Landlords Beware! – a reminder of landlord obligations under the Local Government Reform Act
Section 32 of the Local Government Reform Act 2014 (the “2014 Act”) was enacted on 1 July 2014 and applies to all sales/leases closing on or after 1 July 2014.
Section 32 of the 2014 Act introduces two important amendments to the law. Firstly, it has the effect that new tenants of rateable property are no longer automatically liable for rates arrears of the previous tenant and instead, rates must be discharged by the outgoing tenant. Secondly, it introduces a new notification obligation on an owner or landlord of rateable property where there has been a transfer of any interest in that property and imposes a penalty where there is a failure to notify and the rates are not discharged by the outgoing tenant. These amendments will have a significant impact in the commercial property sector, particularly on landlords and receivers.
Prior to the enactment of the 2014 Act, subsequent occupiers, which would include landlords as they would be deemed entitled to occupy, were liable to pay rates arrears of the previous occupant.
The usual practice was that rates were recoverable from subsequent occupiers in amounts of up to two years’ arrears. Section 32(2) (b) now provides that, if there is a pre-existing liability to pay rates on the part of “the person transferring the property being either the occupier or the owner”, that person must now pay those rates “at the date of the transfer”.
Section 32(2)(a) provides that the existing owner, where there is a change of rated occupier—whether or not the owner is in occupation or indeed aware of an assignment or its actual date—must provide written notification of the transfer to the rating authority within two weeks of the transfer date. Notification is in the form of a “Section 32 Declaration” submitted by the owner of the rateable property which is now a legal obligation. Failure to comply will result in penalties for the owner of the rateable property equating to a maximum of 2 years worth of rates.
It is also important to note that, where the arrears are owed by the owner—as opposed to a mere occupier—the liability becomes a charge on the property, likewise the penalty. Section 32(3) provides that rates due by an owner “shall remain a charge on the relevant property” which, as against a good-faith purchaser for value, may last for up to 12 years.
The notification obligation gives rise to practical problems as an owner landlord is not usually represented at completion of an assignment. Pursuant to Section 32(4), failing discharge of rates and timely notification, the owner becomes “liable for a charge equivalent to no more than two years of the outstanding rates”. For an owner-occupier, this liability is in addition to the existing liability to pay rates. This will also be particularly problematic for the owner landlord if an assignment or sublease is arranged without his or her knowledge (and therefore he or she has not had a chance to make the notification), becoming personally liable for a charge under Section 32(4) (of an unknown value) if the tenant’s rates arrears are unpaid.
Needless to say, with the introduction of these new punitive changes landlords should be aware of the added risk of consenting to an assignment unless the outgoing tenant provides evidence that all rates have been paid up to date.