The Town Council has resolved to write off a debt of £67,494.44 owed by La Belle Epoque Limited. The company was tenant at 60 King Street and entered administration owing the council legal fees, rent and VAT. The administrators have now confirmed that none of this will be recovered and the council was therefore required to remove the debt from its accounts.
The company was a limited company, this means that it is a distinct legal entity and the liability of its directors for the debts incurred by the company are limited to the value of any shares they hold. Whilst it is noted that the directors of La Belle Epoque Limited now operate a similar business (Larkspur Lodge Limited) it is not possible to pursue either the directors individually nor the new business for any part of the debt.
The debt written off is:
Recharged legal fees £ 49,619.44
Rent (25/03/2019 to 16/06/2019) £ 14,895.83
VAT on rent £ 2,979.17
The VAT will be recovered with the council’s next VAT return. The council’s 2019/20 budget and precept forecast that this debt would be written off.
History of the Debt
The company was tenant in the property with an internally repairing lease originally granted in 1974 and subject to the security of tenure provisions of the Landlord and Tenant Act 1954. The issues leading to the bad debt began in 2014. In accordance with the lease the rent was due in four equal instalments on the 25th of March, June, September and December. In accordance with the lease, the company was required to reimburse the council all legal costs connected with enforcing its rights as landlord under the lease. As the chronology below sets out, the council was forced to commence numerous proceedings to enforce the payment of rents as the company continually failed to pay rents on time and in spite of assurances and extensions to deadlines. The council recovered the majority of its legal fees up to the middle of 2018.
2014
In March 2014 the council’s agent informed the company that the council would be ‘opting to tax’[1] the property with effect April 2015 and that from this date the quarterly rents would be subject to VAT. June 2014 was the five-yearly rent review date and the council commenced the process of reviewing the rent with the company.
2015
The June quarter rent was the first quarter to be paid with VAT, the payment received from the company did not include the VAT element and the company’s director explained that he had not amended the standing order. In July the rent review was concluded, increasing the annual rent to £71,500 ex-VAT. The lease specifically provided that where the revised annual rent is not agreed on or before the review date the company shall continue paying rent at the pre-review date rate and once it is agreed shall pay the shortfall (if any) between the amount paid for the period from the review date to the next payment date following agreement. In accordance with the lease, and the signed memorandum of rent review, the revised rent was therefore backdated to the rent review date of 1st June 2014.
In September the company challenged the fact that VAT was charged on invoices and the quarter rent was paid without the VAT. The council had incorrectly charged VAT on the backdated rent (for the period 01/06/2014 to 01/04/2015, i.e. covering the period prior to the option to tax) and once guidance had been received from HMRC to ascertain this the VAT invoiced was credited to the company’s account in December, leaving an outstanding balance of £14,533.08.
On 25th December a further £21,450 was due (the quarter rent), the council received payment of £10,000, leaving an outstanding balance of £26,003.08.
2016
In January a further £5,000 was paid by the company and the director stated that he could not explain why full payment was not made as it was being dealt with by his accountant. In February the director stated, “as far as I’m aware I’m not withholding rent, I’m seeking answers to the queries I have raised.”
In March the agent met with the directors who apologised for being in arrears and stated that that the reasons were due to being unaware the rent review would be backdated, that the VAT change had impacted the company’s cashflow and that the company had expended funds on surveyors and legal fees for the rent review and subsequent arrears dispute. The company gave assurances that the March rent would be paid in full and the arrears settled in three monthly instalments to bring the account to balance by the end of June.
The March quarter rent was not paid in full, a payment of £10,000 was received leaving a total balance of £32,453.08. In April the company requested an extension to pay the balance owing to theft of takings; this was granted and payments totalling £12,001.03 were received in May, reducing the balance to £20,452.05. No payment was received in June and the June quarter rent was unpaid leaving a new balance of £41,902.05.
In July the company advised the agent that it was having cashflow issues which would be temporary; they were attributed to the loss of a “substantial” court case and the theft of a “substantial” amount of money but that the company would be receiving a “substantial” cash injection which would enable it to pay the rent arrears immediately “with plenty to spare” and payment was assured for the 23rd July.
At a meeting of the Assets and Operations Committee held on 18th July it was resolved [A16/040] that should payment not be received action to recover the debt would be commenced with the courts. The company subsequently reported that it could not pay the rent, but thought it could pay the previous quarter by the end of August. A payment of £5,000 was received.
In August the council issued the first claim for the arrears through the courts. In September the company admitted the debt of £39,950.05 and requested time to pay. The Council rejected the offer of payment by instalments noting that the company had failed to honour previous promises. The September quarter rent was unpaid, increasing the debt to £52,852.05. In October a £10,000 payment was received.
In November the County Court issued judgment ordering the company to pay. No payments were received and the council instructed bailiffs to recover the debt in December; settlement was made before the bailiffs visited and a balance of £950.05 was left outstanding. The December quarter rent was not paid, increasing the balance to £22,400.05.
2017
In January payment of the £950.05 was received and the council issued a second court claim for the new arrears. Payment was received in March. The March quarter rent was not paid in full, leaving a balance of £7,921.28 which the company was given four weeks to settle.
In March the agent wrote to the company requiring it to undertake repairs to the staircase in the Gaskell Memorial Tower, a tenant obligation in accordance with the lease. At a similar time the council was notified that the company had breached the lease by removing an internal stud wall and installing decking without authorisation.
In May a third court claim was issued due to non-payment of the arrears. In June the rent was unpaid, increasing the balance to £29,371.28.
At the July Assets and Operations Committee meeting it was resolved [A17/027] to issue a notice under Section 146 of the Law of Property Act 1925 requiring the tenant to remedy the breaches. In August the tenant paid the June quarter but the council was obliged to return this payment so as not to prejudice the action to require the remedy of the breaches as acceptance of payment after a breach has occurred indicates acceptance of the breach.
On September 14th the Town Clerk and Cllr Julian Goodrich, the then Chairman of the Assets and Operations Committee meeting met with the company directors to discuss all the issues. At this meeting the directors stated they were in a position to pay the rent and explained the financial issue the company had had, acknowledging they should have been upfront about the financial problems rather than promising the rent it would be paid when it was unable to do so. At this meeting the company stated it was preparing a claim against the council for the cost of cleaning pigeon waste around the property.
Following this meeting a number of the issues highlighted in the s146 notice were resolved and a stay in proceedings was agreed until January. The council also agreed to waive £10,000 of legal fees if the rent was paid on time and undertook to commission a heritage report to guide the necessity of the repair of the staircase. The council also undertook to continue to review options for the method of undertaking major works to the front of the property.
The September quarter rent was unpaid, leaving a new balance of £50,821.28. In October the June quarter payment was received and the Town Clerk met with the directors to discuss progress on the matters agreed at the September meeting.
Despite assurances that payments would be made the company continued to fail to clear the debt. The council decided it was necessary to change the approach for debt recovery and issue a statutory demand for the debt of £38,743.39. Failure to settle a statutory demand indicates a company is unable to meet its debts and allows creditors to commence court proceedings for the winding up of the company. Following the issue of the demand a payment of £21,469.39 was received and the December quarter rent was paid within 10 days of it falling due.
2018
In January the council rejected an offer from the company to settle legal fees incurred by the council by instalments, requiring payment of the full debt. The legal fees were settled in January and a balance of £7,921.28 remained outstanding; this related to the March 2017 quarter rent which formed part of the stayed court claim.
The company failed to pay the March quarter rent and a statutory demand was issued for settlement. The company settled the statutory demand in April. A formal request for mediation was received. Mediation took place over a full day in June but was unsuccessful. The £7,921.28 was settled.
The company paid £5,000 of the June quarter rent in advance, but on the due date advised it could not make full payment but would do so the following week. The council gave the company a seven-day extension as requested; the company did not settle the quarter until 26th July. At the end of July the company owed £21,387.50 in legal fees, principally the costs incurred for mediation.
The September quarter rent was paid within two days of falling due. The December quarter rent was waived by the council as compensation for business interruption whilst essential works were undertaken to the front of the building in January 2019[2]. By the end of 2018 the company owed £26,187.50 in legal fees.
2019
The council was continuing to incur legal fees in respect of the outstanding 2017 court case. The claim against the company had been settled (by the tenant paying the debt it related to) and by this stage the case was the counter claim from the company against the council (primarily relating to the company claiming the council owed it money for cleaning the exterior of the property[3]). Legal fees were routinely being recharged to the company in accordance with the lease. At the end of February the balance owed was £31,687.50.
In February the company entered into a Company Voluntary Arrangement (CVA) with its creditors but failed to include the debt owed to the council nor inform the council of the CVA. The company’s published statement of affairs details debts of £774,522.64 excluding that which was owed to the council.
The entering into a CVA triggered the forfeiture clause of the lease and set into motion the termination of the lease.
The lease was forfeited in June 2019 and the company was issued with invoices for the rent (between 25th March and 16th June) and final legal fees dealing with the disputes. An inconsequential sum was recovered through the sale of chattels (£162.44) leaving a total balance of £67,494.44 inclusive of £2,979.17 of VAT.
[1] Lettings of property are by default VAT exempt (no VAT is charged). If the total amount of VAT to be reclaimed on expenditure relating to VAT exempt business exceeds £7,500 in one year, then the organisation can reclaim none of the VAT incurred. In a review of its finances, the council determined that it was likely to exceed the threshold due to the costs of repairing the building combined with other VAT-exempt business (e.g. markets). It was determined that it was necessary to elect to charge VAT on the property (and the Market Hall) and convert them to standard rated supplies which have no cap on VAT reclaim. The lease provided for this and set out that the rent must be paid with any VAT which may become due.
[2] The works involved the erection of scaffolding for an eight-week period. Following discussions between the agent and the company the works were to be programmed in January/February at the to minimise business disruption. In September 2014 the agent notified the company of the intention to undertake these works between January and March 2016. As the date approached, the company objected and the works were postponed. The council explored alternatives for undertaking the works but this was the only viable option. The works were reprogrammed during 2018 to take place in January/February 2019 with a rent holiday provided as compensation for the loss of business during this period; at the 11th hour the company requested the council move the works to the summer months. This request was refused as the council had provided a rent holiday and programmed the works when requested and it was not confident that they would again be delayed if pushed back.
[3] The company claimed that the council was responsible for the cleansing of bird droppings. The company invoiced the council in excess of £20,000 backdated to 2009 (the commencement date of the then lease). The council took extensive legal advice from Kings Chambers and was set to robustly defend its position that this was a tenant responsibility.
