London Borough of Southwark v Ludgate House Ltd & Anor (2020) EWCA Civ 1637

This is the Court of Appeal judgment on what has been a long running dispute between Southwark and Ludgate House Ltd as to the rates to be paid on Ludgate House, an office block in Southwark. It is of huge significance for the property guardian sector and commercial property owners using property guardian firms. We noted the Valuation Tribunal decision here, and the Upper Tribunal reversal of that decision here. The significance of this judgment is also that the lead judgment is given by Lewison LJ who, to say the least, knows his property law.

The issue was whether occupation of parts of Ludgate House by property guardians meant that the property was not a ‘single hereditament’ for rating purposes, because parts of it were in separate domestic rateable occupation.

This is of importance to building owners and property guardian firms because a major selling point for property guardian firms was that occupation by guardians would take a otherwise empty commercial property out of commercial rates. But as we will see, the whole question in part turns on the nature of property guardians’ occupation which has implications for them. As I observed on this case at earlier stages, property guardian firms live in the grey areas. When something falls to be decided, the ‘having it both ways’ of the grey area can’t survive.

The relevant facts are set out in the earlier reports.

The Upper Tribunal had decided that some property guardians were occupying specific rooms and had been given keys for those rooms, and that this was “exclusive for the particular purposes of the possessor”, which for the Guardians was residential occupation. This was not ‘on behalf of LHL’ as there was no direct contractual relation and no service was provided to LHL. Thus the rooms were separate domestic rateable hereditaments and the property was not a single hereditament.

The Court of Appeal disagreed.

First, the UT was wrong to find that there was no purpose for LHL in the guardians’ occupation. The purpose for LHL was to prevent trespassers. The UT was wrong to focus solely on the guardians’ purpose in occupying their rooms. Turning to the nature of the Guardians’ occupation, it was significant that in its contract with VPS, the Guardian Firm, LHL had reserved significant rights of control over both the building and of the guardians’ occupation of it. The nature and extent of contractual rights involved was therefore important.

LHL had not given up possession of any part of Ludgate House: its agreement with VPS made that clear. On the contrary, that agreement asserted that LHL retained both possession and control; and forbade VPS from occupying the property. No one has suggested that that agreement was a sham or pretence. The purpose for which the Ludgate House was occupied (including the rooms used by the guardians) was a common purpose which was of direct benefit to LHL and/or VPS. It was a case in which LHL and/or VPS retained at least contractual control over the building to realise that benefit, precisely because neither had parted with possession (or indeed occupation). The question is not, therefore, one of “paramount occupation;” but of “general control” which is the decisive factor in establishing who is in rateable occupation of the building.

The Court of Appeal went through a series of cases over rateable occupation and the contractual basis for occupation, taking first principles from John Laing & Son Ltd v Assessment Committee for Kingswood Assessment Area (1949) 1 KB 344:

“First, there must be actual occupation; secondly, that it must be exclusive for the particular purposes of the possessor; thirdly, that the possession must be of some value or benefit to the possessor; and, fourthly, the possession must not be for too transient a period. The primary question here is whether the plaintiffs are in actual occupation and exclusive occupation of these particular hereditaments.”

In Cardtronics Europe Ltd v Sykes (2020) UKSC 21, Lord Carnwarth cited

“Where a person already in possession has given to another possession of a part of his premises, if that possession be not exclusive he does not cease to be liable to the rate, nor does the other become so. A familiar illustration of this occurs in the case of a landlord and his lodger. Both are, in a sense, in occupation, but the occupation of the landlord is paramount, that of the lodger subordinate.”

And, as per Westminster Council v Southern Railway (1936) AC 511, the question for rateable purposes was “who was in paramount occupation”.

So:

i) Occupation must include actual occupation;
ii) “If there is more than one candidate, who is in rateable occupation depends on “the position and rights of the parties in respect of the premises in question.” If those rights depend on a contract, that necessarily means that the relevant tribunal must examine the terms of the contract”
iii) The purpose of the occupation of premises
iv) Who is in paramount occupation

Lord Russell in Southern Railway held on lodgers

“But it can I think be justified and explained when we remember that the landlord, who is the person held to be rateable, is occupying the whole premises for the purpose of his business of letting lodgings, that for the purpose of that business he has a continual right of access to the lodgers’ rooms, and that he, in fact, retains the control of ingress and egress to and from the lodging house, notwithstanding that the power of ingress and egress at all hours, is essential to the lodger. The general principle applicable to the cases where persons occupy parts of a larger hereditament seems to be that if the owner of the hereditament (being also in occupation by himself or his servants) retains to himself general control over the occupied parts, the owner will be treated as being in rateable occupation; if he retains to himself no control, the occupiers of the various parts will be treated as in rateable occupation of those parts.”

The issue was not whether contractual rights of control over occupied parts had been exercised, it was whether, if exercised, they would interfere with the occupant’s enjoyment of the premises. Contractual control was enough to void exclusive occupation.

Turning to the terms of the Guardians’ contracts/licences with VHS, they were not consistent with exclusive occupation

The question was whether the terms of the licence were inconsistent with exclusive occupation by the guardians. As the lodger cases show, sole use is not necessarily the same as exclusive use. The terms of the licence proclaim several times that a guardian is not being granted exclusive occupation of any part of the building. The UT’s decision did not, in my judgment, address this point at all. The UT made no finding that, in that respect, the agreement was a sham. If, as Blackburn J held, the test is whether a guardian would be entitled to maintain an action for trespass, it seems to me to be clear that the terms of the licence did not give them exclusive possession, which is the necessary foundation for an action in trespass.

In the same paragraph the UT referred to the guardians’ obligation to challenge intruders; but discounted that positive obligation on the ground that a residential occupier would expect to do the same out of self-interest rather than obligation. While it is true that a residential occupier would no doubt challenge intruders into that part of the property that he personally occupies, the UT overlooked the point that the contractual obligation extended to the whole of the “Property” as defined (i.e. the whole of Ludgate House including those parts of it that were not comprised within the “living accommodation”).

While the UT had relied on the absence of evidence that HL had exercised general control of the individual rooms, that was not evidence that it could not. Moreover:

the UT disparaged the right in the guardian’s licence to require relocation as a “draftsman’s device” even though that right had actually been exercised in two cases. There was no evidence (or at least none to which we have been referred) to back that assertion. It may simply have been the UT’s own appreciation. Since it was not a sham, it ought to have weighed in the UT’s appreciation of where control lay.

Overall:

The effect of the contract between VPS and the guardians is, as I see it, a question of law: see Solihull BC v Gas Council at 117. If the UT misappreciated the effect of the contract, this court is entitled to intervene. In my judgment, for the reasons I have given, the UT did misappreciate it. Based on its view of the effect of the contractual arrangements, it held that the guardians were in rateable occupation of their individual rooms. In my judgment, the UT was wrong in that conclusion.

Appeal allowed. The property was a single hereditament, and no part fell under domestic rates.

Southwark had advanced a further argument on illegality, on the basis that the Guardians’ occupation amounted to an unlicensed HMO, but this was not addressed further. (Although I think the position on guardian occupation and HMO licensing is pretty clear – it would count for HMO licensing purposes as residential licences.)

Comment

As I said before, this case revealed the tensions at the heart of property guardian firms.

In order for guardians’ occupation of commercial buildings to make the owners exempt from commercial rates, the occupation of at least part had to be effectively exclusive residential occupation.

But, if the guardians’ occupation of part was exclusive occupation, that made the argument that occupation was under a licence rather than a tenancy much harder to maintain – exclusive occupation of a specific room being granted (and the non-functionality of contractual rights to move to another room, or put in other occupiers to the same room) would make a Street v Mountford argument much stronger.

So, they could not have it both ways, and that was true from the first Valuation Tribunal hearing.

The result – Guardian firms have lost a selling point for commercial properties, which would have saved the owners many thousands of pounds. This will, I suspect, mean that property owners will instead want a cut of the Guardians’ ‘licence fees’ and put the fees up.

Meanwhile, for Guardians, this decision is on all fours with Camelot Guardian Management Ltd v Khoo (2018) EWHC 2296 (QB)  (our report) in that the context of the guardian firm’s contract and the details of the licence/contract between guardian firm and guardians are taken seriously and the contract construed accordingly – the result being a licence, not a tenancy.

How this might map on to guardian occupation of residential properties (flats, former care homes, nurses’ residences etc) we will have to see. My suspicion is that some elements of the licence/contract might look rather more artificial in those circumstances, including the degree of control by the property owner, and reserved rights of entry and moving guardians into other spaces. Some guardian firms charge different fees depending on the size or room, or flat – this strikes me as at least an indication of exclusive occupation, even if the Court of Appeal was not convinced that having a key to a specific room was a marker of exclusive occupation.

This judgment does, however, mean that there are greater hurdles to climb in any possession defence by guardians alleging a tenancy.