As someone who advises investors in HMOs (houses in multiple occupation), I had been watching for the appeal decision in the case of Southwark London Borough Council v Ludgate House Ltd and another. This is because Southwark LBC had argued that if Ludgate House was held to be a residence for guardians, then as it was occupied by 5 or more persons without an HMO licence, it was an illegal HMO. A mandatory HMO licence is required for an HMO occupied by 5 or more persons and it is a criminal offence not to have one. Southwark LBC argued that it would be against the public interest for the court to allow Ludgate House to be used as an illegal HMO to avoid business rates.
In the end this was the HMO case that wasn't. The appeal court did not have to decide whether Ludgate House was an HMO as occupied by the guardians and preferred not to say anything about this.
The case however has a major impact for the use of property guardianship schemes for rates mitigation purposes. There are different types of property guardianship schemes so it is important to briefly describe the type of property guardianship scheme which the court of appeal had before it.
The property guardianship scheme used at Ludgate House was one which I have seen myself where licences are granted to the property guardians who occupy the premises and the property owner then approaches the local authority to remove the premises from the rating list because it is being used for residential use.
The appeal court noted that the guardians had sole use as they had keys to their rooms but this was akin to a lodger who has use of a room at a boarding house. It was not rateable occupation. In fact, the appeal court pointed out that sole use is not necessarily the same as exclusive use.
The property owner's agreement with the property guardian company which grants the licences to the guardians (a company called VPS (UK) Ltd), made it clear that the property owner was not giving up possession of Ludgate House. The property owner and/or VPS (UK) Ltd retained contractual control of the building and the appeal court held that general control is the deciding factor of who is in rateable occupation of a building. The property owner had rights of control over the guardians' occupation which was to achieve its purpose of protecting the property from trespassers. The occupation of the guardians was like that of a caretaker and although a caretaker resides at a property, it is not in rateable occupation of it.
The appeal court therefore concluded that the guardians were not in rateable occupation of their individual rooms and allowed the appeal of Southwark LBC so that Ludgate House must remain on the rating list.
Going forward, for a property guardianship scheme such as at Ludgate House to have a chance of mitigating business rates, it would have to involve the property owner giving up control of the building through the grant of assured shorthold tenancies of individual rooms. This would however mean that the property would have to comply with HMO licensing requirements which would be a significant cost to a property owner and further a property owner would no longer have the flexibility to move the guardians out of the premises when it required.
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