Flashback on ECJ Cases C-409/98 (Mirror Group) – Tenant inducements are not exempt property letting

On 9 October 2001, the ECJ issued its judgment in Case C-409/98, Mirror Group.

Summary

Facts: Mirror Group agreed to lease several floors of a London building and received a substantial inducement from the landlord. Part of the payment related to leases already agreed and part to options over additional floors.
Issue: The dispute concerned whether the tenant made a service for consideration by accepting the lease and, if so, whether that service qualified for the exemption for leasing or letting immovable property under Article 13B(b) of the Sixth VAT Directive.
Question to the Court: The High Court asked whether a payment by a landlord to a person agreeing to become a tenant, including payments connected with options over additional premises, represented an exempt property-letting transaction.
Decision: A prospective tenant that had no prior interest in the property did not make a service falling within the property-letting exemption merely by agreeing to take the lease or exercising lease options in return for an inducement.
Argumentation: Property letting requires the landlord to grant the tenant a right to occupy property and exclude others for an agreed period in return for rent. A tenant’s undertaking to become a tenant is not the same exempt service.

Facts

Mirror Group plc was seeking premises in London for its newspaper-publishing operations. As a potential anchor tenant, Mirror Group could negotiate favourable terms.
On 20 June 1993, Mirror Group entered into agreements with Olympia & York Canary Wharf Ltd concerning floors in One Canada Square. Those arrangements consisted of an agreement for lease, leases over five floors and options to take leases over additional floors.
The landlord agreed to pay a net inducement of GBP 12,002,590 plus VAT. Approximately GBP 6.5 million related to the initial floors, while approximately GBP 5.5 million was placed in escrow as security for the option arrangements.
Mirror Group claimed repayment of approximately GBP 2.1 million in VAT paid on the inducement. The Commissioners refused the claim.
The VAT and Duties Tribunal considered that Mirror Group had made a service for consideration by entering into the arrangements. It treated part of that service as exempt leasing or letting of immovable property. Both parties appealed.

Issue

Article 13B(b) of Sixth Council Directive 77/388/EEC required Member States to exempt the leasing or letting of immovable property.

The dispute required the Court to distinguish among:

The landlord’s exempt grant of a right to occupy property.
The tenant’s agreement to accept a lease.
A potentially separate service supplied by an anchor tenant, such as an undertaking to relocate and attract other tenants.

The Court also had to determine whether its earlier judgment concerning compensation paid for surrender of an existing lease extended to inducement payments made to a new tenant.

Questions

The referring court submitted the following questions:

Following the decision of the Court in Case C-63/92 (Lubbock Fine & Co. v Commissioners of Customs and Excise), does Article 13B (b) of Council Directive 77/388/EEC exempt from VAT a supply made by a person (“the person”) who does not initially have any interest in the immovable property, where that person enters into an agreement for lease of that immovable property with a landlord and/or accepts the grant of a lease by the landlord in return for a sum of money paid by the landlord?
Following the decision of the Court in Case C-63/92 (Lubbock Fine & Co. v Commissioners of Customs and Excise), does Article 13B (b) of Council Directive 77/388/EEC exempt from VAT a supply made by a person (“the person”) who does not initially have any interest in the immovable property, where that person:

(a) enters into an option agreement in relation to leases of that immovable property in return for a sum of money being paid to the person, on terms that the money will remain in a special account as security for its obligations under the option agreement; and/or

(b) subsequently exercises the options under the option agreement and accepts the grant of leases of the immovable property in return for the release of the money in the special account to the person?

Advocate General’s Opinion

Advocate General Antonio Tizzano delivered a joined Opinion on 23 January 2001 in Mirror Group and Case C-108/99, Cantor Fitzgerald International.

The Advocate General examined the concept of leasing or letting by reference to the right to occupy immovable property and exclude others. The proposed treatment distinguished the landlord’s property supply from services that a tenant might independently provide in return for an inducement.

AG Opinion:

(1) exempts from VAT a transaction consisting in the grant of a lease of immovable property to a person who does not initially have any interest in the property, where that person enters into an agreement with the landlord for lease of that immovable property and/or accepts the grant of a lease of that property in return for a sum of money paid by that landlord; and

(2) exempts from VAT a transaction consisting in the grant of a lease of immovable property to a person who does not initially have any interest in the property, where that person:

(a) enters into an option agreement in relation to the lease of that immovable property in return for a sum of money paid to the person, on terms that the money will remain in a special account as security for that person’s obligations under the option agreement; and/or

(b) subsequently exercises the options under an option agreement relating to the lease of immovable property in return for the release of the money held in the special account in that person’s name.

In Case C-108/99 Cantor:

In accordance with the judgment of the Court in Case C-63/92 Lubbock Fine [1993] ECR I-6665, Article 13B(b) of Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (the Sixth Directive), exempts from VAT the assignment of a lease of an immovable property by the tenant to a third person who does not have any interest in that property, in return for the payment of a sum of money to that person by the tenant.

Decision

The Court ruled as follows:

A person who does not initially have any interest in the immovable property and who enters into an agreement for lease of that immovable property with a landlord and/or accepts the grant of a lease of the property in return for a sum of money paid by the landlord does not make a supply of services falling within Article 13B (b) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment.
A person who does not initially have any interest in the immovable property and who enters into an option agreement such as the one before the national court in relation to leases of that immovable property in return for a sum of money paid by the landlord, on terms that the money will remain in a special account as security for its obligations under the option agreement, and who subsequently exercises the options under the option agreement and accepts the grant of leases of the immovable property in return for the release of the money in its special account, at no time makes a supply of services falling within Article 13B (b) of the Sixth Directive 77/388.

The ruling does not establish that every reverse premium is necessarily consideration for a taxable service. It establishes that any service made by the incoming tenant is not itself exempt as leasing or letting merely because it relates to a lease.

Argumentation

Meaning of leasing or letting
- The Court defined letting as the landlord granting the tenant, for an agreed period and in return for rent, the right to occupy property and exclude others.
- The landlord makes that property supply. The tenant normally receives it and pays the consideration.
- A tenant that merely agrees to take a lease does not itself supply the exempt right to occupy the property.
Existence of a separate tenant service
- The Court acknowledged that an incoming anchor tenant might provide a separate service. For example, an undertaking to relocate a significant business to a new building could serve an advertising or commercial-attraction function for the landlord.
It was for the national court to determine whether Mirror Group had provided such a specific service. If it had, the service would not fall within the property-letting exemption.

Distinction from Lubbock Fine

In C-63/92 Lubbock Fine, an existing tenant surrendered an established leasehold interest to the landlord.

Mirror Group had no pre-existing interest to transfer back. Accepting a new lease was therefore legally different from surrendering an existing exempt lease.

Source

Similar ECJ Cases

C-63/92 Lubbock Fine: Held that consideration for surrender of an existing lease followed the exempt treatment of the underlying letting.
C-108/99 Cantor Fitzgerald International: Considered a payment connected with a tenant procuring another person to assume lease obligations.
C-326/99 Goed Wonen: Clarified the autonomous EU meaning and essential characteristics of leasing or letting immovable property.