The legal definition of what constitutes a sham dates back to Snook v London and West Riding Investments Ltd [1967] 2 QB 786. In that case, the court described shams as being “acts done or documents executed … which are intended … to give to third parties or to the court the appearance of creating … legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”. But it is, of course, a matter of fact whether an arrangement is, or is not, a sham.
Broxfield v Sheffield City Council [2019] EWHC 1946 (Admin); [2019] PLSCS 169 concerned the validity of a document purporting to be a lease of premises in Sheffield. The council had sent the company demands for business rates totalling £62,500 for a three-month period, but the company claimed that rateable occupation, and therefore liability to rates, had passed to, and reposed in, a company called Busy Bodies Business Services Ltd (BBBS) (which was now in liquidation because it also owed money to Leeds City Council, which had not been paid).
The company provided the council with a copy of what it said was the lease to BBBS (although the correspondence subsequently produced to the court suggested that all that the parties had signed were individual copies of the final page of the document – as opposed to the document as a whole). The document reserved a rent in the sum of £1,000, plus 50% of any sub-rents and stated that the premises were to be used as offices. But another clause in the document prohibited underletting and, although the document defined “the term” as “the contractual term granted by this lease together with any extension holding-over or continuation of it”, it did not actually grant BBBS a contractual term at all.
When the council queried this, the company supplied the council with another copy of the lease, which defined “the term” as being “the contractual term of three years granted by this lease together with any extension, holding over or continuation of it”. But the page that defined “the term” bore a completely different footer number, suggesting that it originated from a different document.
The court was satisfied that this was an “overwhelming case” of a sham. Once it emerged that it was a distinct possibility that all that the parties had signed were individual copies of the final page of the document alone, it was incumbent on the company to prove that the parties had signed the whole document. But it had failed to do so. Furthermore, there was documentary evidence indicating that the company had granted licences during the period in question to other businesses, which it could not have done, had the premises been let to BBBS. And there was no evidence to suggest that BBBS had ever paid the company any rent for the premises.
BBBS began life as a shelf company with assets of £1 and no revenue or expenditure – and its last published accounts (which post-dated the period for which the council had demanded rates) indicated that BBBS had remained totally dormant throughout the relevant period, without assets, revenue and expenditure. Consequently, the court was satisfied that there had never been any genuine intention to pass rateable occupation to BBBS. As a “man of straw”, it had never had the means to pay the rates, nor was it ever intended that it should do so.
Allyson Colby is a property law consultant
