This post was written by Katherine Campbell and Siobhan Hayes.

We have just had a reminder that a landlord’s obligation to pay rates can arise when it has the legal right to take possession even though it is careful not to do so. The case in question is Schroder Exempt Property Unit Trust v Birmingham City Council.

In this case, the liquidator disclaimed the interest in the property but the guarantor continued to pay rent pursuant to the guarantee covenants in the lease. The landlord did not exercise any right to physical possession of the property following the disclaimer. The question was whether the landlord was the owner (within the meaning of sections 45(1)(b) and 65(1) of the Local Government Finance Act 1988) and thus liable for rates.

The landlord argued that a disclaimer has the effect of ending the liabilities of a tenant, but not ending the lease for all purposes. They maintained that the lease continued for certain purposes.

The judge ruled however, that, after the disclaimer, the lease ceased to exist and the landlord was entitled to immediate possession which is what gave the landlord its rates liability and it was ordered to pay almost £600,000 in rates.

The guarantor remained liable to make good the defaults of the former tenant but not because the lease continued in any shape or form. What the Court said was that the guarantor “does not ‘pay rent under the terms of the lease’ – the lease has gone – but rather it makes payments under its contractual covenants to make good the former tenant’s default (as bound to do under the guarantee) for which unique purpose the lease is deemed to continue”. It was Section 178 of the Insolvency Act 1986 that preserved the guarantors obligations.

The concept behind disclaimer being an acceleration of the reversion (so the landlord is entitled to possession) with a preservation of the rights and liabilities of others by a deemed continuation of the lease is not the most obvious legal concept. Landlords who take possession after a lease disclaimer lose their rights to claim rent from the guarantor so most do not until they have other plans for the property that they can implement.