibited the four markers of rateable occupation – actual occupation, exclusive for the purposes of the possessor, it was of benefit to the possessor and was not transient.

On the property owner’s arguments:

102. The respondents nevertheless submitted that because LHL had purposes of its own in arranging for the occupation of the building by the licensees, namely promoting the security of the building and mitigating its rates liability, and because the licensees were obliged by contract to further those purposes by their presence, the building was not “used wholly for the purposes of living accommodation” and therefore it was, or included, non-domestic property. We accept that the building as a whole was not wholly used for the purposes of living accommodation, but we do not agree that the individual rooms occupied by the licensees had any separate or concurrent use other than as living accommodation. The motive of rates mitigation was not a purpose of anyone’s occupation (although it may have been a consequence of it). The presence of an employee providing security or caretaking is not beneficial occupation by the employer, and even less so is that of a licensee providing no other service than, merely by their presence, ensuring that squatters can be more effectively removed by others.

103. The respondents also submitted that LHL was in paramount occupation of the building. Mr Clayton suggested that its general control of the building meant that there was no need to consider whether there was more than one hereditament, and that the appellant’s reliance on Mazars was misconceived. That is clearly not the case, as Southern Railway demonstrates. No doubt the railway company was in general control of Victoria Station, including by keeping it locked overnight denying access to the shop keepers, but that did not prevent the shops and kiosks from being in the rateable occupation of those same shopkeepers.

104. There is no evidence from which general control by LHL of the individual rooms can be discerned. LHL had no presence in the rooms, and no need to enter them. The licensees had keys to their rooms and while the security guard or some other member of VPS’s staff also had copies there is no suggestion that they ever entered uninvited. The licences could not be terminated except by four weeks’ notice given by VPS, and after termination any attempt by LHL to recover possession of the building otherwise than by proceedings in court would not have been lawful by reason of section 3(2B), Protection from Eviction Act 1977. The right to require relocation to a different room was an additional draftsman’s device to prevent the occupier claiming to have a tenancy and was not utilised in practice, other than in in the two exceptional cases where there was a good practical reason to do so.

So, there were separate hereditaments in the building at the valuation date, and on that basis, the appeal succeeded.

Comment

Now, this decision is apparently to the benefit of property owners and property guardian firms, as a part of the firm’s sales pitch was that guardian occupation would take a commercial property out of commercial rates.

But, as ever in the ‘grey area’ in which Guardian schemes work, nothing is straightforward.

The first Valuation Tribunal decision was reached effectively by saying that property guardians were not residential occupiers, with exclusive occupation. This supported the guardian firms in their argument that occupation was under licence, not a tenancy, but did so in removing the ‘relief from commercial rates’ business value.

This appeal effectively allows the ‘relief from commercial rates’ business value, but only by a stress on the residential and exclusive occupation of specific rooms by guardians, as:

If the occupation of the building had taken the form of individuals camping out in the middle or at the undivided ends of the floor plate, with nothing to segregate or define any unit of occupation as theirs, apart perhaps from some items of furniture or fabric hangings, we would have agreed with the VTE that no smaller separate hereditaments would have been readily ascertainable. But that is not the arrangement contemplated by the licence agreements or demonstrated by the evidence and the agreed facts before us.

Indeed, it is notable that the judgment takes several sideswipes at what the Guardian firm thought they were doing, as opposed to what they were doing. Eg at 48

Although Mr Forsdick suggested otherwise, we are satisfied that Ludgate House became an HMO once the licensees moved in, as it then satisfied the standard test in section 254(2), Housing Act 2004. It is a criminal offence to be in control of an unlicensed HMO (s.72, 2004 Act).

And then more significantly for the business model, at 85 and 86:

85. The licenses granted in this case to the first four settlers permitted each of them to share the whole of the living space with every other person granted the same rights. The agreements were modelled on a flat sharing arrangement considered by the House of Lords in AG Securities v Vaughan [1990] 1 AC 417, by which individuals were each separately granted licences to share the whole of a flat with up to three others who would be granted the same right. This arrangement was held not to grant exclusive possession of any part of the flat to any individual or of the whole flat to them collectively. In the absence of a grant of exclusive possession no tenancy was created and the occupiers were not entitled to statutory security of tenure. The occupiers agreed between themselves who would occupy which room.

86. The standard licence agreement used by VPS referred to the AG Securities decision on its first page, and described itself as a licence “for non-exclusive shared occupation of premises at …” with space for completion of an address. The draftsman no doubt intended that the address inserted would be that of the building (to replicate the arrangement in AG Securities). In reality, Mr Jayawardene told us, the practice was to fill in the number of a specific room on a particular floor (which rather misses the point of the House of Lords’ decision). (My emphasis)

The UT was clear that the licence/tenancy issue was not for it to determine:

87. Whether the licence agreements succeeded in preventing the occupiers from acquiring statutory security of tenure is not determinative of the question whether, for rating purposes, the arrangements involved the creation of separate hereditaments. That question does not depend on the existence of a particular relationship between the occupier and the owner of the property

But it was clearly alive to to the issues.

If a residential hereditament has to be established to stop a commercial property being commercially rateable, then, given the requirements for a (domestic) rateable hereditament, (actual occupation, exclusive for the purposes of the possessor, it was of benefit to the possessor and was not transient), then there is a problem for the ‘licence’ model, as it was the guardian being provided with a designated, lockable room for their particular use that the UT found to meet the requirements. And that looks very much like a tenancy.