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Are property guardians the solution for empty property?

With countless retail, leisure and hospitality tenants currently struggling and some office occupiers looking to go fully remote, we may well see an increase in the number of empty commercial properties in the coming months. Property guardians might be one option to reduce the risk of squatters and vandalism, as well as reducing liability for void costs and business rates. However, this option is not without risk and is certainly not the simple “win-win” scenario often portrayed. So what do property owners need to consider about such arrangements?

What are property guardians?

A property guardian arrangement is usually made with a company which in turn grants rights to individuals (known as “guardians”) to live in a particular vacant property. Those individuals usually occupy under a short-term licence terminable on relatively short notice and pay a low rent in return for fairly basic facilities.

This temporary arrangement is designed to give flexibility to the property owner until it is able to find a more permanent tenant or carry out a proposed redevelopment. One clear benefit for the property owner is to deter squatters without the need for security costs. This can be particularly important for commercial property (which is the focus of this article) given that squatting of commercial property is still not a criminal offence and so court proceedings are usually required to regain possession.

What is the legal basis of the property guardians’ occupation?

The relationship between the property owner and the guardian company will be governed by the terms of their agreement. This agreement might be a service contract, although the more common approach is for the property owner to grant a commercial licence or short-term lease to the company.

This first step of the arrangement is therefore within the owner’s control and can be structured to avoid any statutory protection in connection with the agreement. However, there can be issues when the guardian company then grants the individual “guardians” a right to occupy the property. Even if the guardian company only has a licence, this does not prevent it from granting tenancies to occupiers (see Bruton v London and Quadrant Housing Trust [1999] 2 EGLR 59).

Ideally, the arrangements for the occupation of guardians should be agreed between the company and property owner. Given that guardians usually reside at a property as part of their duties, there is a risk that any “licence” granted to them will actually be an assured shorthhold tenancy. If so, terminating their right to reside could cause delay and extra cost as well as additional challenges if certain statutory requirements have not been met (such as providing the occupier with gas safety and energy performance certificates).

Readers will be well aware of the decision in Street v Mountford [1985] 1 EGLR 128 and the fact that the nature of an agreement is not determined by the label given to it by the parties. Therefore, just because the parties call something a “licence” will not mean that it necessarily is one; the courts will instead look to the substance of the arrangement. A licence is simply a permission to do something on someone else’s property, whereas a tenancy is the grant of the right to exclusive possession of property for a specified period of time.

There have been a few cases dealing with this issue in the property guardian context. In Camelot Property Management Ltd and another v Roynon (Bristol County Court, 24 February 2017, unreported), Greg Roynon was found to have a tenancy of part of a former care home notwithstanding the fact that the parties had entered into a written agreement which stated that it was a licence.

The court found that Roynon had exclusive use of two rooms. The management company did not enter the rooms regularly and no services (such as cleaning) were provided to the rooms. The absence of any power to move Roynon between areas in the building was considered to be a significant factor in indicating that there was a tenancy and not a licence.

That decision may be contrasted with the later appeal decision of Camelot Guardian Management Ltd v Khoo [2018] EWHC 2296 (QB). The terms of the agreement in that case were clearly designed not to grant Heiko Khoo exclusive possession of part of office premises. The High Court also took into account the background and other circumstances known to the parties when the agreement was concluded, including the importance of the property being returned to the owner on short notice. The court therefore noted that the purpose of the transaction would be undermined if one were to adopt an artificial meaning of the agreement and construe it as a tenancy.

These cases demonstrate that much will turn on the particular circumstances of an arrangement. However, there remains a real risk that an AST can be created even where the intention is to grant the guardian a licence to occupy. Even if there is a genuine licence, court proceedings are still likely to be required to obtain possession where a guardian is residing at the property and refuses to vacate.

Can the arrangement lead to extra obligations for an owner?

Another potential issue is that guardian-occupied properties can be classified as houses in multiple occupation because they tend to be occupied by two or more households which share one or more basic amenities (such as a toilet, bathroom or kitchen).

The position has to be reviewed in detail in order to establish whether there is an HMO under section 254 of the Housing Act 2004, although not all HMOs need to be licensed. A mandatory licence will be required for property in England if it has five or more occupiers who form two or more households. Local authorities also have the power to extend licensing regimes to properties that are outside the scope of mandatory licensing to cover a broader range of HMOs.

The obligation to obtain a licence lies with the person who has control of, or manages, the HMO and so would usually fall on the guardian company. Where it fails to meet this obligation, this is a criminal offence and it can also be subject to a rent repayment order (see the First-tier Tribunal decision in Oxley v Live in Guardians Ltd LON/00BG/HMF/2019/0037). Even if these risks can be avoided, HMOs can be a concern to property owners because of the management issues which sometimes arise, and the failure to obtain a licence can also affect the ability to obtain possession if the guardians occupy under a tenancy.

As a commercial building is unlikely to be designed for residential use, property owners will also need to be alive to the fact that the building must comply with repair and safety standards that apply to the residential sector. For example, the property owner and guardian company are likely to have a duty to take reasonable care that occupiers are reasonably safe when using the property in accordance with the occupiers’ liability legislation. Furthermore, there are gas and electrical safety regulations that may apply, as well as ensuring that the duties of the “responsible person” are met under the Regulatory Reform (Fire Safety) Order 2005.

What about business rates relief?

Property owners also need to be aware that the question of whether or not a guardianship scheme will mitigate business rates liability will depend on who is in “rateable occupation” of the property.

In theory, a property will be deleted from the non-domestic ratings list once occupied as a residence. Instead of paying business rates, the property guardians should then contribute to the council tax that becomes payable as part of their licence fee. However, the position is not always straightforward.

In Ludgate House Ltd v Ricketts (VO) [2019] UKUT 278 (LC), the Valuation Tribunal for England found that the property guardians were primarily installed to provide security services and were not granted exclusive occupation of any part of the property. As such, the property owner was held to be in rateable occupation and the property was entered in the non-domestic ratings list. The decision was later overturned on appeal to the Upper Tribunal (Lands Chamber), on the basis that the guardians were in occupation to provide themselves with somewhere to live rather than to provide security services. However, the position could still be open to argument.

A difficult balancing act

Obviously, leaving a commercial property vacant for months brings with it significant risks for property owners and probably increased insurance premiums. However, owners will need to consider carefully whether those risks are outweighed by the benefits of a property guardianship arrangement. Such arrangements come with their own issues and property owners may prefer to keep control of the arrangements made for their empty properties.

This article was written by Emma Humphreys and Georgina Redsell. For more information, please contact Emma on +44 (0)20 7203 5326 or at emma.humphreys@crsblaw.com or Georgina on +44 (0)20 7203 8897 or at georgina.redsell@crsblaw.com.

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