DB v Liverpool City Council (Housing and council tax benefits : liability, commerciality and contrivance) [2014] UKUT 326 (AAC) (10 July 2014)

IN THE UPPER TRIBUNAL Case No. CH/403/2013

ADMINISTRATIVE APPEALS CHAMBER

Before Upper Tribunal Judge Rowland

Decision: The claimant’s appeal is allowed. His claims for housing benefit made on 23 March 2011 and on 12 August 2011 are to be determined on the basis that he was liable from 1 March 2011 to make payments in respect of the flat that he occupied as his dwelling and that he is not to be treated as not so liable.

REASONS FOR DECISION

1. This is an appeal, brought by the claimant with my permission, against a decision of the First-tier Tribunal dated 10 August 2012, dismissing his appeals against decisions of Liverpool City Council to the effect that he was not entitled to housing benefit on his claims made on 23 March 2011 and on 12 August 2011.

The legislation

2. Part 7 of the Social Security Contributions and Benefits Act 1992 makes provision for income-related benefits. In particular, section 130(1)(a) provides that a person is entitled to housing benefit if, among other conditions “he is liable to make payments in respect of a dwelling in Great Britain which he occupies as his home”. However, regulation 9 of the Housing Benefit (Persons who have attained the qualifying age for state pension credit) Regulations 2006 (SI 2006/214), made under section 137(2)(i), provides that -

“9.-(1) A person who is liable to make payments in respect of a dwelling shall be treated as if he were not so liable where -

(a) the tenancy or other agreement pursuant to which he occupies the dwelling is not on a commercial basis;

…

(e) subject to paragraph (3), his liability under the agreement is to a company or a trustee of a trust of which -

(i) he or his partner;

…

is, in the case of a company, a director or an employee, or, in the case of a trust, a trustee or a beneficiary.

…

(h) he previously owned … the dwelling in respect of which the liability arises …;

…

(l) in a case to which the preceding sub-paragraphs do not apply, the appropriate authority is satisfied that the liability was created to take advantage of the housing benefit scheme established under Part 7 of the Act.

(2) In determining whether a tenancy or other agreement pursuant to which a person occupies a dwelling is not on a commercial basis regard shall be had inter alia to whether the terms upon which the person occupies the dwelling include terms which are not enforceable at law.

(3) Sub-paragraphs (e) and (g) of paragraph (1) shall not apply in a case where the person satisfies the appropriate authority that the liability was not intended to be a means of taking advantage of the housing benefit scheme.

(4) …”

The procedural history

3. The claimant first claimed housing benefit in 23 March 2011, in respect of a flat that was owned by a company of which he was a director and that he claimed he rented from the company. The local authority disallowed the claim on 27 April 2011 under regulation 9(1)(e). When he appealed on 12 August 2011, after various requests for reasons and other correspondence, the claimant also said that he had just resigned his directorship. It was accepted that he had done so on 10 August 2011 and the letter of appeal was effectively treated as a new claim. (The local authority did not put it that way, but it should have done so because a change of circumstances cannot be a ground for revision or supersession of a disallowance of a claim (R(I) 56/54).) The local authority notified its decision on the second “claim” in a letter dated 13 September 2011. The claimant appears not to have received that letter at the time, but instead received a “notice” dated 16 September 2011 which is not in the documents before me and may possibly have been expressed as a notice of a refusal to revise the disallowance of the original claim.

4. The letter of 13 September 2011 is nonetheless relevant because it set out the local authority’s case as it stood at the time. It stated -

“You were a director of the company when you first claimed in March 2011 until you terminated your appointment of director on 10/08/11. You appear to have done this for the sole purpose of claiming Housing Benefit for this property.”

No reference was made to regulation 9(1)(l), but the local authority may have had it in mind in the event that no other subparagraph applied. The letter then referred to the fact that the claimant had taken advice from a friend as to the appropriate amount of the rent, which was said to be a reason for regulation 9(1)(a) applying, and to the fact that the company owned the property, which was said to be a reason for regulation 9(1)(h) applying. The letter continued -

“On 24/04/11 you stated that you were in arrears and that you had not received any correspondence regarding the arrears from your landlord. At that point you would have owed approximately £1,900.00. It is unusual for a landlord to allow a tenant to accrue such a sum without taking any action. You have since said that you have paid rent to your landlord due to taking out loans. However, it is unclear who your landlord is.

You did not look at any other properties before you rented this one and the property has not been rented to anyone else before by the current landlord/owner.”

It was not explained why it was considered unclear who the landlord was or what the relevance of the matters set out in those two paragraphs was considered to be, but the claimant was asked to provide “land registry documents showing who owns the property”. His not answering that and other questions that were asked was consistent with him not having received the letter. In any event, when he queried the progress of his original appeal, he was treated as also having appealed against the decision in respect of his second “claim”.

5. In its initial response to the appeals, the local authority continued to rely on regulation 9(1)(e) in respect of its first decision but did not mention regulation 9(1)(a) or (h) in respect of its second decision and instead relied solely upon regulation 9(1)(l).

6. Following the first hearing before the First-tier Tribunal, which resulted in an adjournment, the local authority submitted a new response in which it argued that the points relied on in the first submission in fact showed that the claimant was not liable to make payments in respect of the flat at all, because the tenancy agreement was a sham, and that therefore the appeals should be dismissed on that ground without it being necessary to consider regulation 9 at all. However, in the event that that submission was not accepted, it continued to rely on regulation 9(1)(e) in respect of its first decision but in relation to its second decision now relied principally on regulation 9(1)(a), although it relied on regulation 9(1)(l) as a fall-back position. Wisely, it seems that any reliance on regulation 9(1)(h) was abandoned at that stage of the proceedings.

7. The First-tier Tribunal rejected the local authority’s argument that the agreement was a sham but accepted its arguments that the claimant was not entitled to housing benefit while a director due to the effect of regulation 9(1)(e) and that he was anyway not entitled to housing benefit due to the effect of regulation 9(1)(a) as the agreement, although not a sham, was not on a commercial basis. It therefore did not need to consider regulation 9(1)(l), although its decision in respect of regulation 9(1)(e) implied that it would have found regulation 9(1)(l) to be satisfied had it not found regulation 9(1)(a) satisfied.

The First-tier Tribunal’s decision

8. On the question of whether the agreement was genuine, the First-tier Tribunal considered that the issue was whether the parties intended to create the legal obligation to pay rent, citing the definition of “sham” given in Snook v London West Riding Investments [1967] 1 All E.R. 518 (CA), and then simply said -

“7. Having considered the entirety of the evidence before it the Tribunal dismissed and rejected the assertion that the agreement was a ‘sham’ agreement, because in the judgement of the Tribunal the evidence did not support such a claim.”

9. In relation to regulation 9(1)(e), it was not in dispute before the First-tier Tribunal that the claimant’s liability under the tenancy agreement was to a company of which he was a director. The dispute was as to the application of regulation 9(3) and therefore as to whether the liability was intended as a means of taking advantage of the housing benefit scheme. The First-tier Tribunal said -

“9. To establish that the exception applies, the burden of proof is upon [the claimant]. The test is whether the liability was created to take advantage of the HB scheme. It is therefore the circumstances that existed when the liability was created that are relevant and not those that existed at the date of the decision under appeal. The focus of the test is on the purpose behind the creation of the liability.

10. The LA provided in its submission why it reached the conclusion that at the time of making his application for HB regulation 9(1)(e) HB Regulations applied and why the exception to the provision had not been established to its satisfaction by [the claimant].

11. The Tribunal accepted the conclusions of the LA in that regard and adopted them as its own. In the judgment of the Tribunal neither the appellant's oral evidence [nor his] grounds of appeal on this point were such as to lead the Tribunal to a conclusion different from the conclusions of the LA which the Tribunal accepted as being a reasonable interpretation of the circumstances as at the time of making the initial application for HB. The HB scheme exists to meet certain accommodation costs. The Tribunal concluded, upon the totality of the evidence, that the parties had created a liability for the dominant purpose of underpinning a HB claim rather than as a "bona fide" consideration for the provision of accommodation to the claimant and concluded that such was an abuse.”

10. In relation to regulation 9(1)(a), the First-tier Tribunal said -

“13. HB is only concerned with residential property. The legal test is whether the agreement under which the claimant occupies the property is on a commercial basis. It is not:-

(a) whether the "landlord" is a "commercial landlord".

(b) whether the "tenant" is a "commercial tenant".

14. Although the Tribunal when considering this point considered the decisions in CH/2329/2003 and CH/663/2005 [sic - I think the First-tier Tribunal may have had CH/663/2003 in mind] and R(H) 1/03 and CH 3282/2006, it followed R(H) 1/03 and

"Investigated and determined the facts material to the issue and then determined as a question of "compound fact" whether as a matter of the proper use of language the arrangement was not on a commercial basis applying the principles established by the Authority".

15. In so doing it considered "whether the terms upon which [the claimant] occupied the dwelling included terms which were not enforceable of law". It is noticeable that the copy tenancy agreement provided by the appellant at page 37 did not appear to reflect any terms and conditions of occupancy other than the parties to the agreement, the term, and the rent.

16. The appellant's oral evidence, was vague and evasive. He sought to cloud the issues by not directly addressing the points put to him. From the oral evidence however it did appear to accept that it was the downturn of the company's financial circumstances prompted the application for Benefit. In response to the query of whether he would have paid rent to the company if it had remained prosperous and financially sound he indicated that he would only have paid rent if the "project" was finished and the^,other flat accommodation had been let out. It was clear from his oral evidence that there had been no discussion between him and the company as to the terms and conditions upon which he would occupy the property and the provisions for possible termination by notice of either party prior to entering into the agreement. There appears to have been no investigation into how the amount of rent was arrived at i.e. investigation into comparable rates or into the adequacy or otherwise of the amount of rent agreed. It was claimed by [the claimant] that he consulted a friend upon how much rent he should pay. There was insufficient evidence before the Tribunal to lead it to the conclusion that the friend was appropriately qualified to give professional advice as to rent or to reflect how and on what basis the decision was made as to the adequacy of the figure finalised. In any event the rent imposed does not appear to have been fixed by the landlord or by negotiation between the landlord and [the claimant]. The Tribunal considered each and every individual fact in the context of all the others. It did not seize upon one or two facts to decide whether or not the tenancy was commercial.

17. The Tribunal considered the whole of the evidence before it regarding the appellant's eligibility for HB past his termination of directorship but also taking account of all of his correspondence and of his modest ongoing shareholding in the company. Having done so the Tribunal concluded that it preferred the evidence of the LA and adopts its findings and conclusions as its own both in its detailed submissions and in its letter to [the claimant] dated 13 September 2011. The Tribunal considered the whole of the evidence and submissions made by [the claimant] and his accountant but rejected them as failing to either address the issues involved or in the alternative, failing to establish sufficient, credible and reliable evidence or information that could lead the Tribunal to a conclusion different from the conclusions expressed by the local authority.”

11. The claimant now appeals with my permission, granted after an oral hearing. Both parties asked that, in the event that I found the First-tier Tribunal to have erred in law, I should substitute my own decision without holding a further oral hearing. I will therefore consider in respect of each of the main issues whether the First-tier Tribunal erred in law and, if it did, what my decision on that issue is. Although the First-tier Tribunal considered regulation 9(1)(a) last, I prefer to consider it first.

Regulation 9(1)(a)

12. The authorities on regulation 9(1)(a) and its predecessors to which the First-tier Tribunal referred, make it reasonably clear that the question that arises under that provision is whether the terms of “the tenancy or other agreement” are commercial as opposed to, in most cases, being of a personal nature. In CH/3282/2006, Mr Commissioner Bano cited from the judgment of Sedley J in R v Poole Borough Council ex parte Ross (1996) 25 HLR 351 at pages 359-360 where, so far as is relevant to the present case, Sedley J said -

“The correct approach is for the Board to ask themselves whether the evidence has satisfied them on the balance of probability that the principal basis on which the agreement was made was a non-commercial one. If the test is not met, the liability is excluded. As Blackburne J. pointed out in ex p. Smith:

“In regulation 7(1)(a) [of the Housing Benefit (General) Regulations 1987 (SI 1987/1971)] the concern … is to exclude from benefit … certain arrangements which may not in fact be an abuse of the benefit scheme but which, by their very nature, are capable of being an abuse of the scheme. Rather than enquire whether there is, in fact, an abuse, those who framed the regulations have simply excluded them from benefit.”

For this reason it is necessary for decision makers to move with great care for fear of excluding the payment of benefit to a person whose rental agreement is both genuine and necessary. …

It cannot be the intention of the Regulations that a tenant who becomes good friends with his landlady but continues to live an independent life under her roof ceases to be eligible for housing benefit; nor therefore that two persons who, because they are friends, enter into a legal relationship by which the one provides the other with accommodation in return for an agreed payment should be excluded, without more, from the scheme. It is to the truly personal arrangement which is merely clothed in the garments of a legal agreement or liability that regulation 7(1)(a)(ii) is directed.”

Therefore, the relationship of the parties and the motivation for entering into the agreement are only of indirect relevance to the question whether the agreement is on a commercial basis, although they may be of more direct relevance to other provisions in regulation 9.

13. The claimant’s first ground of his application to the First-tier Tribunal for permission to appeal was that the First-tier Tribunal erred in finding, or at least suspecting, that there were no terms and conditions of the agreement other than those on doc 37. Doc 37 is clearly a standard form of agreement and under the parties’ signatures said -

“THIS TENANCY AGREEMENT comprises the particulars detailed above and the terms and conditions printed overleaf …”

Thus it was obvious that the other terms and conditions had simply not been photocopied into the bundle. Had the point been put to the claimant during the hearing, he would no doubt have pointed out the First-tier Tribunal’s error. Moreover, the heading of the document showed that the agreement was intended to take effect as an assured shorthold tenancy. Therefore, while the claimant accepts that “there had been no discussion between him and the company as to the terms and conditions upon which he would occupy the property and the provisions for possible termination by notice of either party prior to entering into the agreement”, it seems perverse to imply that the agreement did not in fact include such terms and conditions. Equally, the way in which the rent was arrived at is, in my judgment, immaterial to this issue. As the First-tier Tribunal said, the question under regulation 9(1)(a) is whether the agreement was commercial; not whether the relationship between the parties taken as a whole was commercial. The agreement provided for a rent and the local authority has never suggested that it was not a commercially appropriate rent. It could hardly do so, since the rent was actually (and deliberately) equal to the relevant local housing allowance.

14. I am quite satisfied that the First-tier Tribunal erred in law in finding that the tenancy, if genuine, was not on a commercial basis and, moreover, I am also satisfied that there was no evidence upon which the First-tier Tribunal could properly have found that the agreement, if genuine, was other than on a commercial basis. There is also no evidence upon which I could make such a finding.

15. However, that is of little assistance to the claimant if the First-tier Tribunal was right to find that the agreement was intended as a means to take advantage of the housing benefit scheme, so that first regulation 9(1)(e) and then regulation 9(1)(l) applied, or if it was wrong to reject the local authority’s argument that the agreement was a sham. Those were the real issues in this case, as is reflected in the lack of reliance on regulation 9(1)(a) in the local authority’s response to this appeal. They are closely linked, both because they are concerned with the intentions of the parties and because of the evidence in this case.

The First-tier Tribunal’s style of reasoning

16. The First-tier Tribunal’s reasoning on these issues was at best unhelpful. It recorded no independent findings of fact or reasons in paragraphs 7 and 11 of the statement of reasons. One is left to discern them from the parties’ submissions. Moreover, notwithstanding what it said in paragraphs 16 and 17 about the claimant’s evidence, there was actually little dispute about a great many matters, particularly where his evidence was supported by contemporaneous independently-created documents. It seems to me that the First-tier Tribunal must be taken to have accepted the claimant’s evidence in so far as it was not in dispute but to have rejected it where there was a dispute and also to have rejected the claimant’s arguments where there was a dispute, except on the issue whether the agreement was a sham. However, it did not identify what was in dispute, so again one must look at the submissions made by the parties. If, having looked at the evidence and submissions it is not obvious what the First-tier Tribunal accepted and rejected, then the decision is erroneous in point of law for breach of the statutory duty to give reasons.

Undisputed evidence

17. There was undisputed evidence before the First-tier Tribunal that the claimant was a director of two companies when he claimed housing benefit. One of them, of which the claimant and his eldest daughter were the directors when he made his first claim for housing benefit, acquired in 2003 the remaining 30 years of a 99-year lease of a derelict building consisting of commercial premises on the ground floor, two flats on the first floor and a third on the second floor. The company intended to refurbish the building, letting the flats in order to generate income to enable it to restore a bakery and associated facilities on the ground floor. At the time, the claimant was married. He and his wife were divorced in 2007 but he remained living in the matrimonial home until it was sold in 2008, when he went to live with his eldest daughter and her partner. Also in 2007, and for inheritance tax reasons, 10,000 non-voting shares in the company were issued, in two tranches, to the claimant’s five children. The claimant’s 1,000 voting shares ensured that he retained control of the company but had only a ¹/₁₁^th financial stake in it. Evidence that was not before the First-tier Tribunal is to the effect that a café was opened on the ground floor but it was closed in 2008 because it was making a loss. In any event, there was evidence before the First-tier Tribunal that the company paid no remuneration to the claimant from 2008 and had no assets other than the lease it had acquired in 2003. It had been unable to borrow money for the planned refurbishment of the building.

18. When the matrimonial home was sold, the claimant received £160,800 from the proceeds of sale, which enabled work to start on the flats. (The claimant has explained in the Upper Tribunal proceedings that nearly half of that sum went into his other company, which also had property as its only asset, in order to develop the property for sale, about £47,000 was spent on the redevelopment of the building relevant to this case and the balance had been spent by the end of 2010 on living expenses and school fees.) The intention by then was that the rear first-floor flat would be let to the claimant when it had been rebuilt. Plans were drawn up and planning permission and the necessary approvals and consents were obtained at the beginning of 2010. Work was carried out throughout 2010, with the help of two personal loans taken out by the claimant. By November 2010, work on the front first-floor flat was substantially, but not entirely, complete and the claimant was living there. Money had been tight and therefore, as that flat had been the one most nearly complete, it had been decided to give it priority. The second personal loan, taken out on 29 November 2010 was specifically for the purpose of trying “to complete 1 unit properly” (doc 199). The rear first-floor flat and the second-floor flat were still completely unfinished.

19. However, the claimant suffered a heart attack on 3 December 2010 while carrying out glazing work in the building. He was then aged 66 and in receipt of a retirement pension. In February 2011, he received advice that he might be entitled to income-related benefits. At the beginning of March 2011, he underwent further surgery. Shortly afterwards, he claimed state pension credit, housing benefit and council tax benefit. State pension credit was awarded by the Secretary of State for Wok and Pensions from 6 December 2010, presumably because three months was the maximum period for which an award could be backdated although it was also, of course, just after the claimant had had his heart attack and ceased working. I do not know whether council tax benefit was awarded by the local authority. However, as already explained, housing benefit, which had been claimed in respect of the front first-floor flat was refused.

20. I do not understand the local authority ever to have challenged any of that background evidence.

Disputed evidence

21. What it did challenge was the claimant’s statement in his claim form that he had moved into his flat on 1 November 2010, in support of which he had provided the tenancy agreement mentioned above and a rent book purporting to show rent paid in respect of the period from 1 November 2010 to 12 March 2011. However, the tenancy agreement, although purportedly signed on 1 November 2010, stated that the tenancy would start from 1 December 2010. Moreover, the local authority had received information from the Pensions Service to the effect that the claimant had moved to the building on 19 February 2010 which, the local authority pointed out, was consistent with the notice of the initial payment of retirement pension to him having been sent to that address on 22 February 2010. In the light of that information, the local authority’s initial submission to the First-tier Tribunal was that -

“… the decision to start charging rent was only arrived at when [the claimant] and his companies’ financial situation suffered a downturn and his friend advised him that he ‘might been entitled’ to HB. This would seem to have coincided with [the claimant’s] health problems in December 2010.

Whilst presumably living at [the address of the building] rent-free, [the claimant’s] decision to effectively start charging himself rent is in the LA’s opinion a demonstration that there was a clear intention to take advantage of the HB scheme. This is also evident in [the claimant’s] decision to terminate his directorship of [the relevant company] as the sole purpose in doing so would appear to be to avail himself to the HB scheme.

… The LA acknowledges that the flats above [the address of the building] were to be refurbished with the intention of letting them but, on the basis that [the claimant’s] tenancy was created to take advantage of the HB scheme, the LA considers it implausible that [the claimant] would be evicted, given the close relationship between the parties.”

22. When, upon receiving his claim form in March 2011, the local authority had asked the claimant to provide a copy of his tenancy agreement and proof of payments of rent, the claimant had not only provided the tenancy agreement and the rent book but had also provided bank statements which, taken together and allowing that money had been drawn from cash machines rather than paid directly from one account to the other, showed payments from an account of the claimant’s to the company of the sum of £1,200 on 30 November 2010 and the sum of £900 on 8 December 2010, with a payment from the company to him of £210 on 25 February 2011. The company’s account also showed payments, each recorded as a “loan”, from one of the claimant’s sons of £500 on 1 March 2011 and 30 March 2010. The claimant said that those were loans from the claimant’s son to him to enable him to pay the rent. The claimant also said that the reason for his move was that his daughter’s second child had been sleeping in his or her parents’ bedroom and was then eight months old and needed to be moved into the bedroom he was using, especially as his daughter was pregnant again.

23. In its further response dated 17 May 2012, the local authority submitted that the evidence suggested that the payments from the claimant’s son were loans to the company rather than to the claimant. As I have already said, it also relied on the points made in the first response to the appeals as showing that the tenancy agreement was a sham. This new approach seems to have been prompted by a suggestion by the First-tier Tribunal at the adjourned hearing that regulation 8 of the 2006 Regulations might have been relevant. Regulation 8 is concerned with circumstances in which a person who is not actually liable to make payments is to be treated as though he or she were liable to do so. It has no obvious relevance to this case but the judge may simply have had in mind the question whether there really was any liability at all in this case and that is certainly the point that was picked up by the local authority.

24. The claimant, through his accountant, replied to that further response by saying that the mere naming of a payment as a “loan” did not mean that it was anything other than a loan to the claimant and that “[t]his was to facilitate the payment of rent to the landlord company without which funds the company could not run the building.” It was also argued that the agreement was not a sham and that - I paraphrase - that the company had to let the flats to recoup its expenditure, that allowing the claimant to reside in the property without charging rent would have conferred on him a taxable benefit in kind, which would have been inequitable given his finances, that if he did not live in the flat the local authority would have to pay housing benefit in respect of other accommodation and that the liability was not intended to be a means of taking advantage of the housing benefit scheme because the claim was “made out of need and not for spurious profit”.

25. These points were reiterated at the hearing before the First-tier Tribunal, which was not before the same judge as had previously adjourned the case. During the course of the hearing, the claimant gave evidence to the effect that, although he had been living with his daughter, he had also stayed in the company’s building occasionally while work was going on there in 2010. That was corroborated by his accountant, who said that the building was a shambles, that the claimant had had a camp bed there and that it “was quite squalid”.

The inconsistency in the First-tier Tribunal’s decision and the inadequacy of its reasons

26. Had the First-tier Tribunal merely accepted the local authority’s revised argument, it might be arguable that its simple adoption of the local authority’s arguments constituted adequate reasons for its decision on the basis that it was obvious enough what its findings were and why it had not accepted the claimant’s arguments. However, its rejection of the argument that the agreement was a sham makes it very unclear why it made the decision it did.

27. The difficulty is in the dates. If the agreement was entirely genuine and was made before the claimant had his heart attack but the claimant was advised about the possibility of claiming housing benefit only after he had had the heart attack, on what ground can it be said that the liability was “intended to be a means of taking advantage of the housing benefit scheme” or was “created to take advantage of the housing benefit scheme”? The First-tier Tribunal might, of course, have found that the liability was created after the claimant had found out about the housing benefit scheme, but the local authority had never advanced any case for so finding and the First-tier Tribunal did not record any findings of its own that might have led to that conclusion.

28. Accordingly, I am satisfied that the First-tier Tribunal has not given adequate reasons for its decision that the liability was intended to be a means of taking advantage of the housing benefit scheme and that its decision is therefore erroneous in point of law. It also failed to give adequate reasons for finding that the tenancy agreement was not a sham. Indeed, that finding is not obviously consistent with its finding in paragraph 11 that there was no “bona fide consideration for the provision of accommodation”. That inadequacy would have been immaterial if its reasons for dismissing the appeal had been adequate, but it is impossible to uphold the finding that the agreement was not a sham once the rest of its decision falls. Accordingly the whole of the First-tier Tribunal’s decision must be set aside and I must decide what to put in its place.

Was the tenancy agreement genuine?

29. One of the difficulties with this case, and one that has been magnified by the First-tier Tribunal’s style of reasoning, is that the local authority never completely spelled out its position. It identified matters that troubled it but it did not fully explain what it considered the implications of those matters to be. Its response to this appeal has clarified its position.

30. It certainly had doubts as to whether any rent had in fact been paid and, if no rent was paid, that might imply that the tenancy agreement was a sham because it was never intended to create any real liability to pay rent. It also did not accept that the claimant had moved to the property on 1 November 2010, as he had stated in his claim form, but it seems to have regarded its view that the claimant had already been living in the property as a reason for believing that the liability to pay rent from that date was created to take advantage of the housing benefit scheme. As I have said, the difficulty with that is that the claimant says that he did not consider claiming housing benefit until February 2011. There is a good reason for accepting the evidence of the claimant on that point because no claim was made until March and one might have expected an earlier claim had he intended taking advantage of the housing benefit scheme before he had his heart attack. But the inference to be drawn from these various matters may then simply be that the tenancy agreement was drawn up in February or March 2011 and backdated. That is what the local authority now suggests in its response to this appeal.

31. In my judgment, that is, on the balance of probabilities, what happened.

32. It is important to remember that there was no decent living accommodation in the relevant building until the front first-floor flat was rebuilt even though it is clear that the claimant had started staying in the building by February 2010, no doubt as a consequence of his eldest daughter’s second child being born. I dare say that, as the building work progressed, he did so more often. But even before that work was done, the building could be used as a postal address. There were disused commercial premises on the ground floor. The address on the letter from the Pensions Service of 22 February 2010 was that of the building as a whole, rather than of a specific flat in it. It is not surprising that the claimant should have had that letter sent there because his daughter’s address was not his permanent address and he may anyway have wished to keep his pensions correspondence private. Nor is there anything surprising in the claimant staying in the building, using a camp bed, from time to time. That background is neutral.

33. It may well be that the claimant substantially left his daughter’s home at the beginning of November 2010 and that it was also at that time that it was decided that the company would concentrate on getting the first-floor front flat finished so that he could rent that one instead of the rear flat. However, given that he effectively controlled the company, there does not seem to me to have been any reason to create a tenancy agreement until the flat was finished and was fit to be let commercially. That stage had not quite been reached when the claimant had his heart attack. It is difficult to see that there could have been a taxable advantage in him occupying the flat until that stage was reached. He was already putting money into the company without it being identified as rent and, in the absence of a claim for housing benefit that was not then contemplated, identifying the money as rent would have made no difference to either the company or him.

34. Moreover, if no claim for housing benefit had been in contemplation, I would not have expected the amount of the rent to have been fixed at exactly the rate of the local housing allowance, rather than being rounded to £100 pw.

35. Backdating the agreement may explain why the making of the agreement does not appear in the detailed chronology at doc 194. It may also explain how the expressed date of the tenancy agreement coming into force does not tally with the rent book, since that sort of mistake is less likely to be made if the documents are being created at the time, and why the entries in the rent book do not tally with the payments made. The rent book showed receipts of £490 in the week of 29 November 2010, £980 in the week of 3 January 2011 and £490 in the week of 7 February 2011. The payments subsequently said to be payments of rent in respect of the period before the claim for benefit was made were £1,200 on 30 November 2010, £900 on 8 December 2010 and £500 on 1 March 2011. Even allowing for the informality there may be in this sort of company, particularly as the claimant was clearly investing all his spare money in it, and the possibility of two payments being made at the same time, it seems to me that the truth is that that these were payments made to the company without any thought of them being rent. Only subsequently was it decided to categorise them as rent. The first payment was clearly derived from the personal loan, taken out to finance the building work. It is also noteworthy that the claimant’s son’s payments were both made when the balance in the company’s bank account had fallen to almost nothing and therefore it seems likely that the payments were made so that the account did not become overdrawn. Moreover, had the son intended his payments to be loans in respect of rent, one might have expected them to have been for the exact amount.

36. For all these reasons, I am satisfied that the tenancy agreement was not in fact made until after the claimant had been advised that he could claim housing benefit. In the absence of any better date, I consider that it should be taken as having been effective from 1 March 2011.

37. Insofar as the tenancy agreement was backdated and created a retrospective liability, I am satisfied that it was either a sham (in the sense of not being intended to create a real liability for rent) or the liability was intended to be a means of taking advantage of the housing benefit scheme (in the form of a retrospective payment of housing benefit in respect of a period when there had not previously been any liability for rent) so that regulation 9(1)(e) applied. Either way, the claimant is not entitled to housing benefit in respect of the period of retrospection, even if he could otherwise show grounds for backdating the claim.

38. However, insofar as the agreement was prospective, I am satisfied that it was not a sham and to that extent I agree with the First-tier Tribunal. There were sound reasons for creating a genuine prospective liability. It would not be to the disadvantage of the claimant if he could claim housing benefit and it would be to the advantage of the company because it would give it an income which could be used to carry out further work on the building. I am not persuaded that the fact that no rent was paid while the claim for housing benefit was pending is significant. It is perfectly reasonable to await the outcome of the claim and subsequent appellate proceedings and, anyway, one cannot expect a landlord and tenant who are closely related to behave in the same way as a landlord and tenant who have no connection other than a contract. It would be surprising if the landlord in this case were to evict the claimant while the claim was being considered but, if the claim were ultimately to fail, I would not be surprised if the company and the claimant decided that the claimant should move and claim housing benefit elsewhere so that the company could let the flat to someone else and use the money to continue work on the building. That would be perfectly legitimate. Like the claimant, I find it impossible to understand why it should be of any relevance that the claimant, who was in control of the company, should have fixed the amount of rent on the basis of advice from a knowledgeable friend as to what a reasonable rent might be.

39. I ought to mention here that the local authority argues in the response to this appeal that, as a director and part-owner of the company, the claimant while a director had the right to occupy the property and any payment to do so could not be rent for housing benefit purposes but only compensation to the other directors and owners for his exclusive use of the property. That submission, which is a challenge to the legality of the agreement, is, like the local authority’s earlier reliance on regulation 9(1)(h), plainly misconceived. A company has a separate legal personality from that of its directors and shareholders. Directors and shareholders do not own what the company owns and they do not have a right to occupy company property as individuals, although directors may perhaps do so as officers of the company. Were it otherwise, regulation 9(1)(e) would be unnecessary. In any event, I do not see why payments of compensation of the type contemplated by the local authority would not be “rent” within the wide scope of regulation 12, as “payments in respect of, or in consequence of, use and occupation of the dwelling”.

Regulation 9(1)(e) and (3)

40. It is not in dispute that regulation 9(1)(e) applies during the period of the first claim unless the claimant is assisted by regulation 9(3). So, the question is whether the liability under the agreement “was intended as a means of taking advantage of the housing benefit scheme”. It cannot be an adequate reason for deciding that a liability was intended as a means of taking advantage of the housing benefit scheme that the transaction between the director and the company was not made at arm’s length. Regulation 9(3) plainly contemplates the possibility that, despite the tenant being a director of the landlord company, there will be cases where liability is not intended as a means of taking advantage of the housing benefit scheme. Nor can it be sufficient that the tenant is a director of the landlord company, because if that were so, the exception contemplated by regulation 9(3) would never apply.

41. The agreement was plainly created with the prospect of a claim for housing benefit in mind. However, that also cannot be a sufficient reason for deciding that the claimant can rely on regulation 9(3). Although Ross was decided under a forerunner of regulation 9(1)(a), it seems to me that Sedley J’s observation that “it is necessary for decision makers to move with great care for fear of excluding the payment of benefit to a person whose rental agreement is both genuine and necessary” must apply to all the elements of regulation 9. More specifically, as Mr Commissioner Jacobs pointed out in CH/39/2007, in this context a person does not “take advantage of the housing benefits scheme” merely by using it or making the most of the opportunities it presents.

42. In most cases, it would be highly relevant that the claimant had been living rent-free in the premises before the agreement was created. However, to the extent that that was true in the present case, that seems to me to be irrelevant because the premises were not fit to be let or, at any rate, work on them had not been completed. In fact, I do not consider that the claimant was living in the premises the whole time before November 2010, I accept that he lived primarily with his daughter, but he was then effectively homeless until the building work was completed. No doubt, as the work progressed, the flat gradually became more habitable but I am satisfied that the flat became fit to let only shortly before the tenancy agreement was created and, even then, the work may not have been entirely completed.

43. I accept the claimant’s case that the claims for benefits were precipitated by his heart attack, which rendered him unable to work. The company’s financial difficulties were part of the background in that they prevented it from renovating the other flats at the time and so the claimant ended up renting a different flat. But it had long been the intention that the company would let a flat to the claimant and there could have been no complaint if that had been done and the claimant had only later become ill and claimed housing benefit. The coincidence of the flat becoming fit to let at the time that the claimant became ill explains why the claim for housing benefit was made immediately after the tenancy agreement.

44. For all these reasons, I am satisfied that the liability was not intended as a means of taking advantage of the housing benefit scheme and so the claimant was not to be treated as not liable to make payments while he was a director of the landlord company.

Regulation 9(1)(l)

45. Although regulation 9(1)(l) is not in identical terms to regulation 9(3), it is plain that, having found that the liability to pay rent “was not intended as a means of taking advantage of the housing benefit scheme”, I must also find in the circumstances of this case that it was not “created to take advantage of the housing benefit scheme”. The local authority is no doubt right that the claimant resigned his directorship in order to be able to claim housing benefit after the local authority’s initial refusal, but that resignation did not create the liability to pay rent. In any event, for reasons that I have explained, the resignation was unnecessary.

Conclusion

46. For these reasons, I am satisfied that the claimant was liable to make payments in respect of his flat from 1 March 2011 and is not to be treated as not so liable. It will be for the local authority to determine all other issues arising on the claims.

Mark Rowland

10 July 2014

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	Upper Tribunal (Administrative Appeals Chamber)
You are here: BAILII >> Databases >> Upper Tribunal (Administrative Appeals Chamber) >> DB v Liverpool City Council (Housing and council tax benefits : liability, commerciality and contrivance) [2014] UKUT 326 (AAC) (10 July 2014) URL: http://www.bailii.org/uk/cases/UKUT/AAC/2014/326.html Cite as: [2014] UKUT 326 (AAC)

Upper Tribunal (Administrative Appeals Chamber)