Rates : How to avoid exposure when a tenant enters administration

Over recent years, unfortunately, struggling tenants entering administration is commonplace and with challenging economic times ahead, this is likely to continue to be the case.

A common scenario when a tenant enters administration is for administrators to attempt to surrender the lease. Why? Administrators, unlike liquidators, don’t have the power to disclaim a lease so unless there is a break, the only route to bring liabilities to an end is via surrender.

What does a surrender mean for landlords and rates liability?

Not only does a surrender result in the end of tenant’s liability to the landlord for rent, service charge etc but the tenant’s liability to third parties such as utility providers and rating authorities.

We all know that rates can form a significant chunk of a tenant’s outgoings and, if a lease is surrendered, that liability will fall to the landlord unless an incoming tenant or occupier can be found.

If commercial property is unoccupied then the landlord will be responsible for paying rates (subject to any empty rates relief).

Landlords and their agents should exercise caution to avoid a surrender inadvertently taking place (it can be implied and doesn't need to be by way of a formal deed).

An implied surrender can take place by circumstance. For example;

• An administrator is appointed and simply sends keys to a landlord or agent by post. The acceptance of those keys could amount to a surrender of the lease.
• The tenant is in administration but the premises are empty, the landlord wants to inspect and remarket so decides to do so – without the consent of the administrator, this could result in a surrender being implied.

The good news is that an implied surrender can be relatively easily avoided by taking protective steps or using protective wording when corresponding with the tenant or its administrators. For more information around access, read our see our recent article on accessing the premises in these situations. 

Rates mitigation schemes - What are they?

• There a number of rates mitigation schemes used by landlords.
• The most common is for Landlords to lease property to a third party typically for low or nominal rent.
• That third party will then be in rateable occupation of the property in question and the liability will no longer fall to the landlord.

Rates Mitigation – A cautionary snail?

There have been a number of recent decisions involving rates mitigation schemes and which perhaps demonstrate a more robust approach being taken by both rating authorities and courts to the schemes.

One of those cases is Isle Investments Limited v. Leeds City Council, a 2021 decision involving a snail farm business in a Leeds office building. The court found in favour of the rating authority that the lease was no more than a sham, that there was no intention to comply with the lease arrangements by either the landlord or the tenant and that the landlord was liable for the rates. 

Factors that led to that decision included:

• the director of the landlord company admitting that the tenant was not expected to occupy;
• the offices were simply not suitable for snail farming and;
• no snail farming (or any occupation) took place!

It is important to note that, as recognised by the court, entering into a lease to avoid rates won’t automatically mean the arrangement is a sham and liability falls to the landlord but if the true nature of the arrangement doesn’t match with the lease then it could be set aside for rates liability purposes.

The facts in the Isle case are perhaps unusual and relatively rare but nonetheless it perhaps indicates a greater readiness on the part of rating authorities to clamp down on sham arrangements and is a useful reminder to landlords implementing mitigation schemes that they should carefully consider the arrangements they are putting in place.