Isle Investments Ltd v Leeds City Council [2021] EWHC 345 (Admin) – Success for Bill Hanbury in “sham leases” Appeal

February 22, 2021

Case details

• Court: High Court of Justice, Administrative Court sitting in Leeds
• Judge: Mr Justice Fordham
• Date of judgment: 19 February 2021

Summary

Was the magistrates court right to conclude that leases entered for the sole purpose of avoiding business rates were shams and how does the court tell a sham from a genuine transaction or series of transactions?

What did the court decide?

The magistrates court found a dishonest intention to enter leases whereby exclusive possession did not pass certain special purpose vehicle companies set up for the sole purpose of avoiding rates.

What was the background?

The case involved three empty office units close to Leeds city centre. The units during the relevant period were surplus to market demand.  Therefore, the freehold owner went to a rates mitigation company called Crusader, who created a number of 21-week leases at nominal rent terminable on seven-days written notice. Several of the leases contained user covenant is requiring the premises the useful heliculture or heliciculture – the farming of snails!

Significance  

Decisions in business rates have all gone in recent in one direction in recent years:

• Rossendale v Hurstwood [2017] EWHC 3461 (Ch) which went to the Court of Appeal [2019] EWCA Civ 364, in which the local authorities claimed for unpaid business rates as a debt by ignoring the special purpose vehicle companies set up to deflect liability for rates failed, the avoidance scheme having been found to be effective by HHJ Hodge QC. The has been heard by the Supreme Court in the question of piercing the corporate veil and whether the Ramsay principle should apply but not on shams as permission was refused.
• Macro Properties v Nuneaton and Bedworth [2012] EWHC 2258 (Admin) in which premises had been used for storage as a means of attracting extended rates relief by utilising void periods. Held: legitimate rates avoidance.
• Sheffield CC v Kenya Aid [2013] EWHC 54 (Admin) in which charitable relief was exploited by utilising a genuine charity which received a sum of money from the owner in return for the obtaining of the relevant reliefs. However, a small part of the premises was used for charitable objects. Held: the court is not to judge the efficiency or otherwise of the limited storage for charitable purposes.
• Secretary of State for Business Innovation and Skills v PAG [2015] EWHC 2404 (Ch), in which the use of company insolvency procedures to exploit loopholes in business rates law, whereby leases are disclaimed following liquidation, and local authorities effectively “sing for their money ”. Held by HHJ Stephen Davies: not satisfied he should wind-up the tax avoidance company on just and equitable grounds.

This is very much a hot topic as Hurstwood was heard by the Supreme Court on 26 October 2020.  A decision is awaited. It is surprising that the local authority claimants were not given permission to appeal the sham decision as this area of the law is unsatisfactory, having given rise to a large number of cases recently.

The company running the rates avoidance/mitigation scheme in this case (Isle) used leases which had no commercial reality and were mere pretences. In Mr Justice Fordham’s view the judge below had been entitled to conclude that they were shams.

The case contains one of the most thorough considerations of law in shams, the judge having been referred to approximately 30 cases, many of them in recent years. The sham test: whether there was deliberate intention to deceive third parties into believing that what was created was different from that which it actually purported to create, was clearly a difficult test to surmount.  The burden rested on the person asserting it, in this case the local authority. There is a presumption of regularity, i.e. that legal instruments do what they say they are supposed to do. This lease actually granted, or purported to grant, exclusive possession to the claimant. That, said the unsuccessful appellant, was the end of the matter. The judge said it was not.  He could look at the reality of what was created including looking at what happened subsequently.

A separate procedural point that arose in the Kenya Aid case (see paragraph 53) was whether an application for judicial review is appropriate. The importance of this issue is that there is as a right of appeal from a decision to refuse to judicial review to the Court of Appeal.  The unsuccessful appellant (the charity) appealed to the Court of Appeal when they were unsuccessful.  The courts have repeatedly said that the proper course is to appeal by case stated to the High Court.  Once such an appeal is launched, section 28 A (4) of the Senior Courts Act 1981 prohibits a subsequent appeal in a civil matter. Business rates are civil matters.

Conclusion

This was therefore a relatively rare victory for a local authority in this hard-fought field. Local authorities are left with responsibility for the collection of business rates.  There is going to be massive pressure on them and national government to collect as much as they can when business gets back to normal in the next year, we hope.

Although the world of business rates seems like a narrow area, cases of sham cross boundaries. Thus, of the 30 or so cases referred to mainly by the appellant in Isle, some were  landlord and tenant cases, some were general commercial disputes and a few were rates cases.

The law of shams is important to all commercial practitioners and arises frequently in the world of corporate insolvency and revenue law.

Written by William Hanbury, barrister at Exchange Chambers who appeared for the successful respondent, Leeds City Council.