Isle Investments Ltd v Leeds City Council (Rev 1)

A lease is not a sham merely because it is artificial or intended to avoid business rates. The question is whether the parties intended the document to create the rights and obligations it appeared to create, and intended to give a false impression of that position to third parties or the court. In an unoccupied-premises case, the critical issue is ordinarily whether the tenant genuinely received an exclusive entitlement to occupation, rather than whether it actually occupied the premises or carried on meaningful business there. The court may examine the documents, surrounding circumstances and subsequent conduct. A strong presumption of regularity applies, but it may be displaced by evidence of a dishonest common intention, including reckless indifference.

Isle Investments Ltd appealed by way of case stated from a determination of Leeds Magistrates’ Court. The magistrates’ court had made liability orders for unpaid non-domestic rates relating to three office units in Leeds. Isle relied on a series of short leases to newly incorporated companies and argued that liability had passed to those tenants. The Council contended that the leases were shams because they were intended solely to avoid rates and did not genuinely confer exclusive possession.

The appeal concerned the amendment of the case stated, the legal test for sham leases, the relevance of artificiality, rates-avoidance purpose, actual occupation, the exclusive entitlement to occupation, and the appellate court’s approach to factual findings.

1. Case stated. The application to remove passages from the case stated was refused. A magistrates’ court may amplify its reasons and provide fuller findings where the issue was argued before it, provided the amplified reasons are genuinely explanatory and do not constitute an unfair or fundamental alteration of the decision. The case stated and judgment must be read together.
2. Sham. A sham requires an intentional mismatch between the apparent and true nature of the relationship, coupled with an intention to give a false impression to third parties or the court. It requires a common intention, and ordinarily involves a degree of dishonesty. Reckless indifference may suffice. Artificiality, uncommerciality, rates-avoidance purpose, unused contractual rights, or departure from contractual terms do not, without more, establish a sham.
3. Unoccupied premises. Under the Local Government Finance Act 1988, liability for unoccupied premises focuses on the person entitled to possession. The relevant question was whether the leases genuinely conferred an exclusive entitlement to occupation. It was legally erroneous to treat the absence of meaningful business or actual occupation as itself decisive.
4. The court could consider external evidence, practical reality and subsequent conduct. The snail-farming restriction, the practical impossibility of the permitted use, the absence of due diligence, the parties’ knowledge that the units would remain empty, and the absence of any intention that the tenants would enjoy the purported right were capable, cumulatively, of supporting a finding that the exclusive entitlement was a pretence.
5. The magistrates’ court had made a sustainable finding of a dishonest common intention not to confer exclusive possession. Its reasoning was legally adequate and its conclusion was reasonably open on the evidence. The appeal was dismissed, and the liability orders were remitted for issue.

High Court (Administrative Court): The appeal by way of case stated from Leeds Magistrates’ Court was dismissed. The liability orders were remitted to the magistrates’ court for issue.