Real Estate Partner, Paul Henson, Explains Significance Of Recent Ruling
In Ludgate House Limited v (1) Andrew Ricketts (2) London Borough of Southwark  UKUT 278 the Upper Tribunal found that Ludgate House, a 173,633 sq ft central London office building, was to be omitted from the 2010 non-domestic rating list where it had previously been entered with a rateable value of just over £4 million. In so doing, the Upper Tribunal overturned the earlier decision of the Valuation Tribunal for England (“VTE”). The Upper Tribunal were satisfied that “property guardians” who had resided in the building had rendered it liable to council tax as opposed to commercial rates.
Ludgate House was constructed in 1988 and comprised ground and lower ground floors with nine upper storeys; it was the former office of Express Newspapers. It was demolished in 2018 to make way for redevelopment and the last of the office tenants vacated in March 2015. Of material importance in this case, between 1 July 2015 and May 2017, the building was occupied by a number of property guardians. Property guardians are now a familiar part of the commercial property landscape as they are useful in protecting vacant properties from squatters whilst they are empty. As a result of this decision, it is likely that commercial property owners will see even further benefits in using them as a tool to avoid significant rates liabilities.
In short, a property guardian is an individual who, together with other guardians, occupies vacant premises pursuant to a licence granted by a guardian company. In return for a significantly below market rent, the guardians enter into a licence which prevents them from claiming any statutory security of tenure as a tenant and guarantees a presence in the building to prevent squatting.
In this case, the licences were granted by VPS (UK) Limited (“VPS”) who specialise in supply of property guardians. Importantly, licence arrangements are concluded between the individual guardian and VPS and not with the building owner, in this case Ludgate House Limited (“Ludgate”). The licences made clear that the guardian had no right of exclusive occupation of any part of the building and that they could be moved by VPS to an alternative part of the building whenever required.
The reality of this case was that the guardians chose the rooms they wished to occupy and the first four such licensees moved into Ludgate House pursuant to their licences on 1 July 2015. They chose specific rooms on the second, eighth and ninth floors. Thereafter, VPS carried out internal works to the building over the next eight to 10 weeks which included the installation of shower pods, cookers and portable washing machines etc. Over time, 46 guardians took up occupation in the building each pursuant to their own separate licence. In the majority of these cases the individuals were allowed to select (or were allocated) a specific room. VPS kept records of the rooms in which individuals resided and it was recorded that, by August 2015, at least one guardian was living on each floor of the building albeit on five of the floors there was only one licensee and on two floors there were only two. Records also demonstrated that the number of guardians was stable during their period of occupation until they all moved out in May 2017 when Ludgate had obtained planning permission to undertake the wider re-development. The guardians role in protecting Ludgate House from squatters was therefore successful but did their occupation also assist Ludgate with reducing their rates liability?
Litigation commenced when Ludgate sought to delete two entries in the 2010 Rating List. The first respondent valuation officer initially accepted those proposals and deleted the two entries. The effect of which was that each floor of Ludgate House was entered as a separate dwelling for domestic council tax purposes. The second respondent billing authority, when it became aware of the deletion and therefore reduction in its rates recovery, then inspected Ludgate House. It decided that the building was “essentially vacant” and challenged the deletion.
Various legal wranglings then ensued before the VTE decided the matter in favour of the respondents in a decision dated 5 July 2018. The Vice President of the VTE considered Ludgate House was still an office block and, despite the occupation by the guardians, could not be said to be used “wholly for the purposes of living accommodation”. The VTE, who were persuaded by the size of Ludgate House and the relatively limited amount of space the guardians were occupying, also came to the conclusion that Ludgate were in control and possession of the whole of the building and it should therefore be returned to the non-domestic ratings list.
Upper Tribunal decision
The Upper Tribunal disagreed with the VTE and found that, when the first four guardians moved in on 1 July 2015, there were four sufficiently distinct units of occupation capable of being recognised as separate units of property which were liable to be rated. Conscious that the test for liability for council tax or non-domestic rates depends on the how a property is used (as opposed to how it is configured or designed) the Upper Tribunal’s approach was to follow that set out by Tucker LJ in John Laing & Sons Limited v Kingswood Assessment Committee  1 KB 344, 350 where he stated that there were four necessary ingredients of rateable occupation:
“… there are four necessary ingredients in rateable occupation …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”.
When applying the above tests, the Upper Tribunal was satisfied that the guardians were in actual occupation and the purpose was for the benefit of providing themselves with living accommodation. They had been given exclusive use of their individual rooms (which was of benefit to them) and their occupation had been for a period of 22 months. In those circumstances, the Upper Tribunal was satisfied that the rateable occupation was that of the guardians and such occupation was liable to council tax. As a result, Ludgate House was omitted from the 2010 non-domestic rating list which clearly created a significant saving for Ludgate and dealt a blow to the local billing authority’s finances.
This decision gives non-domestic property owners looking to avoid business rates liability another weapon in their armoury. If (and it will be fact specific) they can fulfil the four essential ingredients set out by Lord Justice Tucker it seems they will benefit from the property being subject to (lower) council tax liabilities, which in some instances, can then be passed onto the occupying guardians.
Expect to see more of these arrangements in the future.