Property litigation weekly update - 4 March 2020
This week's bulletin covers recent cases on business rates avoidance schemes and the challenges facing residential possession orders during the pandemic. We also highlight the important aspects of the 2021 Budget from a property perspective.
Setting up a snail farm to avoid business rates? Not so fast… - Isle Investments Ltd v Leeds City Council  EWHC Admin 345
For investment landlords, empty rates charges add insult to injury, but as ever landlords should remain cautious about the efficacy and propriety of so-called rates mitigation schemes. In this case the High Court upheld a Magistrates' Court decision in a business rates avoidance case involving an office building-cum-snail farm.
The landlord, Isle Investments Ltd, entered into an agreement with a rates mitigation company called Crusader in 2018. Under the agreement, Crusader implemented a rates avoidance scheme in exchange for a percentage of the business rates payable in respect of the three office units owned by Isle. The scheme involved the grant of a number of short-term leases to newly created companies, several of which contained an unusual user covenant requiring the premises to be used only for the purpose of heliciculture (AKA snail farming).
If the leases were genuine, the business rates liability would have been borne by the tenants (although it was strongly suspected that the tenants would not in fact pay those liabilities). As it was, the landlord was held liable for business rates of around £105,000. The Magistrates Court was disappointed that in fact there was no snail farm in existence and that no other meaningful business was taking place in the offices. It was clear from the evidence that the snail farm use was a fiction and that all parties were aware that there would never be any meaningful occupation of the property. The Magistrates Court decided that the leases were a sham and the landlord had been deliberately dishonest in its attempt to avoid liability for business rates.
The High Court conducted an extensive review of the Magistrates Court's reasoning and considered that the finding that these were sham leases contained no error of law and was reasonable and logical on the evidence.
The High Court's decision provides a helpful review of case law in this area. There have been a number of other court decisions to date which have refused to strike down some fairly similar avoidance schemes. The distinction between this particular case and the cases where the court refused to find a sham remains somewhat unclear however. Landlords should therefore consider very carefully any such arrangement before deciding to proceed with one.
Possession orders and execution of writs and warrants in the pandemic
On 11 February, the High Court considered the application of the current restrictions on residential possession cases.
The Defendants were individuals who rented a townhouse from the Claimant, the Corporation of the Trinity House of Deptford Strond. The Defendants had fallen into rent arrears, such that in August 2019 they were served with a section 21 notice (i.e. the no-fault Form 6A notice) as well as a section 8 notice (i.e. where a ground for possession must be proved and unless the ground is mandatory, the court has to be satisfied that it is reasonable to make a possession order).
When the Claimant issued possession proceedings, it only referred to the section 21 notice and based its possession action on that. At a hearing in January 2020 a possession order was granted on the basis of this claim. By this stage, arrears of eight months rent had accrued.
In February 2020 the Claimant applied for a warrant. However, by the time this came to be enforced, emergency legislation due to the Covid pandemic was in force and therefore the warrant could not be executed.
In December 2020, the Claimant obtained permission to transfer the matter to the High Court for enforcement and a writ was issued on 8 January 2021. However, by this stage, further Regulations were in force which prohibited the execution of writs and warrants of possession until 21 February 2021 (this deadline has now been extended again until 31 March 2021). There are exceptions to this ban and one of these is that if there are substantial rent arrears and an order for possession was made on one of the rent arrears grounds (i.e. Grounds 8, 10 or 11 of Schedule 2,Housing Act 1988) then the eviction can proceed.
The issue for the Claimant in this case was that whilst the arrears were over £70,000 when the matter came before Master Dagnall, who was hearing the application for permission to issue the writ of possession, the order for possession had been made pursuant to section 21 and not upon the basis of a section 8 notice.
The Claimant argued that the exception to the execution of a writ/warrant should be read to include any case where there were substantial rent arrears. It argued that the policy of the Regulations was to provide that landlords were entitled to recover possession where there were substantial arrears. The Master however held that the Regulations could not be read so as to include section 8 possession orders when only section 21 had been referred to.
At the time proceedings were issued the Claimant could not have foreseen what lay ahead, but the salutary lesson from this case is that it is better to allow for all eventualities in a situation where there are substantial rent arrears and to rely upon the notices that have been served, in the alternative.
The 2021 Budget - a property perspective
The Government's 2021 budget was published on 3 March 2021. The Government has extended a number of initiatives aimed at stimulating economic growth in the aftermath of the Covid-19 pandemic. The following updates are particularly relevant for those working in the property sector:
- The Nil Rate Band for Stamp Duty Land Tax affecting sales of residential properties up to a value of £500,000 has been extended in England and Northern Ireland until 30 June 2021. Thereafter the threshold will reduce to £250,000 until the end of September before returning to £125,000. This will no doubt encourage the ongoing flurry of new residential property purchases, as people race to take advantage of the stamp duty holiday before it comes to an end later this year.
- The Government is introducing a new mortgage guarantee scheme from April 2021 to lenders offering mortgages to people with a deposit of just 5%. It remains to be seen which lenders will be offering mortgage products that take advantage of the scheme and how willing lenders will be to offer residential mortgages with the lower deposit requirements. This measure is designed to make it easier for first time buyers to get onto the property ladder and will ensure that conveyancing teams across the country remain busy.
- In April 2018, the Government introduced the Support for Mortgage Interest (SMI scheme), a government loan to assist home owners in paying the interest on their mortgages in exchange for a charge being registered against the property. The 2021 budget promises to allow parties claiming under the scheme to add legal costs associated with transferring their claim to a new property up to the value of their existing loan from 15 March 2021.
- The Government has brought forward measures originally due to start from October 2023, to allow care leavers up to the age of 25 and those under the age of 25 who have spent at least three months in a homeless hostel to be exempt from the Shared Accommodation Rate in Universal Credit and Housing Benefit.
Insight from around the firm
- Podcast: Transforming public procurement - Green Paper reforms explored
- Report: Positioning cities for inclusive growth
- Government Green Paper on reforms to public procurement law released
- Update on the Building Safety Bill
Good news stories
- At Trowers and Hamlins, we have introduced our random acts of kindness initiative, encouraging colleagues to raise money for the Edwards Trust by committing to a random act of kindness and making a donation to the Trust.
- In Alcester, Warwickshire, a mystery knitter, dubbed by locals 'the queen of hearts', has been leaving crochet hearts around the town with little messages of kindness for residents to find.
- School pupils got together to buy pizza for staff working at the critical care unit in Royal Stoke University Hospital. The hospital staff were left lost for words at the surprise gesture after long working hours led many of the staff to miss regular meal times.
- The goats are back. The Kashmiri goats became a sensation when they descended upon Llandudno in March last year. It seems to have become an annual event, as the goats have been spotted on the quiet streets of Llandudno again in February this year.