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United Kingdom Special Commissioners of Income Tax Decisions
You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Property Company v HM Inspector Of Taxes [2004] UKSC SPC00433 (05 October 2004)
URL: http://www.bailii.org/uk/cases/UKSPC/2004/SPC00433.html
Cite as: [2004] UKSC SPC00433, [2004] UKSC SPC433
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- A Property Company appeals against estimated assessments to corporation tax in the estimated sum of about £112m for two alternative periods, the first being 25 August 1996 to 18 September 1996, and the second being 19 September 1996 to 18 September 1997.
- At the original hearing in June to August 2003 we heard argument about whether the Appellant was liable to tax under Schedule A, which was at the time the Inspector's only argument. The Appellant was represented by Mr Kevin Prosser QC, Mr Charles Harpum and Miss Elizabeth Wilson, and the Inspector by Mr Hugh McKay. At the end of the Inspector's case Mr McKay raised for the first time the possibility of Case VI of Schedule D being applicable. We issued an interim decision (being this decision up to the end of paragraph 70, to which we have added paragraph 38 to explain why we did not permit re-arguing the point at the resumed hearing) to the effect that the Appellant was not taxable under Schedule A. We then heard further argument in November 2003 on whether the Inspector could raise the Case VI issue. At that hearing the Inspector was represented by Mr Launcelot Henderson QC and Mr Hugh McKay, and the Appellant by Mr Kevin Prosser QC and Miss Elizabeth Wilson. We issued a Direction permitting the Inspector to raise the Case VI issue on certain terms. At the resumed hearing in May 2004, we heard further evidence, on which we make further findings of fact in the section of this decision relating to Case VI, and argument on whether the Appellant was taxable under Case VI of Schedule D. The Appellant was represented by Mr Kevin Prosser QC, Mr Charles Harpum and Miss Elizabeth Wilson, and the Inspector by Mr Christopher Tidmarsh QC and Mr Hugh McKay.
- The background to the appeals is that the Appellant was originally the property-owning company in the Cornwall Group. Some of its properties were sold in April 1995 to another group company, Cornwall Group Investments Limited (CGI), and an agreement for lease of other properties was entered into on 15 August 1995 in favour of CGI (the 1995 Agreement for Lease), followed by a further Agreement for Lease of the same plus some additional properties on 16 August 1996 (the 1996 Agreement for Lease). By the Business Sale Agreement the Appellant then sold all its assets to another group company, Cornwall Group Properties Limited (CGP), retaining the next rent payment from CGI due on 31 August 1996 (the Retained Rent Payment). (We should mention that we are following the parties' use of the current names of the companies involved rather than the names they had at the time of the various transactions.) Finally by the Share Sale Agreement, CGI, which was the parent company of the Appellant sold the shares of the Appellant out of the Cornwall Group in September 1996, the Appellant then having the right to the Retained Rent Payment on 31 August 1996 less the expected tax thereon and having a liability in respect of an inter-group debt which was paid off out of the rent. The purchaser of the shares intended to offset the Retained Rent Payment by creating a deduction in the Appellant company, the benefit of the tax saving from which would be split between the Cornwall Group, in the form of the sale price of the shares in the Appellant, and the purchaser, in the form of the balance of the rent. It is now accepted that the proposed tax avoidance scheme to create a deduction did not work. The Appellant now argues that the Retained Rent Payment is not in fact rent and is not taxable under Schedule A because in the accounting period in which it received the payment the Appellant had no interest in land, and at the resumed hearing that the Appellant is not liable to tax under Case VI of Schedule D either.
- In relation to corporation tax Schedule A applies to:
- We need to determine by what right the Appellant was entitled to the Retained Rent Payment. The following issues arise in relation to Schedule A:
- We heard evidence from the Cornwall Group Head of Tax, and the Company Secretary of Cornwall Group Limited, in the circumstances described in paragraph 14.
- On 15 August 1995 the Appellant (1) and seven group companies that held properties as nominee for the Appellant (2) to (8) agreed to let to CGI (9) properties listed in the Schedules 1 (properties in the name of the Appellant) and 2 to 8 (properties in the names of each of the seven nominees). The Agreement provided for the properties to be let in the form of the underlease annexed. It provided that the leases were to commence on 1 August (changed in manuscript from July) 1995 and expire 10 days before the date marked "end" in the Schedules; the form of underleases annexed are 20 year leases. The leases were to reserve rent for each property of the amount shown in a column headed "rent" in the Schedules payable annually in advance the first payment of one year's rent to be calculated from 1 August (changed in manuscript from July) 1995. The form of underleases annexed however provided for rent to be payable on the last working day in August with the apportioned rent from the start date (left blank in the case of the underlease of the properties legally owned by the Appellant, and stated to be from 4 December 1994 in the case of the properties beneficially owned by the Appellant) to 31 August 1995 being expressed to be payable on the date of the underlease. The rent is expressed to be payable under the leases when granted; the agreement itself does not provide for rent.
- The Agreement contains the following clauses:
- The parties hereto shall use all reasonable endeavours to complete the granting and taking of leases referred in clauses 1 to 8 above [being the properties described above as Schedules 1 to 8 of the Schedule] within 28 days of the obtaining of the consent to any Superior Landlord to the grant of the relevant lease."
- By an agreement made on 27 February 1996 the date of 31 August 1996 in clause 11 was substituted for 29 February 1996. We shall consider the effect of these clauses later in this decision. We make further findings of fact in relation to the obtaining of landlords' consents to underletting in relation to this and the 1996 Agreement for Lease in paragraph 15. Three underleases were granted pursuant to this agreement. We shall call the properties subject to these three underleases and any other underleases that may have been granted pursuant to the 1995 Agreement for Lease "the 1995 Agreement Properties."
- On 31 August 1995 rent was invoiced by the Appellant to CGI of £104,116,036.40 plus VAT for the period 1 September 1995 to 31 August 1996. This does not correspond to the 1 August 1995 starting date in the Agreement for Lease or the Underleases annexed; 31 August was the last business day in August in 1995. We make further findings of fact about payment of this rent in paragraph 35.
- On 16 August 1996 the Appellant (1), and seven group companies that held properties as nominee for the Appellant (2) to (8) agreed to let to CGI (9) properties listed in the Schedule comprising part 1 (180 properties in the name of the Appellant), parts 2 to 8 (549 properties in the names of each of the seven nominees) [parts 1 to 8 are identical to the corresponding Schedules to the 1995 Agreement for Lease], and part 9 (comprising 111 mainly freehold properties and, we believe, leasehold properties where no consent of the landlords was required to the subletting). The Agreement provided for the properties to be let in the form of the underlease annexed (with different forms for the part 1, and the parts 2 to 8 properties), or in the form of the lease annexed (part 9 properties; it being a lease rather than underlease suggesting that they are freehold properties). The Agreement provides that the leases (or underleases) were to commence on 1 August 1995 and expire on 30 July 2105 (or in some cases earlier). The leases were to reserve rent for each property of the amount shown in a column headed "rent" in the Schedule, continuing:
- The parties hereto shall use all reasonable endeavours to complete the granting and taking of leases referred in clauses 1 to 9 (inclusive) [corresponding to the properties described above as parts 1 to 8 of the Schedule] within 28 days of the obtaining of the consent to any Superior Landlord to the grant of the relevant lease and the leases of the premises referred to in clause 9 [described above as part 9 of the Schedule] shall be granted within 28 days of CGPL [which must be a misprint for the company we have described as CGI] serving notice on [the Appellant] requiring the grant thereof."
- On 30 August 1996 the rent payment date for 1996 only was changed to 19 September 1996 and an additional rent equal to interest for the postponement period was charged. The Appellant was not a party to the agreement making this variation. The Agreement recites that CGP had entered into the 1996 Agreement for Lease; in one copy (although we also had a completed copy of the same Agreement without the alteration) a manuscript addition has been made that "A Property Company the predecessor in title to CGP" entered into the Agreement for Lease. The Head of Tax explained the reason, which we accept, for the change of the date for payment of the 1996 rent from 31 August 1996 to 19 September 1996. The original proposed purchaser of the shares under the Share Sale Agreement (see paragraph 20) had withdrawn on 23 August 1996. The company that eventually purchased the shares was subsequently found but it was not possible to complete the Share Sale Agreement before 31 August 1996. The rent payment date was deferred until 19 September 1996, the day following the completion date of that Agreement. On 19 September 1996 the Appellant invoiced CGI for rent of £112,857,267 plus VAT for the period 1 September 1996 to 31 August 1997. The amount is different from the amount invoiced in 1995 because of the additional part 9 properties and an interest charge of £415,879 because of the deferment from 31 August to 19 September. We make further findings of fact about payment of this rent in paragraph 35.
- It will be seen that this agreement is substantially the same as the 1995 Agreement for Lease, the main changes being the introduction of new Part 9 properties; the date for satisfaction of the condition now being 31 August 1997; and the rent payment date being 31 August 1996 and subsequent years rather than on the last business day in August. The relationship between the 1995 and 1996 Agreements for Lease is considered further under the heading Issue (1).
- During the first four days of the hearing there was no evidence whether any consents of the superior landlords to the underletting had been obtained in accordance with the 1995 or 1996 Agreements. The Appellant asked us to infer that they had not been obtained (from the absence of evidence that rent had been paid to the Appellant, or evidence that CGI was in possession in the sense of the receipt of rent from occupational tenants, and the fact that the Agreements gave no right to receive rent before the grant of a sublease); and the Respondent asked us to infer that consent had been obtained (from the fact that the date for obtaining consents under the 1995 Agreement for Lease had been extended, implying that consents were being obtained but this could not be finalised within the time limit, that rent was invoiced, that the existence of rent was necessary to the Business Sale Agreement and the Share Sale Agreement, and that there was evidence of consents to assignment being obtained from most of the landlords in relation to the Business Sale Agreement). The matter was in doubt because the Appellant is no longer in the Cornwall Group and does not have access to its records. We decided that we were not prepared to infer such a fact, which could easily be proved, and risk making a finding of fact that was wrong and adversely affected one or other party.
- At the Respondent's request we issued a Witness Summons on 19 June 2003 on the Cornwall Group then head of tax (The Head of Tax), and on the company secretary of Cornwall Group Limited (The Company Secretary). Subsequently the Respondent asked us to withdraw the witness summons so far as it related to The Company Secretary on his agreeing to attend and produce documents, which we agreed to do. The Witness Summons asked a number of questions relating to 50 properties from parts 1 to 8 and 25 properties from part 9 of the 1996 Agreement for Lease chosen at random by one of us who issued the Summons. In the light of their evidence we find the following facts which we understand to relate to all of the properties, not just the ones in the sample:
- By three leases dated 16 August 1996 49 mainly freehold properties in total (being some of the properties contained in part 9 of the 1996 Agreement for Lease) were let by the Appellant to CGI for a term from 1 August 1995 for 20 years. One of the leases relates to properties in Scotland. The total rent is £5,302,000 (the figure is after adjusting for one property which seems to be contained in two different leases) and is reviewable every 5 years. The rent is payable in advance on 31 August every year the first payment being from 1 to 31 August having been paid during August 1995.
- As with the 1996 Agreement for Lease on 30 August 1996 the rent payment date for 1996 only was changed to 19 September 1996 and an additional rent equal to interest for the postponement period was charged. The Appellant was not a party to the agreement making this variation, possibly because of an error caused by a change of names of the companies. The reason for the change is the same as that given in relation to the 1996 Agreement for Lease.
- As stated in paragraph 15, three subleases were granted pursuant to the 1995 Agreement for Lease on 24 July 1996, 29 November 1996 and 11 March 1997; and six further subleases were granted on various dates between 14 August 1996 and 11 March 1997. The term of the subleases was from 1 August 1995. In most cases the rent due up to 31 August 1996 was stated to be due on the signing of the sublease, but in three cases the rent due up to 31 August 1997 was stated to be due on the signing of the sublease.
- On 16 August 1996 the Appellant agreed to sell to CGP all its assets including the properties listed in various schedules which total about 1,300 properties. Clause 2.2 provided:
- On 18 September 1996 CGI agreed to sell the whole of the issued share capital of the Appellant to New Property Limited, which is independent of the Cornwall Group, for £20,460,181. Clause 5.1 provides:
- In summary, the 1995 and 1996 Agreements for Lease provide for the letting of 840 properties (729 in the 1995 Agreement) by the Appellant to CGI from 1 August 1995 for a total rent of approximately £112m (£104m in the 1995 Agreement), of which the 1995 rent is stated in the 1996 Agreement to have been paid, and the 1996 rent was payable in advance on 31 August 1996 (changed to 19 September 1996 but the Appellant was not a party to the change). The Appellant sold all its assets to CGP while retaining the Retained Rent Payment plus some cash as its only assets subject to a liability for tax on that rent and to a liability to repay an intra group debt of roughly the amount of the balance. The shares in the Appellant were then sold out of the group for £20m.
- A puzzling feature is the conditionality of the 1995 and 1996 Agreements for Lease compared to what the parties actually did. A straightforward reading of the 1995 and 1996 Agreements for Lease indicates that they are conditional on obtaining landlords' consents to subletting, in the sense of a condition precedent so that until consent is obtained for underletting a particular property there is no sublease and accordingly no rent is payable; the existing arrangement under which the group companies in occupation paid rent or licence fees to the Appellant continued. We have made some provisional findings of fact relating to the obtaining of consents in paragraph 15. As to the part 9 properties in the 1996 Agreement for Lease, other than the properties comprised in the Three Leases and any other part 9 properties for which leases were granted, until notice is given there is merely the equivalent of an option to grant a lease. There is no evidence of any such notices. Again, a straightforward reading is that there is no obligation to grant a lease and no obligation to pay rent for such properties until a notice is given.
- On the other hand, the parties acted in all other respects as if rent was payable in respect of all the properties immediately on entering into the 1995 and 1996 Agreements for Lease. In particular the following—
- But the Appellant did not ignore the obligation to obtain consents. We have made some provisional findings in paragraph 15 about the extent to which consents were obtained. Since there is evidence of subleases being granted or consents obtained in relation only to 33 of the 729 parts 1 to 8 properties, the earliest consent was granted on 24 July 1996, and most were granted in 1997, it seems that the Appellant did not give much urgency to obtaining such consents, in complete contrast to the obtaining of consents to assignment pursuant to the Business Sale Agreement where between 16 August and 11 September 1996 landlords' consents to assignment had been obtained, at least in principle, in 96 per cent of cases (see paragraph 19). A standard letter was sent to all landlords on 16 June 1995 asking for consent to subletting. A draft letter prepared by solicitors was written to the 31 main landlords in about July 1996 emphasising the urgency of obtaining consent to assignment pursuant to the Business Sale Agreement before the end of the accounting period at the end of August 1996 and adding "The outstanding application for licence to underlet to [CGI] is not in fact affected and our clients still wish to grant those proposed underleases." In evidence The Head of Tax said that creating rent was of primary importance; obtaining landlords' consents to subletting was of secondary importance so as not to upset the landlords. He thought that The Property Director seemed relaxed about obtaining consents to subletting.
- We need to determine before proceeding further what legal relationship was created between the parties by the 1995 and 1996 Agreements for Lease so far as the landlord's consent to subletting was required (which is all but 7 of the 50 properties in the sample of 50 parts 1 to 8 properties). If one starts with the Agreements they are straightforward conditional agreements having the effect of avoiding the possibility of the landlords forfeiting the leases for subletting without consent. But on that basis the charging of the full rent and entering into agreements assuming the rent was payable is a mistake by the parties. If, on the other hand, one starts with the actions of the parties in charging the full amount of rent, they appear to have treated the 1995 and 1996 Agreements for Lease as not being conditional on obtaining landlords' consents (with the inevitable consequence that the subletting is in breach of the covenant against subletting without consent rendering the leases liable to forfeiture) but at the same time an attempt was made to obtain consents and some consents were obtained. Similarly the parties appear to have ignored the requirement for notice to be given requiring the grant of a lease in relation to the part 9 properties in the 1996 Agreement in charging the rent for all these properties.
- Mr Prosser QC and Mr Harpum start from the 1995 and 1996 Agreements for Lease and contend that, as to those parts 1 to 8 properties requiring consent to subletting, the agreements do not provide for any rent until consent is obtained, and, as to the part 9 properties in the 1996 Agreement for Lease, there is no evidence that any notices were given (except for the properties comprised in the Three Leases). Accordingly, as to the parts 1 to 8 properties, no rent is payable unless and until consent is obtained, or, as to part 9 properties, notice given requiring the grant of a lease. This result is entirely to be expected since any other interpretation means that the leases from third parties to the Appellant are liable to forfeiture, a breach of covenant that uniquely cannot be remedied (Scala House & District Property Co Ltd v Forbes [1974] QB 575), and relief from forfeiture for a deliberate breach is unlikely to be granted by the court. The other purpose of making the agreement conditional was to give the parties a means of terminating the contract if consent cannot be obtained within a reasonable time. The obligation on CGI to pay the Retained Rent Payment is therefore derived solely from the Share Sale Agreement. Anything else is a mistake by the parties about the legal position they have created. So far as the statement in the 1996 Agreement for Lease that rent up to 31 August 1996 had been paid in August 1995 the effect is to prevent any rent being payable for any period before 31 August 1996 by estoppel while retaining the same starting date from which the terms of all the subleases were counted for good estate management purposes. Although a lease cannot have retrospective effect a provision that rent is payable prior to the execution of the lease is perfectly valid: Bradshaw v Pawley [1980] 1 WLR 10.
- Mr McKay starts from the fact that rent was charged from the start and looks for an alternative interpretation of the 1995 and 1996 Agreement for Lease. He submits first that it is possible to read those Agreements as creating a condition subsequent to obtain consent. In particular the words: "…if consent has not been obtained to the lease of any particular property of properties by 31 August 1997 then this Agreement shall cease to have effect in so far as it relates to that particular property or properties" point to the agreement taking immediate effect but ceasing to have effect if the condition is not satisfied. While he accepts that this puts the Appellant at risk of the landlord forfeiting the leases, it explains the charging of rent and the fact that the parties were obtaining consents and the leisurely way in which consents were being obtained because the Appellant effectively had from 15 August 1995 (the date of the 1995 agreement for Lease) to 31 August 1997 (the final date under the 1996 Agreement) to obtain consents.
- Against this, Mr Harpum, who it is fair to say did not have prior notice that the submission would be made as it was not in Mr McKay's skeleton argument, emphasised the unlikelihood of anyone putting themselves in breach of the covenant against subletting without consent by entering into an agreement for lease subject to a condition subsequent. The test of a condition subsequent depends less on the words used and more on whether the condition is for the benefit of one of the parties who is in a position to waive it. A condition that can be waived by one party points towards its being a condition subsequent, as in Graham v Pitkin [1992] 1 WLR 403. There is authority that a condition relating to obtaining the landlord's consent to assignment could not be waived (Ganton House Investments Ltd v Corbin 1988 2 Estates Gazette LR 69); by analogy the same would apply to subletting. In addition, here the landlord's consent is for the benefit of both parties: the Appellant is as risk of having his lease forfeited, and the sublessee is at risk of losing his sublease. The quoted wording can be explained by the fact that they qualify the agreement to endeavour to obtain consents to subletting, and so the parties can terminate the agreement as to properties for which no consents had been obtained by the final date in the 1996 Agreement for Lease.
- Secondly, Mr McKay submits that the parties created an annual tenancy. This involves payment of rent by the tenant, possession (here meaning the receipt of rent) by the tenant and an intention to create such a tenancy. Rent was invoiced on 31 August 1995 and on 19 September 1996 in respect of all the properties irrespective of whether the landlord's consent to subletting had been obtained and was paid by book entry.
- Against this Mr Prosser QC contends that there is no evidence of actual payment of rent by CGI. Both The Head of Tax and The Company Secretary stated that payment of the invoiced rent was made immediately by book entry. No copies of the entries were produced. Mr Prosser QC relied on Minsham Properties Ltd v Price 63 TC 570 in which a company owned by a charity had made book entries showing payment of interest on a loan fro the charity and claimed that the book entries amounted to payment of the interest. He pointed out that the book entries had been made in the accounts of both the company and the charity but nevertheless it was held not to amount to payment. Mr McKay contended that the case depended on its facts. Book entries were made on 3 April 1986 showing credits "as at 30 September 1984." Vinelott J said at page 585I "There can be no doubt that a book entry can constitute payment." At page 586E he says
- As to intention Mr Harpum submits that by entering into the Agreements for Lease the parties have shown their intention is not to create any tenancy before consents had been obtained, which is to be expected since subletting would be in breach of covenant. There is no presumption that payment of rent creates a periodical tenancy. He cited Javed v Aqil [1991] 1 WLR 1007 in which prospective tenants were allowed into possession of premises while negotiating the terms of a lease and paid quarterly rent for three quarters. Negotiations then broke down and they claimed that possession plus payment of the quarterly rent gave rise to a presumption of a periodic tenancy which was a protected business tenancy. Nicholls LJ said at page 1012 B:
- In this case, Mr Harpum submitted, it was clear from the Agreements for Lease that the parties did not intend the relationship of landlord and tenant to be established in elation to any property unless and until the landlord's consent to subletting had been obtained.
- Mr McKay contended that there was an exception to the rule where rent is paid under a void tenancy creating a yearly tenancy as in Prudential Assurance v London Residuary Body [1992] AC 386. A landowner sold land to a local authority for road widening and took back a lease stating that "The tenancy shall continue until the land is required by the council for the purposes of the widening of the highway" (which term is void for uncertainty). The land was never used for road widening and notice to terminate was given on the basis that it was a periodic tenancy. Lord Templeman said at page 392B
- Thirdly, Mr McKay submits, on the basis that the 1995 and 1996 Agreements for Lease created a condition precedent, the rent payments can be explained on the basis that the Appellant continued to be in receipt of the rents from the occupational tenants which were received via CGI effectively acting as their handling agent. This involves reading the words "the rental income receivable by [the Appellant] from CGI on 31 August 1996…" in the definition of Excluded Assets in the Business Sale Agreement as meaning the rent received from CGI which received the rents from the group companies in occupation as agent for the Appellant. Mr Prosser QC submits that this strains the language of the Business Sale Agreement too far. The definition assumes that the Appellant had an entitlement to rents from CGI on 31 August 1996.
- As to Mr McKay's second alternative of an annual tenancy (paragraph 29), both parties are agreed that this requires payment of rent to the Appellant and receipt of rent by CGI from the group companies in occupation and an intention to create such a tenancy. So far as payment of rent is concerned both The Head of Tax and The Company Secretary said that payment by book entry was a recognised way of making payments between members of a group of companies which for good commercial reasons do not have separate bank accounts. It is different in nature from the question arising in the Minsham Properties Limited case under a statutory provision that gave tax relief for interest paid and stated that debiting of interest only by a bank was equivalent to payment. In such circumstances adding the interest to principal is not payment. Here the issue is whether the parties intended the book entries to constitute payment. We consider that by making book entries both parties intended that there should be payment and we so find.
- As to intention to create an annual tenancy we agree with Mr Harpum that Prudential Assurance v London Residuary Body is not an exception to the principle that the parties must intend to create a periodic tenancy but an example of it. The parties have shown their intentions clearly in the 1995 and 1996 Agreements for Lease which are not similar to a void lease. The Company Secretary was clear that leases would be granted only after the landlord's consent to subletting had been obtained. The problem is that the Agreements for Lease do not provide for any rent but the parties have acted as if they did and so the parties must have had a different intention from that stated in the Agreements. Their actions are consistent with the existence of an annual tenancy if consents are not obtained. While we prefer Mr McKay's first argument, if we are wrong on that, we would find that an annual tenancy had been created on the basis that this gives effect to the intentions of the parties as demonstrated by the way they acted, in particular in charging rent immediately before any consents had been obtained in breach of the covenant against subletting without consent.
- We regard Mr McKay's third alternative (paragraph 34) as straining the language of the Business Sale Agreement too far to be credible. If the condition is a condition precedent there is no legal relationship under which CGI is liable to pay rent. The Appellant continues to receive rent or licence fees from the group members in occupation but the business Sale Agreement cannot be read as retaining these payments. It refers specifically to payments due from CGI on 31 August 1996 and therefore assumes that CGI has a liability to pay rent on that date.
- We are more attracted by Mr McKay's first alternative (paragraph 27) that the 1995 and 1996 Agreements for Lease created a condition subsequent. While in terms of property law an Agreement for Lease subject to a condition subsequent makes no sense, since the effect would be that the Appellant has agreed to grant a lease immediately in breach of the covenant against subletting which agreement comes to an end if consent to subletting is not obtained, it fits the other facts, particularly the assumption that the full rent was payable immediately, and explains the apparently leisurely pace at which the Appellant was obtaining consents, resulting in 33 consents to subletting being obtained out of 729 properties between 15 August 1995 and 31 August 1996, in complete contrast to the speedy obtaining of consents for assignment under the Business Sale Agreement under which by 11 September 1996 96 per cent of consents, at least in principle, had been obtained. We consider that in the light of the facts set out in the bullet points in paragraph 23, we cannot take the wording of the conditionality clause in the 1995 and 1996 Agreements for Lease at its face value, particularly given the contemporary evidence of the Board Minute of 16 August 1996. This demonstrates an important commercial reason relating to the solvency of the Appellant in entering into the business Sale Agreement for receipt of rent at the end of August, some two weeks later. If parties write an agreement saying one thing and then do something else, they cannot intend that their legal relations should be governed by the agreement. We therefore look for an alternative reading that fits the facts. In spite of the serious objection that reading the condition about obtaining consent to subletting as a condition subsequent means that the Appellant was in immediate breach of the covenant against subletting, it is the interpretation that fits the facts best. The idea for the Agreements for Lease was The Head of Tax's in order to give effect to the rental mismatch arrangements; they were not agreements driven by property considerations. The parties intended to put The Head of Tax's tax advice, which depended on the payment of rent, into effect. The only way to achieve the tax result was to create a tenancy under which rent was immediately payable. The parties acted on his advice by invoicing and paying rent. This was contrary to the documents, probably because the property lawyers drafting the documents naturally made it a priority to avoid a breach of covenant. The Head of Tax may have failed to communicate to them what he was trying to achieve, and they may have failed to communicate with him what the agreements achieved. This is not surprising when what The Head of Tax wanted was the legally impossible combination of charging rent and not being in breach of covenant, by providing for the payment of rent before the landlord's consent had been obtained. The only alternative interpretation that we have not so far rejected is the one put forward by Mr Prosser QC and Mr Harpum that the agreement fails to provide for any rent until consent is obtained and everything done by the parties is based on a mistake. We prefer Mr McKay's interpretation that the Agreements for Lease created a condition subsequent as the less unlikely of these two unlikely interpretations, and hold that the 1995 and 1996 Agreements for Lease were subject to a condition subsequent that consents to subletting be obtained.
- At the resumed hearing in relation to Case VI of Schedule D Mr Prosser and Mr Harpum sought to re-argue the conditionality point on the basis that we were wrong in law in taking into account extrinsive evidence, statements of the intention of the parties and their subsequent conduct in interpreting the 1995 and 1996 Agreements for Lease. Mr Tidmarsh QC opposed their re-arguing this. We decided that the issue could not be raised again as it was essentially part of a finding of fact that we had already made. Our reasons are that while we accept that if one interprets the agreements in isolation they appear to create a condition precedent, it is generally recognised that the meaning of a document is what the parties using the words they have used against the relevant background would reasonably have been understood to mean. Taking into account solely the relevant background, such as, in relation to the 1996 Agreement for Lease, The Head of Tax's evidence, the board minutes and the Business Sale Agreement made on the same day, we concluded that the agreements could not have been understood to create a condition precedent, and so did not have the meaning which they would have on normal principles of construction. Having decided against the normal meaning we considered all the factors set out in paragraphs 23 and 24 in deciding that the agreements created a condition subsequent.
- So far as concerns the part 9 properties not included in the Three Leases or any further leases (where no such consent to subletting was required), clause 13 of the 1996 Agreement for Lease states that the lease shall be granted within 28 days of CGI serving notice on the Appellant requiring the grant thereof. In other words, the Appellant was bound to grant the lease if asked, but CGI was not bound to ask. Until CGI asked, there would be no rent payable because rent is payable only under leases, not under the 1995 or 1996 Agreement for Lease. There is no evidence of any such notices being given, and the parties ignored this provision by charging rent as if the agreement were unconditional. We hold that in the light of the way the parties acted, the Agreements were not intended to be read as containing this requirement to give notice.
- Accordingly we proceed on the basis that the Agreements for Lease created an immediate obligation on CGI to pay rent. This means that there is no difference between the Three Leases and the Agreements for Lease, and no difference according to whether subleases had been granted or consents obtained.
- We should mention one further aspect relating to the amount of rent. A letter of 25 July 2002 from the Cornwall Group's Accountants to the Respondent was included in the documents reconciling the rent figure of £112,875,276 to the underlying documents. The differences are caused by the following factors: invoiced rent of freehold properties includes management expenses; or in relation to freehold properties "because part of the lease rent was payable by third parties, not CGI" (the meaning of which could not be explained); the invoice figure includes an estimate of rent where a rent review was in progress (when finally ascertained the invoiced figure was found to be £370,489 too high); in relation to properties subject to a sale and lease back the rent paid by the occupational tenants was stepped whereas the rent paid under the leaseback was fixed (this is not clear either); two properties were disposed of before the rent payment date; one property was acquired since the 1996 Agreement for Lease; and one lease had expired. The total rent payable in accordance with the Agreements was not shown because one of the schedules was impossible to read but is about £105m; the total invoiced rent was £112,441,397 plus interest of £415,879 in respect of the deferment of the 31 August 1996 rent to 19 September 1996, making the total of £112,857,276. What is clear is that the last figure is not the same as the rent receivable in accordance with the documents.
- The Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) applies to "new tenancies" (including agreements for lease, section 28(1)) made on or after 1 January 1996 Under section 1(3) of the 1995 Act:
- Mr McKay contended that the 1996 Agreement was a variation on the 1995 Agreement. The Head of Tax explained that the purpose of the 1996 Agreement for Lease was to recreate the effect of the 1995 Agreement for Lease that was between the Appellant and CGI in an agreement between CGP and CGI. We do not accept this because no agreement was necessary to achieve that result (except as to the part 9 properties which were not dealt with in the 1995 Agreement for Lease) since the effect of the Business Sale Agreement was to make CGP the Appellant's successor in title to the properties and accordingly to the 1995 Agreement for Lease. The Head of Tax also stated that in his understanding party (1) in the 1996 Agreement for Lease, the company called "Cornwall Group Properties Limited," was not the Appellant under its former name but CGP, the resolutions for change of name being passed on the same date although the certificate of change of name was not dated until 20 August 1996. We do not accept this since one would expect two agreements (this and the Business Sale Agreement) entered into on the same day to describe the same party by the same name. We would also expect the solicitors dealing with the Agreements to know that the change of name certificate had not been issued. The Head of Tax's interpretation would also mean that the 1996 Agreement for Lease came after the Business Sale Agreement which is contrary to the terms of the latter. In giving that evidence the Head of Tax was relying on his recollection because he left the group in November 1998 and would not have had access to any records.
- We prefer the evidence of the Appellant company and CGI board minutes of 16 August 1996 which state that: "It was reported that a new agreement was needed rather than a variation of that dated 15 August 1995 as additional freehold properties were now being included in the Agreement." We accept this as contemporary evidence of both parties that the 1996 Agreement for Lease constituted a new agreement and that a variation of the 1995 Agreement was not intended. The 1995 Agreement had either been carried out in relation to properties for which consents had been obtained (3 properties and there may be other such properties), or came to an end in accordance with its terms in respect of properties for which no consents had been obtained by 31 August 1996 (about two weeks after entering into the 1996 Agreement); presumably it was considered that no termination document was necessary.
- The 1995 Agreement Properties are outside the 1995 Act. The remaining properties were subject to the 1996 Agreement for Lease and are accordingly subject to that Act. We turn next to the effect of the 1995 Act.
- Mr Prosser QC and Mr Harpum contend that the exclusion of the Retained Rent Payment by the Business Sale Agreement is of no effect because the 1995 Act prevents the retaining of rent payable in advance on a future date on a sale of the reversion.
- Mr Harpum gave us a detailed exposition of the 1995 Act of which we shall summarise only the parts material to this appeal. The 1995 Act introduces a new mechanism for determining what covenants pass on the assignment of a lease or reversion. A landlord has two different rights to rent: the right reserved by the reddendum (paying therefor…) which is a property right, and the benefit of the tenant's covenant to pay rent, which is a purely contractual right, so that for example for leases granted before the 1995 Act a landlord cannot distrain for rent against the original tenant who has assigned his lease. So far as privity of estate is concerned the 1995 Act provides that the benefit and burden of all covenants pass on assignment unless the covenant is expressed to be personal in which case neither passes on assignment. It abolishes privity of contract completely so far as the tenant is concerned; in section 5 the tenant is released from the tenant covenants on assignment. It is only partly abolished so far as the landlord is concerned by section 6:
- Therefore a landlord who assigns the reversion and does not apply to be released remains liable on the landlord's covenants and can enforce the tenant's covenants. The reason for the difference is that the tenant has no control on assignment by the landlord, whereas the landlord normally has control over the tenant's assigning or subletting. The odd result is that both the assignor (by section 6, not having been released) and the assignee (by section 3 in accordance with privity of estate) of the reversion may both be able to enforce tenants' covenants. The 1995 Act contains no provisions dealing with the joint benefit of covenants (c.f. section 13 dealing with the joint burden). At common law a promise could not be made to two or more persons jointly and severally, but only jointly (Halsbury's Laws of England Vol.9(1) §1036). Section 81 of the Law of Property Act 1925 applies only where a covenant is made to two persons jointly. It may be therefore that the assignor and assignee have to enforce the covenant jointly. In most cases the assignor would be estopped from suing for breach of a covenant by the tenant that had taken place after the reversion had been assigned.
- An objection to the assignor landlord who has not been released being entitled to enforce the covenant for payment of rent is that section 23 provides:
- Section 25 of the 1995 Act prevents contracting out of the Act by providing that:
- In this case Mr Harpum submits that, applying section 23 first, there can be no retention by the Appellant of the right to sue for the Retained Rent Payment, being due after the assignment (including the equitable assignment, section 28(1)) of the reversion by the Business Sale Agreement on 16 August 1996. This leaves nothing on which section 6 can operate to permit the assignor to enforce. On that basis the purported retention by the Appellant of the right to the Retained Rent Payment in the Business Sale Agreement has no legal effect.
- If this argument is wrong, for example, because the 1995 Act is not a comprehensive code dealing with the passing of the benefit and burden of covenants, by section 6 as between the assignor (the Appellant) and the assignee (CGP) the Appellant has validly retained the right to the 1996 rent against CGI but as a contractual right under the surviving relic of privity of contract. That is not an interest in land.
- Mr McKay concentrated on section 6. There had been no release of the landlord pursuant to section 8 with the consequence that the Appellant can still enforce against CGI the tenants' covenant to pay rent on 31 August 1996. Normally the assignor of the reversion would be estopped from claiming this but here that right is expressly excluded from the assignment by the Business Sale Agreement, as permitted by section 23(2). He contended that it was not permissible to read Hansard in order to determine whether the Act dealt comprehensively with assignments as this was not an ambiguity.
- In reply Mr Harpum repeated that section 6 is concerned with privity of contract and so even if the Appellant does have a right to sue CGI for the 31 August 1996 rent that is not an interest in land.
- We are concerned with the application of the 1995 Act to the landlord's right to enforce the Retained Rent Payment which starts to accrue after the assignment. The Act does not, as we read it, seek to enable the assignor to recover such rent as a property right. Section 3 provides for the benefit of all covenants to pass on an assignment of the reversion, unless they are expressed to be personal. It follows that the benefit of the covenant to receive the Retained Rent Payment passed to CGP on 16 August 1996. Section 23 deals with the retention by the assignor of the right to sue for existing breaches of covenant unless such right is expressly assigned. Here we are not dealing with rights under the covenant before the assignment but after it. The Act also prevents contracting out. It seems to us that the Appellant as former landlord can therefore have no right left to enforce against CGI in relation to rent accruing in the future. The purported retention of the Retained Rent Payment is therefore void, but effect can be given to the terms of the Business Sale Agreement on the basis that CGP will receive the rent and pay an equivalent amount to the Appellant, which is clearly not a property right but akin to a contractual right to consideration for the sale of the assets. The only direct right that the Appellant has against CGI to the Retained Rent Payment rent is pursuant to the Share Sale Agreement. This is a purely contractual right and not a property right even though it was made on the assumption that the exclusion of the Retained Rent Payment was valid. If we are wrong about our interpretation of the 1995 Act and section 6 does give the assignor a right to enforce the tenant's covenants, possibly jointly with the assignee, that is a right against CGI by privity of contract and is not an interest in land (we consider below whether it is rent under a lease within Schedule A). The result is therefore the same. In either case the Appellant has no property right.
- In relation to the 1995 Agreement Properties which are not within the 1995 Act, there is no statutory objection to the fact that the Business Sale Agreement in terms retains the Retained Rent Payment. We consider below whether that is within Schedule A.
- The 1995 Act does not apply to Scotland or other jurisdictions where there are properties covered by the 1995 or 1996 Agreements for Lease, including the Channel Islands and the Isle of Man. In the absence of any evidence about the law of Scotland or the other jurisdictions we assume that the law is the same as England. This is unsatisfactory where one is dealing with a statutory code about English land law, which is unlikely to apply elsewhere. We considered whether it would be right to enable the Appellant to present further argument on properties not governed by English law. We decided against this as it does not seem likely that other jurisdictions regard retention of future rent after an assignment of the reversion as an interest in land.
- Our conclusion on the question by what right was the Appellant entitled to receive the Retained Rent Payment, is that it has a contractual right against CGP under the Business Sale Agreement, for payment on 31 August 1996 (the Appellant not being a party to the agreement changing the date to 19 September 1996), and a contractual right against CGI under the Share Sale Agreement for payment on 19 September 1996. If we are wrong in our interpretation of the 1995 Act, and as to the 1995 Agreement Properties not covered by that Act, the Appellant has a right by privity of contract against CGI for the Retained Rent Payment. In that case the payment date would be 31 August 1996 because the Appellant was not a party to the agreement changing the date to 19 September 1996.
- Mr Prosser QC contends that the exclusion of the Retained Rent Payment by the definition of Excluded Assets in the Business Sale Agreement is void for uncertainty. The definition is:
- Mr McKay contends that there is nothing uncertain about the definition which was operated with precision by the parties by invoicing an exact amount of rent.
- We agree with Mr McKay. We consider that the definition is clear. We understand that the Appellant owned, or beneficially owned, other properties that were not included in the 1995 or 1996 Agreements for Lease and so the reference to certain properties is necessary to exclude those properties. On that basis there is no uncertainty about the definition; it means the rent on those Beneficial Properties and Properties as is due from CGI on 31 August 1996.
- Mr Prosser QC contends that even if the exclusion of the Retained Rent Payment by the Business Sale Agreement is possible under the 1995 Act, it is a payment the source of which is the terms of the Business Sale Agreement or the Share Sale Agreement neither of which is an interest in land, and it is not taxable under Schedule A because there was no source of income in the accounting period in which the receipt occurred. The same argument will apply to the 1995 Agreement Properties.
- Mr Prosser QC contends, which is common ground, that the source doctrine applies to Schedule A. For this purpose source means an estate or interest in or right over land, the words in the residual provision in paragraph 1(c) of Schedule A. Such a source must be possessed in the relevant accounting period. An entitlement to rent is not a Schedule A source, any more than an entitlement to an emolument is a Schedule E source (or its modern equivalent under the Income Tax (Employment and Pensions) Act 2003). He contended that the reference to lease in paragraph 1(a) of Schedule A did not extend to an agreement for lease because the definition of lease in section 24 of the Taxes Act 1988: "In this Part [Part II], except where the context otherwise requires—'lease' includes an agreement for a lease, and any tenancy…" did not apply to section 15 which is in Part I. In relation to paragraph 1(c) of Schedule A the receipt must arise by virtue of the ownership of an estate or interest in land. He contends that "by virtue of " are wide words meaning "by right of" rather than a "but for" test. It was not enough that the Appellant would not have received the Retained Rent Payment but for its ownership of land in the past.
- Mr McKay contends that on the authority of John Lewis Properties [2002] 1 WLR 35 rent is an interest in land. This follows from the definition in section 205(1)(ix) of the Law of Property Act 1925 that "'land' includes…a rent or other incorporeal hereditament…" and "'rent' includes a rent service or a rentcharge reserved or issuing out of or charged upon land." The Appellant in fact received rent from CGI as shown by the invoices. There is no requirement that rent is paid to the landlord. On the question whether the reference to lease included an agreement for lease he referred to the Finance Act 1963 in which the definition applies to the whole Chapter which included the equivalent of section 15. Similarly, in the Taxes Act 1970 both Schedule A (section 67) and the definition of lease (section 90) are in the same Part of the Act. He also pointed to section 15(4) of the 1988 Act that "Part II contains further provisions relating to the charge to tax under Schedule A" as incorporating the definition by reference.
- Mr Prosser QC in reply contends that there is no ambiguity or absurdity in the meaning of lease and so it is not permissible to read the pre-consolidation legislation.
- Mr Harpum in reply, reserving the right to contend elsewhere that John Lewis Properties is wrongly decided, distinguishes it on the basis that the definitions in the Law of Property Act apply to rent reserved by a lease, not purely contractual rights for rent by a former landlord based on privity of contract. Secondly, there is no general rule that if rent can be reserved or granted away from the reversion, that right must always be an interest in land. A lease does not in all cases create an estate in land but may be a purely contractual right, as in Bruton v London & Quadrant Housing Trust [2000] 1 AC 406 in which a housing trust having only a licence from a local authority was held to have granted a tenancy. Thirdly, John Lewis is a decision on the pre-1995 Act law.
- In our view Schedule A is concerned solely with estates in land as can be seen in relation to the the definition of "lease" in section 24(6)(a) of the Taxes Act 1988:
- During neither of the accounting periods in question did the Appellant possess any property interest. The Appellant's right to the Retained Rent Payment was a contractual right against CGP under the Business Sale Agreement and against CGI under the Share Sale Agreement. Nothing therefore turns on whether the Retained Rent Payment was receivable on 31 August or 19 September 1996. In relation to the 1995 Agreement Properties to which the 1995 Act did not apply, and if we are wrong in our interpretation of that Act, in relation to all the properties, the Appellant had a contractual right against CGI to the Retained Rent Payment in circumstances where it had no property right. This is different from the situation in John Lewis Properties in which the landlord still retained the reversion but sold a right to rent for a five-year period. That case is distinguishable in relation to this where the Appellant has parted with all his interest in the land retaining the Retained Rent Payment by contract. Even if the Retained Rent Payment could be described as "rent under leases" we do not consider that it is within paragraph 1(a) of Schedule A since at the time it was receivable the Appellant had no property interest. We hold that the receipt of the Retained Rent Payment was not within Schedule A. We mention for completeness that it was no part of the Respondent's case that, following the Business Sale Agreement, CGP held its property interests (or any of them) as trustee for the Appellant to give effect to the Retained Rent Payment arrangements.
- Mr Prosser QC submitted that the right to receive the single Retained Rent Payment deriving solely from the Share Sale Agreement with no possibility of recurrence was capital. Mr McKay contended that the receipt in question was income as the second payment of rent, the first being the rent payable on 31 August 1995, and that the Retained Rent Payment was shown as income in the accounts.
- In our interim decision we decided that the Retained Rent Payment was not a single payment but the second in a series of payments and accordingly it was not capital. This aspect was argued more fully at the resumed hearing in relation to Case VI and the parties agreed that our decision should be made in relation to Case VI. In view of other grounds for our decision on Schedule A this aspect is not material to this part of our decision.
- At the resumed hearing we heard further oral evidence from the Head of Tax and The Company Secretary. Mr Prosser QC explained that he wished to recall them (although they had been the Respondent's witnesses in relation to Schedule A) in order to show that (a) the 1996 Agreement for Lease was a composite transaction with the Business Sale Agreement, (b) that there was no business purpose in the retention of the Retained Rent Payment; it was merely part of the tax avoidance scheme, and (c) there was no intention that the Appellant should have the use of the whole of the Retained Rent Payment but that all but the amount reserved for tax should be returned to the Cornwall Group, in a similar way to the covenanted payment in Campbell v IRC 45 TC 427, which therefore had the effect of depriving the Retained Rent Payment of the character of income. Having heard their evidence we make further findings of fact that the 1996 Agreement for Lease and the Business Sale Agreement were entered into at the same time as part of a single transaction. However, if the 1996 Agreement for Lease had not been entered into the 1995 Agreement for Lease would have still existed and would not have formed part of a single transaction with the Business Sale Agreement. We do not therefore find that the 1996 Agreement for Lease and the Business Sale Agreement are a pre-ordained series of transactions whose sole purpose is to avoid tax. One of the purposes was to sell the properties to another group company, CGP, so as to leave the Appellant in a position to be sold out of the group not owning any properties. With regard to (b) we find the only purpose of the Retained Rent Payment was as part of the tax avoidance scheme. Putting the Appellant in funds to turn it from an insolvent company to a solvent one was a necessary part of the scheme. For CGP to purchase the properties at their book value which equated to market value but to take on the burden of the properties without the right to the first year's rent made no commercial sense and was certain to make CGP insolvent. We should add that this does not affect our findings in paragraph 23 (fourth bullet) or 38 which is to the effect that there was a commercial reason for the payment of the full amount of rent as opposed to rent so far as the landlords' consent to underletting had been obtained which would be the case if the Agreements for Lease were subject to a condition precedent. On point (c) we do not accept that the Appellant never had the use of the money on payment of the Retained Rent Payment. The Appellant had the use of the whole of it but was obliged to repay the existing indebtedness of about £75m to the Cornwall Group plc in accordance with clause 5.4 of the Share Sale Agreement, which is a normal provision on the sale of a company.
- Mr Prosser QC handed in a copy letter from solicitors, on behalf of the Cornwall Group, stating that before the transactions in 1996 the Appellant had a profit rent in respect of the properties of about £25m. On this basis the Retained Rent Payment of £112m represents about 4.5 years purchase. The Retained Rent Payment meant that the Appellant had the benefit of the whole £112m with the burden of rent payable of about £87m being suffered by CGP. This is not, however, an agreed figure and in any event it does not agree with the figure in the accounts, which may be because of the effect of the timing mismatch. We are therefore unable to make any finding of fact on this. Mr Prosser QC also asked us to accept that by not receiving the Retained Rent Payment CGP must have paid more than the market value of the properties that was accepted by the parties to equate to the book value of £553m. Although The Head of Tax did not accept that the retention necessarily made any difference to the market value of the land, we agree that the price a purchaser would be prepared to pay must take into account the receipt of rent from CGI because it was clear that in the first year CGP would have an income deficit.
- Mr Prosser QC sought at the resumed hearing to call an expert witness on the correct accounting treatment. The terms on which we agreed that the Case VI point could be argued included that the Appellant was entitled to call witnesses of fact but not expert witnesses. Mr Prosser contended that he had disclosed the expert's report and accordingly by Regulation 12 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 he was entitled to call expert evidence. Mr Tidmarsh QC contended that we had made a general Direction under Regulation 4 which excluded expert evidence, and this took priority over Regulation 12. We declined to hear any expert evidence on the basis that that is what we had directed earlier. It was open to Mr Prosser to ask for a variation of the direction, which he did not do. We did not, and still do not, consider that the accounting treatment is relevant as the issue is one of law, and we are not relying on the treatment in the Appellant's accounts.
- We start by repeating a summary of the transaction set out in the agreements as we have found it to be after taking account of the effect of the 1995 Act:
- The issues that arise in relation to Case VI of Schedule D are:
- It was common ground that the principle for ascertaining whether the Retained Rent Payment was income or capital in the hands of the Appellant is the (frequently approved) principle stated by Dixon J in Hallstroms Pty Limited v. Federal Commissioner of Taxation (1946) 72 CLR 634, 648 that one should ask:
- Mr Prosser QC analyses the Balance as being additional consideration for the sale of assets by the Business Sale Agreement. The Appellant sold the whole of its assets. The Balance accordingly becomes part of the proceeds of sale in addition to the assumption of liabilities. On that basis the Balance is capital. It makes no difference that the Balance is measured by income receivable by CGP. It is analogous to a cum div sale of shares (instead of the equivalent of an ex div sale that the documents state the parties set out to achieve). One cannot take into account that the parties thought they were creating an income payment. In Lawson v Johnson Matthey 65 TC 39 Lord Goff said at page 79C:
- If he was wrong on the Balance being capital, the Balance was not ejusdem generis with income taxed by Schedule A, because it does not arise from ownership of any interest in land, or Schedule D, because it is not a reward for services, or a sum that is or may be recurrent. It was a sump sum contractual payment.
- Mr Tidmarsh QC analyses the Balance as a contractual amount payable by CGP equal to the 1996 rent receivable by CGP. Had the reservation of the Retained Rent Payment been valid it would have been income. It was invoiced and paid as rent. He contends that Mr Prosser's contention involved going further and rewriting the transaction as a sale of the whole assets with the Balance being part of the consideration. The passage cited by Mr Prosser QC from Johnson Matthey is consistent with the approach in Hallstroms; it is merely saying that the taxpayer's purpose is not decisive. Since the Balance represents one year's rent it was unnecessary to go through the analysis in John Lewis Properties to determine whether it is income or capital.
- On the ejusdem generis point in Jones v Leeming [1930] AC 415 Lord Dunedin says:
- We prefer Mr Tidmarsh's analysis. Mr Prosser's approach is to say that because the retention of the Remainder of the Retained Rent Payment is void, one is left with a sale by the Appellant of all its assets in consideration of the assumption by CGP of its liabilities plus a payment of £112m. In applying a practical and business point of view we are trying to recreate the effect of the transaction stated by the documents as nearly as the law allows. In doing so we cannot ignore the term of the business Sale Agreement relating to the Remainder of the Retained Rent Payment even though it is void. The Retained Rent Payment was not stated to be consideration for the sale of assets; it was the opposite, something stated to be excluded from the sale of the assets. The 1995 Act means that the Remainder of the Retained Rent Payment could not be retained but passed automatically to CGP. In that sense there was a sale of the Remainder of the Retained Rent Payment for which CGP is paying the Balance. But it seems to us that this is looking at the result from the juristic point of view which involves rewriting the transaction. From a business point of view, the Balance stands in the shoes of an income payment, the Remainder of the Retained Rent Payment being one-year's rent that the parties stated in the documents was being retained but which the law prevents from being retained. In reaching this conclusion we do not rely on the fact that the Balance is measured by reference to rent, or the intentions of the parties, but on the terms of the Business Sale Agreement. We therefore hold that the payment of the Balance is of an income nature.
- At the material time, Section 18(1) Income and Corporation Taxes Act 1988 provided:
- We should point out that in determining whether the Part and the Balance are taxable under Case VI we have to change our approach to a juristic one because the issue is now the different one of the application of the statute.
- Mr Prosser QC contends that as to both the Part and the Balance the source of the payment was a Schedule A source. The source of the Part is the 1995 Agreement for Lease and the underleases granted pursuant to it. Although the Appellant was entitled to the Part by privity of contract, CGP was entitled to the rent from CGI by privity of estate and was taxable on it under Schedule A.
- So far as the Balance was concerned the Business Sale Agreement did not create a new source; the source was rent from CGI. The Balance is consideration for the assignment by operation of law of the the Remainder of the Retained Rent Payment in a similar way to the sale of the right to rent in John Lewis Properties in which it was not suggested that, if the payment had been income, the source would have been the contract; it was the exploitation of the property interest by selling the right to rent. Here the source has ceased. As Viscount Simonds said in Carson v Cheyney's Executors [1959] AC 412, 423:
- Mr Tidmarsh QC contends that as to the Part, one needs to identify the source by reference to the taxpayer. The Part was originally a Schedule A source but this became CGP's source and so as to the Appellant the nature of the source changed on the sale of the land. The situation was different from that in Carson v Cheyney's Executors where the source was originally the author's profession and this continued to be the source after the profession ceased on his death. From the Appellant's point of view it never had a Schedule A source as regards the Part and so there is no question of a continuing Schedule A source after the source ceasing. CGP was not taxable because it did not have any right to the rent by privity of estate and so, contrary to Mr Prosser's contention, the rent was not taxable twice.
- As to the Balance, Mr Tidmarsh QC contends that it also never had a Schedule A source. It is a contractual right against CGP impliedly created by the Business Sale Agreement. CGP has a Schedule A source in respect of the Remainder of the Retained Rent Payment and if the Appellant is taxable on the same amount under another Schedule that is no different from any other payment made out of taxable income.
- As to the Part, we agree with Mr Prosser. The payment is rent from CGI for CGI's occupation of the 1995 Agreement Properties that arises after the Appellant has ceased to have any interest in the land. It is part of the rent reserved by the 1995 Agreement for Lease and the underleases granted pursuant to it. That was originally a Schedule A source. The Business Sale Agreement referred to the Appellant's right to retain the Part. It did not, however, change the nature of the source. The nature of the source cannot change because the Appellant no longer has an interest in the land. It is still rent. By way of analogy with one of the few cases where the source doctrine still applies, if a non-UK domiciled individual taxable on the remittance basis sells a Case V source, for example shares in a non-resident company, and remits income previously received from that source in the following tax year, there is, we think, no doubt that such income is not taxable because the individual did not possess the source in the year in which it is remitted. It is irrelevant that the source (the shares) has become a Case V source for the purchaser; that will always be the case where the source ceases because the asset is sold. The only Schedule under which the Balance can be taxed is Schedule A and because the source has ceased it is not possible to tax it for the reasons we have already decided. It is not necessary for us to decide whether CGP was entitled to the rent by privity of estate. We therefore conclude that the Part is not taxable under Case VI of Schedule D.
- As to the Balance, we agree with Mr Tidmarsh. It might be said that the source is connected with land because it arises in consequence of the sale of land by the Business Sale Agreement. But the Balance does not arise by virtue of the Appellant's ownership of land, as was the case in John Lewis Properties where the company exploited its interest in land both by letting it and by selling the right to the rent. If the Appellant had retained the right to the Remainder of the Retained Rental Payment the source would have been the land, as is the case in relation to the Part. But the 1995 Act prevented the Appellant from retaining any such property right. The Balance arises solely from the Business Sale Agreement. The Balance stands in the shoes of the Remainder of the Retained Rent Payment but it is not rent and it has no legal connection with land because the effect of the 1995 Act is that it is not possible to retain such an interest in land. The only property right relates to CGP's ownership of land that it, as successor in title to the Appellant, has exploited by continuing to let it to CGI pursuant to the 1996 Agreement for Lease. The Balance is a sum equal to the rent receivable from CGI but the fact that it is measured by reference to rent does not give it the necessary connection with land so as to be able to say that the source of it is derived from land. It is in the nature of income that is ejusdem generis with Schedule A income and, not being taxable under any other Schedule, is accordingly taxable under Case VI of Schedule D. If the result is that CGP is also taxable on the same amount under Schedule A without any deduction for the payment of the Balance that is not something we can take into account.
- Mr Prosser QC contended that if we decided that the Balance was taxable under Case VI there was an issue about whether the income arose at the date of the Business Sale Agreement (which is not within the periods assessed) or at the date of receipt (which is). We agreed that this issue, which he raised for the first time during the resumed hearing, would not be argued at the resumed hearing. As the question now arises, we adjourn and give liberty to the parties within 30 days of the date of release of this decision to request a further hearing for argument on this point as well as adducing further evidence, including expert evidence. If no further hearing is requested within this time our decision in principle is that the Balance is taxable under Case VI for the accounting period in which the payment was received. [Note. The parties settled the appeal by agreement under section 54 of the Taxes Management Act 1970 and so no further hearing took place.]
- In summary our decision on the remaining issues is as follows:
SPC 433
SCHEDULE A – income from land – whether agreements for lease gave rise to an immediate right to rent or whether the right was conditional on obtaining the landlord's consent to subletting – whether the Landlord and Tenant (Covenants) Act 1995 enables retention of a future rent payment on a sale of the reversion – no – whether the definition of the retained rent payment is void for uncertainty – no – whether contractual right to such rent is within Schedule A – no
CASE VI OF SCHEDULE D – profits – as to the rent payable under agreements entered into before the 1995 Act, it is not taxable under Case VI because the only possible head of charge is Schedule A which does not apply because the source has ceased – as to the rent caught by the 1995 Act which passed automatically to the purchaser, the sum equal to the rent purported to be retained on sale that the purchaser was liable to pay to give business effect to the agreement is taxable under Case VI
THE SPECIAL COMMISSIONERS
A PROPERTY COMPANY Appellant
- and -
H M INSPECTOR OF TAXES Respondent
Special Commissioners: STEPHEN OLIVER QC
DR JOHN F AVERY JONES CBE
Sitting in private in London on 2 to 5 June, 31 July and 1 August 2003, 7 and 28 November 2003, 10-12 May 2004
Kevin Prosser QC, Charles Harpum and Elizabeth Wilson, counsel, instructed by Downs for the Appellant
Launcelot Henderson QC (7 and 28 November 2003), Christopher Tidmarsh QC (10-12 May 2004) and Hugh McKay, counsel, instructed by the Solicitor of Inland Revenue for the Respondents
© CROWN COPYRIGHT 2004
Note. Although the parties settled this appeal by agreement (see the note to paragraph 91) the Presiding Special Commissioner has directed that the interim decision be published in anonymised form as a "decision in principle on one or more issues arising in the proceedings" (see Regulation 18(5)(a) Special Commissioners (Jurisdiction and Procedure) Regulations 1994)
ANONYMISED INTERIM DECISION
Schedule A
"1. Tax under this Schedule shall be charged on the annual profits or gains arising in respect of any such rents or receipts as follows, that is to say—
(a) rents under leases of land in the United Kingdom;
(b) …
(c) other receipts arising to a person from or by virtue of his ownership of an estate or interest in or right over such land or any incorporeal hereditament or incorporeal heritable subject in the United Kingdom.
(1) whether the conditions in the 1995 and 1996 Agreements for Lease mean that no rent is receivable except in relation to properties for which the landlord's consent to subletting is obtained, and the extent to which the landlord's consent to subletting has been obtained;
(2) whether the effect of the Landlord and Tenant (Covenants) Act 1995 is that the purported retention of the Retained Rent Payment under the Business Sale Agreement is void;
(3) whether the definition of the Retained Rent Payment is void for uncertainty;
(4) whether the Retained Rent Payment is not taxable under Schedule A on the ground that no source was possessed during the accounting period in question;
(5) whether the Retained Rent Payment is capital.
Findings of fact
The 1995 Agreement for Lease
"11. The parties hereto shall where necessary apply for and endeavour to obtain the consent of any Superior Landlord to the grant of the relevant lease as soon as reasonably practicable and shall comply with the reasonable requirements of any Superior Landlord in order to obtain such consent but if consent has not been obtained to the lease of any particular property of properties by 29 February 1996 then this Agreement shall cease to have effect in so far as it relates to that particular property or properties.
We shall consider the effect of these clauses under the heading Issue (1).
The 1996 Agreement for Lease
"…which rent shall be payable annually in advance the first payment of one year's rent calculated from 1 August 1995 having been paid during August 1995 and future payments to be made on 31 August 1996 and 31 August in every subsequent year."
The rent is expressed to be payable under the leases when granted; the agreement does not provide for rent. The forms of underlease for the part 1 and parts 2 to 8 properties are the same as those annexed to the 1995 Agreement for Lease provide for rent to be payable on the last working day in August. They provide for the apportioned rent from the start date (left blank in the case of the underlease of the properties vested in the Appellant, and stated to be from 4 December 1994 in the case of the underlease of properties beneficially owned by the Appellant) to 31 August 1995 to be payable on the date of the underlease. The form of lease for the part 9 properties corresponds more closely to the agreement, being for a 20 year lease from 1 August 1995 with the rent payable on 31 August in each year; the apportioned amount from 1 August 1995 is stated to have been paid in August 1995. The Agreement contains the following clauses:
"12. The parties hereto shall where necessary apply for and endeavour to obtain the consent of any Superior Landlord to the grant of the relevant lease as soon as reasonably practicable and shall comply with the reasonable requirements of any Superior Landlord in order to obtain such consent but if consent has not been obtained to the lease of any particular property of properties by 31 August 1997 then this Agreement shall cease to have effect in so far as it relates to that particular property or properties.
We shall consider the effect of these clauses under the heading Issue (1).
• 3 licenses were obtained during the period, as extended, for obtaining consents under the 1995 Agreement for Lease (one on 24 July 1996 and two on 30 July 1996), and subleases were granted pursuant to the licenses on 24 July 1996, 29 November 1996 and 11 March 1997;
• 6 further subleases were granted on dates between 14 August 1996 and 11 March 1997 for which copies of 4 licenses were produced and we assume licenses for the others were obtained (some of which could have been before 31 August 1996, the final date under the 1995 Agreement for Lease), although there is no direct evidence of this;
• 24 further licenses were obtained on dates between 21 January 1997 and 16 July 1997 (and also one on 27 October 1996, which is after the final date for obtaining consents under the 1996 Agreement for Lease) but no subleases were granted;
• in 7 cases (6 of which are with the same landlord) in the sample of properties no consent was required for intra-group sublettings.
We dissuaded Mr Prosser QC from pursuing detailed questions relating to any particular property on the basis that if the number of consents turned out to be material to our decision we would make a decision in principle leaving the Appellant at liberty to request the recall the witnesses and to call other witnesses to establish the facts in relation to the consents obtained for any particular property (including making any further findings in relation to the sample of properties) if the figures could not be agreed. The above findings should therefore be regarded as provisional. Our decision does not turn on the number of consents but if the point becomes material as a result of any appeal the same basis will apply.
The Three Leases
Further Subleases
The Business Sale Agreement
"The Excluded Assets, the H Rents, the Recoverable Tax and cash at bank shall be excluded from this sale and purchase."
The Excluded Assets are defined as:
"the rental income receivable by [the Appellant] from CGI on 31 August 1996 in respect of certain of its Beneficial Properties [meaning properties not vested in the Appellant] and Properties [meaning properties vested in the Appellant]."
(The reason for the exclusion of the H Rents is that the Agreement provides for these to be novated.) The consideration was the assumption of the Appellant's liabilities other than an intra-group liability equal to the Appellant's net liabilities as shown in the Completion Balance Sheet (which shows net liabilities of £70m). The Agreement provides for the superior landlord's consent to be obtained to the assignment of the 383 properties vested in the Appellant and listed as Consent Leaseholds (which suggests that consent had been obtained for the assignment of seven leaseholds as there were 390 such leaseholds in total). An email dated 11 September 1996 gave the state of the obtaining of the consents at the time as completed licenses 13%, draft licenses in 61%, landlord's solicitors instructed 18%, in principle agreement 4%. The Agreement was to be completed on the same day as the agreement with either transfers of the properties or declarations of trust where no consent to assignment had been obtained. We saw the statutory declaration claiming the stamp duty intra-group exemption. This refers to declarations of trust over 411 English leasehold properties, and 30 Scottish properties, transfers of numerous English freehold and Scottish heritable properties, and assignments of six leaseholds in England, and an assignation of one Scottish leasehold, which corresponds to the seven consents that had been obtained. There were also references to directions relating to the properties held by nominees.
The Share Sale Agreement
"[CGI] undertakes with the Purchaser (for itself and as trustee for [the Appellant]) that it will pay to [the Appellant] the Rental Receivable [defined as: the sum of £112,857,276 exclusive of Value Added Tax payable by [CGI] to [the Appellant] on [19 September 1996] under the [1996 Agreement for Lease]] no later than 12 noon on the Rent Payment Date [19 September 1996] by CHAPS to [the Appellant's] account [details of the account are then given]"
Clause 5.4 provides:
"[CGI] shall procure [the Appellant] to repay the Intra Group Debt [defined as: the sum of £75,442,075 owing by the Appellant to Cornwall Group plc] to [the Cornwall Group plc] immediately after [the Appellant] has received in immediately available cleared funds an amount equal to the Rental Receivable [see above] such repayment to be effected by CHAPS to [Cornwall Group plc's] account [details of which are then set out]"
A completion balance sheet annexed shows the assets to be a debtor of rents receivable on 19 September 1996 of £112,875,276 and cash of £10,000, and the liabilities to be a loan from The Cornwall Group plc of £75,442,075 and taxation payable of £37,242,901, leaving net assets of £182,300. Accordingly, effectively CGI was selling a company then containing cash of £37,443,201 subject to a tax liability of £37,242,901 (equals £200,300 net) for £20m odd. The transaction makes commercial sense on the basis that purchaser intended to remove the tax charge which was accordingly being shared as to the sale price to the Cornwall Group and the balance to the purchaser.
Issue (1): whether the conditions in the 1995 and 1996 Agreements for Lease mean that no rent is receivable except in relation to properties for which the landlord's consent to subletting is obtained, and the extent to which the landlord's consent to subletting has been obtained
• We heard evidence, which we accept, from The Head of Tax that the purpose of the 1995 Agreement for Lease was to create a mismatch in the timing of the taxation of the rent received and paid by CGI; the purpose of the 1996 Agreement for Lease was to continue the arrangement in relation to the same properties and to add the part 9 properties. CGI received rent or licence fees annually in arrears from the trading subsidiaries in the group. The Appellant had an accounting period ending on 24 August, and CGI (and the rest of the group) an accounting period ending on 31 August. Rent was therefore payable in advance by CGI to the Appellant in the Appellant's following accounting period, leading to a deferment in the payment of tax by approximately the length of an accounting period.
• The accounts of CGI show an increase in rental income from £50m in the year to 31 August 1995 to £238m in the following year. The Appellant's accounts show rental income of £251m in the year to 27 August 1994, £196m in the year to 24 August 1995, and £151m in the year to 24 August 1996, the decrease over two years being because CGI paid its rents just after the end of the Appellant's accounting period. This is consistent with the mismatch arrangements and an immediate obligation to pay rent under the 1995 and 1996 Agreements for Lease.
• On 31 August 1995 rent of £104,116,036.40 plus VAT was invoiced by the Appellant; the 1996 Agreement for Lease states that the rent for the period 1 August 1995 to 31 August 1996 has been paid.
• The Board Minute dated 16 August 1996 of the Appellant approving entering into the 1996 Agreement for Lease and the Business Sale Agreement states: "Going forward, it was noted that the Company's next income receipt was rent due at the end of August of approximately £108m, which after providing for tax thereon would, on a short term basis, eliminate the deficit." The reference to the deficit is that earlier the minutes had stated that the company had properties with a book value of £553m which would realise less on a forced sale, and liabilities of £550m, mostly due to fellow subsidiaries in addition to its indebtedness of about £75m to Cornwall Group plc (see paragraph 20). Similarly the board minute of CGP of the same date approving entering into the Business Sale Agreement notes that the retention was necessary to the Appellant's solvency and the consequence was that CGP would need funding during its first year of operation which the parent company had agreed to provide.
• The Business Sale Agreement excludes the rent due on 31 August 1996, although the amount is not stated.
• The date for payment of rent under the 1996 Agreement for Lease was extended to 19 September 1996.
• The amount of rent is quantified by the Share Sale Agreement as the full £112,857,276.
• Rent of £112,857,276 plus VAT for the period 1 September 1996 to 31 August 1997 was invoiced by the Appellant on 19 September 1996.
Contentions of the parties in relation to conditionality
"But it is not always the case that an entry in books of account crediting an amount as due to a payee will constitute payment. If, for instance, under the terms of his loan the creditor has the right to add arrears of interest to principal, an entry in his books showing that the interest had been added to the principal will not amount to payment of the interest. That was decided by the House of Lords in Paton v IRC 21 TC 626."
In his concluding paragraph on page 588 he says
"In my judgment it is quite plain on the facts of this case that all that happened was that accrued interest was added to principal with the result that it was compounded and thereafter bore interest."
"I cannot accept the tenant's submissions. They are contrary both to principle and to authority. I shall consider first the position in principle. A tenancy, or lease, is an interest in land. With exceptions immaterial for present purposes, a tenancy springs from a consensual arrangement between two parties: one person grants to another the right to possession of land for a lesser term than he, the grantor, has in the land. The extent of the right thus granted and accepted depends primarily upon the intention of the parties."
So far as authority was concerned Nicholls LJ cited Ormerod LJ in Marcroft Wagons Ltd v Smith [1951] 2 KB 496, 849:
"The old common law presumption of a tenancy from the payment and acceptance of a sum in the nature of rent dies very hard. But I think the authorities make it quite clear that in these days of statutory controls over the landlord's rights of possession, this presumption is unsound and no longer holds. The question now is a purely open question; it is simply: is it right and proper to infer from all the circumstances of the case, including the payments, that the parties had reached an agreement for a tenancy? I think it does not new go any further than that… The question is whether the proper inference from all the circumstances is that the parties had agreed upon a new tenancy."
He also cited Sopwith v Stutchbury (1983) 17 HLR 50 in which Stephenson LJ said at page 74:
"The question, of course, is, taking into account all the circumstances, what is the right conclusion to draw?… It is always a question of the intention of the parties, and in these days, where owners of property are unable to evict those who occupy their property under the statutory protection to which I have referred, it is not at all easy to infer, by the acceptance of rent from the protected tenant, the creation of a new tenancy."
"When the agreement in the present case was made, it failed to grant an estate in the land. The tenant however entered into possession and paid the yearly rent of £30 reserved by the agreement. The tenant entering under a void lease became by virtue of possession and the payment of a yearly rent, a yearly tenant, holding on the terms of the agreement so far as those terms were consistent with the yearly tenancy."
Here CGI was in receipt of rent or licence fees from the group members in occupation of the properties. This possession coupled with the payment of rent meant that a yearly tenancy arose. Mr Harpum replied that this was not an exception but an application of the rule. In the case of a void tenancy the parties clearly intended to enter into a tenancy. Finding a periodic tenancy gave effect to that intention.
Reasons for our decision in respect of conditionality
Issue (2): whether the effect of the Landlord and Tenant (Covenants) Act 1995 is that the purported retention of the Retained Rent Payment under the Business Sale Agreement is void
Transition
"For the purposes of this section a tenancy is a new tenancy if it is granted on or after the date on which this Act comes into force otherwise than in pursuance of—
(a) an agreement entered into before that date…."
The first issue we have to determine is the relationship between the 1995 and 1996 Agreements for Lease. Essentially they cover the same ground. The main differences are that the 1996 Agreement includes further properties, the part 9 properties; the rent payment date is slightly different, the last business day in August in the 1995 Agreement and 31 August in the 1996 Agreement; and date for satisfaction of the conditions is the amended date of 31 August 1996 for the former and 31 August 1996 for the latter. Mr Prosser QC and Mr Harpum for the Appellant contended that the 1996 Agreement superseded the 1995 Agreement (which had been the subject of one variation of the final date for obtaining landlords' consents to subletting) in relation to properties for which consents to subletting had not been obtained, otherwise double rent would be payable, once on the last business day in August (30 August in 1996) and secondly on 31 August.
The effect of the 1995 Act
"(1) This section applies where a landlord assigns the reversion in premises of which he is the landlord under a tenancy.
(2) If the landlord assigns the reversion in the whole of the premises of which he is the landlord—
(a) he may apply to be released from the landlord covenants of the tenancy in accordance with section 8; and
(b) if he is so released from all those covenants, he ceases to be entitled to the benefit of the tenant covenants of the tenancy as from the assignment."
"(1) Where as a result of an assignment a person becomes, by virtue of this Act bound by or entitled to the benefit of a covenant, he shall not by virtue of this Act have any liability or rights under the covenant in relation to any time falling before the assignment.
(2) Subsection (1) does not preclude any such rights being expressly assigned to the person in question."
Unlike section 141 of the Law of Property Act 1925 under which an assignment of a reversion passes the benefit of the right to sue for a breach of covenant committed prior to the assignment, section 23 of the 1995 Act does not pass the right to sue for existing breaches unless it is expressly assigned (although of course the benefit of the covenant automatically passes under section 3, unless it is expressed to be personal). The 1995 Act deals comprehensively with assignments and this is the only provision separating a right to sue from the benefit of the covenant. Mr Harpum applied to quote Hansard in support of the proposition that the Act dealt with assignments comprehensively.
"Any agreement relating to a tenancy is void to the extent that—
(a) it would apart from this section have effect to exclude, modify or otherwise frustrate the operation of any provision of this Act…".
Reasons for our decision on the 1995 Act
Issue (3): whether the definition of the Retained Rent Payment is void for uncertainty
"the rental income receivable by [the Appellant] from CGI on 31 August 1996 in respect of certain of its Beneficial Properties [meaning properties not vested in the Appellant] and Properties [meaning properties vested in the Appellant]."
He contends that the reference to "certain of its Beneficial Properties and Properties" is too vague to be effective to reserve rights of any kind. It is impossible to say how much rent or which of the properties are referred to.
Issue (4): whether the Retained Rent Payment is not taxable under Schedule A on the ground that no source was possessed during the accounting period in question
Reasons for our decision on Schedule A
"In Schedule A and in sections 25 to 31—
(a) references to a lease extend only to a lease conferring a right, as against the person whose interest is subject to the lease, to the possession of the premises;…"
This requires a property interest for paragraph 1(a) of Schedule A, and such requirement is made explicitly in paragraph 1(c) of Schedule A. On the question whether "lease" in paragraph 1(a) includes an agreement for lease, the drafting makes a distinction between definitions "in this Part" in section 24(1), "For the purposes of this Part" in subsection (2) and "In the application of this Part" in subsection (5) on the one hand, and the definition quoted above "In Schedule A" in subsection (6) on the other hand. However, we consider that "lease" includes an agreement for lease because of the cross-reference in section 15(4) to Part II which contains a number of definitions necessary to understanding section 15, including the definitions of lease and premises.
Issue (5): whether the Retained Rent Payment is capital
Case VI of Schedule D
(1) As to the 1995 Agreement Properties, to which the 1995 Act did not apply, the Appellant agreed to lease them to CGI by the 1995 Agreement for Lease, leases were granted and the Appellant sold its reversionary interest by the Business Sale Agreement, retaining the right to that part of the Retained Rent Payment ("the Part");
(2) As to the remainder of the properties, which are affected by the 1995 Act, the Appellant agreed to lease them to CGI by the 1996 Agreement for Lease and sold its reversionary interest by the Business Sale Agreement; the right as against CGI, the tenant, to the Retained Rent Payment in excess of the Part ("the Remainder of the Retained Rent Payment") automatically passed to CGP; but in order to give commercial effect to the agreements entered into by the parties CGP is liable to pay an amount equal to the Remainder of the Retained Rent Payment to the Appellant ("the Balance"). There is a further problem of determining the effect of clause 5.1 of the Share Sale Agreement (set out in paragraph 20 above) on the transaction as so rewritten because it proceeds on the assumption that the Retained Rent Payment is validly retained. Since both parties are content to analyse this clause as the payment by CGI to the Appellant with the acquiescence of CGP we need not resolve this problem. The Appellant's right to the Balance is a contractual right against CGP.
(6) Whether the Part (in the case of the 1995 Agreement Properties), and the Balance (relating to the rest of the properties) are capital or income in nature.
(7) If either or both are income, whether that income is taxable under Case VI of Schedule D.
(8) If the income is taxable under Case VI did the income arise in accounting periods assessed.
Issue (6): whether the receipt is capital or income
"What the [payment] is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process".
Lord Nolan approved this principle in CIR v. Wattie [1999] 1 WLR 873, 880: "It is well settled that in considering whether a particular item of receipt or expenditure is of a capital or revenue nature, the approach to be adopted should be that described by Dixon J in [Hallstroms]." This approach was adopted in John Lewis Properties v IRC [2003] STC 117 (see [13] to [14], [42] to [44] and [68] to 73]).
In some ways it is easier to view this transaction from a business point of view because the juristic classification that resulted is not what, viewed objectively from the agreements they entered into, the parties set out to achieve. However, the parties took a different view of the result of applying a business approach in relation to the Balance (they agree that the Part is income, although they differ as to the consequences).
"It is important to observe that the payment does not become a revenue payment simply because JM plc paid the money with the purpose of preserving its platinum trade from collapse. That was the approach of the General Commissioners, which I do not feel able to accept. The question is rather whether, on a true analysis of the transaction the payment is to be characterised as a payment of a capital nature. That characterisation does not depend upon he motive or purpose of the taxpayer."
Mr Prosser QC relied to the approach adopted by Dyson LJ in John Lewis Properties at [80] to [87] where the following factors were taken into account: (1) whether the asset disposed of is long-lasting; here he contends that, unlike the situation in John Lewis Properties there was a sale of the whole of the Appellant's assets; (2) the value of what was disposed of; here he contends the £112m is 20 per cent of the £550m value of the properties being sold or 4.5 years purchase; (3) whether there is a material diminution in the value of the assignor's interest; here he contends that because there is a disposal of the whole thee is a permanent diminution, or alternatively even if the asset is a right to one year's rent there is a substantial diminution in value; (4)whether the payment was a single lump sum; here he contends it was a one-off receipt and even if the £112m is considered separately there was no possibility of recurrence; the Balance was unconnected with the rent payable under the 1995 Agreement for Lease since the other party was different: CGI in the case of the 1995 Agreement for Lease, and CGP in the case of the Business Sale Agreement; (5) whether there has been a transfer of risk; here he contends that the whole risk is transferred to CGP.
"The limitations of the words "profits or gains" were pointed out by Blackburn J long ago in the case of Attorney-General v Black (1871) LR 6 Ex 308, 309, when he said that profits and gains in Case VI must mean profits and gains ejusdem generis with the profits and gains specified in the preceding five cases".
What Blackburn J said was:
"The words of [section 100, schedule D[1]] are very extensive . . .
Not, however, every kind of income derived by a corporation in whatever way it might come to them is included in it. They would not be liable except in respect of something of the same nature and kind as what had been previously mentioned; not, for instance, in respect of a borough rate, a poor rate, or a highway rate, because these are not within the analogy of the "property or profit" previously described . . .
The mention of "rights of markets and fairs" and "tolls" in Schedule A No III shews the intention of the legislature to include in the sweeping words of Schedule D sources of income similar to these. Harbour and port dues, therefore, originally granted to the owners of the ports, being ejusdem generis with market dues and tolls, would be included in those general words."
Attorney General v Black was decided on the basis that the tolls were taxable under Case VI of Schedule D as being ejusdem generis with Schedule A income. Here the Balance was ejusdem generis with rent taxable under Schedule A. From the business point of view it represents the second payment of rent for leasing properties, the first being made under the 1995 Agreement for Lease. In relation to the properties other than the Part 9 Properties the 1996 Agreement for Lease was from the business point of view a continuation of the 1995 Agreement with minor variations.
Reasons for our decision on income or capital
Issue (7): whether the Part and the Balance are taxable under Case VI of Schedule D
"The Schedule referred to is Schedule D as follows:
SCHEDULE D
Tax under this Schedule shall be charged in respect of –
(a) the annual profits or gains arising or accruing –
(i) to any person residing in the United Kingdom from any kind of property whatever, or wherever situate in the United Kingdom or elsewhere …
and
(b) all interest of money, annuities and other annual profits or gains not charged under Schedule A or E and not specially exempted from tax."
At the material time, Schedule D Case VI charged:
"Tax in respect of any annual profits or gains not falling within any other case of Schedule D and not charged by virtue of Schedule A or E."
"The principle which emerges is clear. Payments which are in historical fact (I adopt the language of the late Lord Asquith of Bishopstone in the same case [Stainer's Executors v Purchase [1952] AC 280]) exclusively the fruit or aftermath of professional activities do not change their taxable character when the profession is discontinued."
Here the source was and remained a Schedule A source throughout. This prevents it from being taxed under another Schedule. As Lord Atkin said in Salisbury House Estate Ltd v Fry 15 TC 266, 320:
"Believing as I do that the specific Schedules A, B, C, and E, and the Rules thereunder, contain definite codes applying exclusively to their respective defined subject matters, I find no ground for assessing the taxpayer under Schedule D for any property or gains which are the subject matter of the other specific Schedules."
Reasons for our decision on Case VI
Issue (8): Did the Case VI income arise in the accounting periods assessed?
Issue (1) that rent is payable immediately under the 1995 and 1996 Agreements for Lease which are subject to a condition subsequent in relation to obtaining the landlord's consent to subletting;
Issue (2) that the purported retention of the Retained Rent Payment is void under the Landlord and Tenant (Covenants) Act 1995 with the result that the right to such payment from CGI derives from the Business Sale Agreement and the Share Sale Agreement; and in relation to any properties to which the 1995 Act does not apply the Appellant's right against CGP and CGI is a purely contractual one;
Issue (3) that the definition of the Retained Rent Payment is not void for uncertainty;
Issue (4) that the Retained Rent Payment is not taxable under Schedule A on the ground that there was no source;
Issues (5) and (6) that the right to the Balance (the payment due from CGP on account of the purported retention of the Remainder of the Retained Rent Payment) is of an income nature;
Issue (7) that the Part (the rent from properties let pursuant to the 1995 Agreement for Lease to which the 1995 Act does not apply) is income that would be taxable under Schedule A but for the fact that there was no source in the accounting period in which it was receivable, and cannot be taxed under any other Schedule, and the appeal is accordingly allowed in principle in relation to the Part; and that the Balance is taxable under Case VI of Schedule D.
STEPHEN OLIVER QC
JOHN AVERY JONES
SPECIAL COMMISSIONERS
Release Date: 5 October 2004
SC 3116/02
Authorities referred to in skeletons and not referred to in the decision:
Lehmann v McArthur (1868) 3 Ch App 496
Walsh v Lonsdale [1882] 21 ChD 9
Re King [1963] 1 Ch 459
J Sainsbury plc v O'Connor [1991] 1 WLR 963
Rosen v Trustees of Camden Charities [2001] 2 All ER 399
City of London Corporation v Fell [1993] QB 589; [1994] AC 458
United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904
Cornish v Brook Green Laundry [1959] 1 QB 394
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98
Brown v National Provident Association [1921] 2 AC 221
Bray v Best [1989] 1 WLR 167
BHP Petroleum Great Britain Ltd v Chesterfield Properties Ltd [2002] Ch 194
Leeming v Jones 15 TC 333
Mitchell and Edon v Ross 40 TC 11
Heather v P-E Consulting 48 TC 293
Homes v Robinson [1979] STC 351
Great Peace Shipping v Tsavliris [2002] QB 679
Tucker v Grenada Motorway Services 53 TC 92
Ryall v Hoare [1923] 2 KB 447.
Martin v Lowry [1927] AC 312
A-G v Black (1871) LR 6 Ex 308
Bradbury v Arnold 37 TC 665
Hobbs v Hussey 24 TC 153
Alloway v Phillips 53 TC 370
Lverpool Diocese v Goldberg [2001] 1 WLR 2337
Gage v Gage [1966] Ch 236.
Note 1 This provided that the duties contained in Schedule D “shall extend to every description of property or profits which shall not be contained in either of the said Schedules (A), (B), or (C) and to every description of employment of profit not contained in Schedule (E)” [Back]