Schroder Exempt Property Unit Trust & Anor v Birmingham City Council

Disclaimer of a lease under section 178 of the Insolvency Act 1986 determines the lease and accelerates the landlord’s reversion. The landlord therefore becomes entitled to immediate possession, even though it has not physically entered the property. Section 178(4)(b) preserves a guarantor’s contractual liability by deeming the lease to continue for that limited purpose. It does not preserve the lease as a property interest or the landlord’s contractual right of re-entry. For non-domestic rates, the relevant owner is the person entitled to immediate possession under sections 45(1)(b) and 65(1) of the Local Government Finance Act 1988. Physical possession exercises an existing right; it does not create that right.

The appellants owned a freehold property let to a company whose lease was later assigned. The original tenant guaranteed the assignee’s obligations. After the assignee entered liquidation, its liquidator disclaimed the lease under section 178 of the Insolvency Act 1986. The property remained physically unoccupied, but the guarantor continued making payments under its guarantee.

The Birmingham Magistrates’ Court made a liability order for non-domestic rates. On an appeal by way of case stated, the High Court had to determine whether the appellants were the “owner” for the purposes of sections 45(1)(b) and 65(1) of the Local Government Finance Act 1988, namely whether they were entitled to immediate possession after disclaimer.

1. Appeal dismissed. The liability order was properly made.

2. Section 178(4)(a) of the Insolvency Act 1986 determines the tenant’s rights, interests and liabilities in the disclaimed property. A lease either exists or it does not. Following disclaimer, the lease ceases to exist as an estate in land and the landlord’s reversion accelerates.

3. Section 178(4)(b) operates as a statutory deeming provision. It preserves the contractual liabilities of guarantors and other third parties as though the lease had continued, so that the guarantee retains substance. It does not preserve the lease itself, the landlord’s right to rent under the lease, or the landlord’s contractual right of re-entry.

4. For the purposes of section 65(1) of the Local Government Finance Act 1988, the relevant question is entitlement to immediate possession, not actual physical possession. Once the lease was disclaimed, the appellants, as freehold owners, had an immediate and exercisable right to possession. Their decision not to exercise it did not alter that entitlement.

5. The guarantor’s continuing payments were made under its contractual covenant to make good the former tenant’s defaults. They did not establish that the lease continued or that the appellants lacked immediate possession. If the appellants took physical possession, that would exercise the existing right and end future liability under the guarantee; it would not create the right to possession.

6. Brown v City of London Corporation (Re Solomon) [1996] 1 WLR 1070 was properly construed as distinguishing entitlement from actual possession. It did not support the appellants’ case and was consistent with the approach in Hindcastle Limited v Barbara Attenborough Limited [1997] AC 70.

7. Sections 17 and 19 of the Landlord and Tenant (Covenants) Act 1995 did not alter the result. Section 19 might raise questions about the nature or availability of an overriding lease after disclaimer, but that issue did not require determination.

• Birmingham Magistrates’ Court: Liability order made on 28 August 2013 against the First Appellant for non-domestic rates.
• High Court (Administrative Court): On appeal by way of case stated, the court answered the District Judge’s question in the affirmative and dismissed the appeal.