C-409/98

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OPINION OF MR TIZZANO — CASES C-409/98 AND C-108/99

Case C-409/98 Mirror Group: facts and second option, exercisable within eigh- the questions referred for a preliminary teen months thereafter, to take a lease ruling or leases of another two floors.

3. In 1993, Mirror Group Newspapers Pic (hereinafter 'Mirror Group'), a publishing concern, was interested in leasing premises 4. Clause 13(1) of the principal agreement in London to which to move its operations. provided that on or before 2 July 1993 Given its high profile, Mirror Group com- O&Y was to pay Mirror Group, as anchor manded 'anchor tenant' status and could tenant, an 'inducement' of approximately expect to be offered particularly favourable GBP 12 million (plus VAT) to accept the terms. On 20 June 1993 it entered into a lease. The arrangements for payment were series of agreements with Olympia & York as follows. Canary Wharf Ltd (in administration) (hereinafter 'O&Y'). These were contained in three separate documents and com- prised:

(b) Approximately GBP 5.5 million (exclu- the first five floors and GBP 4.4 million on sive of VAT) by way of inducement to the other floors. take up the option was to be paid immediately to Mirror Group which was to place it forthwith in another escrow account to secure its obliga- tions. That money was to be released to Mirror Group, if and when it exercised its option, in an amount proportional 6. Relying on the exemption provided for to the area leased. Mirror Group did in under Article 13B(b) of the Sixth Directive fact exercise its option in respect of in respect of 'the leasing or letting of three further floors and was thus able immovable property', Mirror Group to r e t a i n the e n t i r e sum of sought reimbursement of the VAT GBP 5.5 million save for GBP 1.4 mil- (approximately GBP 2 million) paid on lion plus VAT, which had to be repaid the inducement (GBP 12 million). The to O & Yin consequence of Mirror Commissioners of Customs and Excise Group's failure to exercise its call (hereinafter 'the Commissioners') refused option over a fourth floor. that claim by decision of 1 January 1997. Mirror Group thereupon appealed to the London VAT and Duties Tribunal (herein- after 'the Tribunal').

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OPINION OF MR TIZZANO — CASES C-409/98 AND C-108/99

8. Both Mirror Group and the Commis- VAT a supply made by a person ("the sioners appealed to the High Court against person") who does not initially have the Tribunal's decision. During the course any interest in the immovable property, of those appeal proceedings, doubts where that person: emerged concerning the interpretation of Article 13B(b) of the Sixth Directive, parti- cularly in the light of Lubbock Fine. In substance, the High Court took the view that it was not clear from that judgment what criteria were used to define the ambit of Article 13B(b) and it was thus not possible to draw safe conclusions for the (a) enters into an option agreement in resolution of the case before it. By order of relation to leases of that immova- 15 October 1998, the High Court therefore ble property in return for a sum of referred the following two questions to the money being paid to the person, on Court of Justice for a preliminary ruling: terms that the money will remain in a special account as security for its obligations under the option agreement; and/or

'1. Following the decision of the Court in Case C-63/92 {Lubbock Fine & Co v Commissioners of Customs and (b) subsequently exercises the options Excise), does Article 13B(b) of Council under the option agreement and Directive 77/388/EEC exempt from accepts the grant of leases of the VAT a supply made by a person ("the immovable property in return for person") who does not initially have the release of the money in the any interest in the immovable property, special account to the person?' where that person enters into an agree- ment 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?

12. Under the transaction described above, Cantor received from Wako the sum of 10. In 1993 Wako decided to assign the GBP 1.5 million, on which it accounted for lease to Cantor Fitzgerald International VAT. This was confirmed as the correct ('Cantor'). This was done by means of treatment by decision of the Commission- three separate instruments. By the first, ers of 30 July 1996. On 13 August 1996 executed on 12 March 1993, Wako and Cantor appealed against that ruling to the Cantor entered into an agreement for Tribunal, which decided on 6 August 1997 assignment of the lease. Under that agree- to allow the appeal, holding that the ment (to which Cantor Fitzgerald Securities transaction was exempt from VAT. was also a party, as guarantor of Cantor's obligations), in consideration of Cantor taking over the lease, Wako agreed to pay Cantor GBP 1.5 million on completion. Cantor, for its part, undertook to perform Wako's obligations under the lease and to indemnify Wako in respect of any losses or 13. On 26 September 1997, the Commis- liabilities incurred by reason of the lease. sioners appealed to the High Court, asking Cantor also undertook to execute a licence that the Tribunal's decision be set aside. to assign with Prudential. However, in the course of those appeal proceedings, too, doubts emerged regard- ing the interpretation of Article 13B(b) of the Sixth Directive, again in the light of the judgment in Lubbock Fine. By order of 2 September 1998, the High Court there- fore referred the following question to the Court of Justice for a preliminary ruling: 11. That licence to assign, the second of the three instruments, was subsequently entered into on 23 March 1993 by Pruden- tial, Wako and Cantor, with Cantor Fitz- gerald Securities as guarantor. Prudential thereby gave Wako licence to assign the underlease to Cantor and Cantor cove- 'Following the decision of the Court in nanted with Prudential to pay the rent Case C-63/92 (Lubbock Fine & Co v payable and to observe Wako's covenants Commissioners of Customs and Excise), under the lease. The following day, Wako does Article 13B(b) of the Sixth VAT and Cantor (again with Cantor Fitzgerald Directive exempt from VAT a supply made

16. The Court stated that '[w]here a given transaction, such as the letting of immova- ble property, which would be taxed on the basis of the rents paid, falls within the scope of an exemption provided for by the Legal analysis Sixth Directive, a change in the contractual relationship, such as termination of the lease for consideration, must also be regar- ded as falling within the scope of that exemption; [consequently, the reply to be General remarks given to the national court is that the term "letting of immovable property" used in Article 13B(b) of the Sixth Directive to define an exempt transaction covers the case where a tenant surrenders his lease and returns the immovable property to his immediate landlord.... The relations cre- 14. By these two references for a prelimin- ated by a lease cannot be broken up in this ary ruling, the High Court seeks, in relation way'. 4 to the facts described above, an interpreta- tion of the phrase 'the leasing or letting of immovable property' in Article 13B(b) of the Sixth Directive. It is specifically requested that such a ruling be given in the light of the Court's judgment in Lub- bock Fine, which provided some guidance as to the scope of that notion. 17. As I mentioned above, the High Court has doubts regarding the scope of Lubbock Fine and specifically as to whether it is an appropriate source of guidance for deciding the cases before it; nor do the parties to the dispute do anything to dispel those doubts because in their pleadings before the High 15. In Lubbock Fine the Court was asked Court and in the observations submitted to to determine the position of a lessee who the Court of Justice, they use that judgment had surrendered its rights under a lease by returning the property to the landlord in return for a payment. The issue to be 4 — Lubbock Fine, paragraphs 9, 10 and 12 respectively.

19. To do so, we must take as our starting point the notion which lies at the heart of both Lubbock Fine and the present cases, that is to say, the phrase 'the leasing or 21. That said, it should also be borne in letting of immovable property', as used in mind that 'the exemptions provided for in Article 13B(b) of the Sixth Directive. How- Article 13 of the Sixth Directive have their ever, this is by no means easy to define, own independent meaning in Community given that, as the Court itself has observed, law' and must therefore be given a Com- 'the wording of Article 13B(b) of the Sixth munity definition. Moreover, that defini- Directive does not shed any light on the tion must certainly be 'wider in some scope of the terms "leasing" or "letting" of respects than that enshrined in various immovable property'. 5 national laws', given the fact that Arti- cle 13B(b) expressly mentions — albeit 'in order to exclude it from the exemption' — a contract for a hotel room, 'which ... is not considered, in some national laws, to be a contract to let'. 7 20. Proceeding therefore by way of gradual approximations, the Community case-law 6 — Case C-346/95 Blasi [1998] ECR I-481, paragraph 18. To the same effect, see also, ex multis. Case C-359/97, cited above, paragraph 67; Case C-358/97, cited above, para- 5 — Case C-359/97 Commission v United Kingdom [2000] UCR graph 55; and, most recently, Case C-150/99 Stockholm I-6355, paragraph 65, and Case C-358/97 Commission v Lindopark (2001 ) ECR I-4931 paragraph 25. Ireland [2000] ECR I-6301, paragraph 53, both of which 7 — See Case C-359/97, cited above, paragraphs 63 and 66, and concerned road tolls. Case C-358/97, cited above, paragraphs 51 and 54.

25. In that respect, it seems to me that a particularly meaningful contribution is made by Advocate General Jacobs in his recent Opinion in Stockholm Lindöpark, in which he argued that in order to qualify for 23. On this point, I would concur with exemption under Article 13B(b) of the Advocate General Darmon in the view that Sixth Directive, a contract must possess 'it is common ground that a letting is a 'the essential characteristics of a lease or contract by which the owner transfers in let, which include the grant of a right to return for a rent certain rights in his occupy a defined piece or area of immova- property, such as the right of enjoyment ble property as one's own and to exclude or of the property, whatever the nuances of admit others, and an agreement between national law on this point'. 9 Although the parties taking account of the duration implicit in that definition, it may be added, of that occupation, in particular as a as the Court observed in the abovemen- criterion for determining the price; such tioned road toll cases, that the phrase 'the characteristics must, moreover, predomi- leasing or letting' 'cannot be considered to nate in the contract'. 11 cover contracts where... the parties have not agreed on any duration for the right of enjoyment of the immovable property, which is an essential element of a contract to let'. 10

that reason, when considering in the same heart of the contract. In the case of a lease, Opinion the case of contracts relating to as noted above, this consists in the transfer the use of golf courses, Advocate General by one party to another of an exclusive Jacobs pointed out the need to determine right to enjoy immovable property for an 'whether the transaction should be regar- agreed period. ded as the occupation of the immovable property or as the supply of services for which the property is an incidental, albeit essential prerequisite'. 12 Advocate General Alber appears to be guided by the same criterion in the road tolls cases, in which he argues that the tolls paid by road-users 28. It goes without saying that this purpose constitute consideration not so much for is the same for all the parties to the contract the use of the property as for the provision and thus determines its content. On the of a service. 13 other hand, it has no connection with the subjective reasons which have led each of the parties to enter into the contract, and which obviously are not evident from its terms. I have drawn attention to this point because, in my view, failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, even in the cases under consideration here, and has complicated the task of categorising the contracts at issue.

factor. As mentioned above, the Court's As noted above, the Court held in that case conclusion turns on the fact that, in draw- that the phrase 'the leasing or letting of ing up the terms of their contract, the immovable property' in Article 13B(b) of parties gave no consideration to the dura- the Sixth Directive covers the case where a tion of the right to use the immovable tenant, for consideration, surrenders his property.15 lease and returns the immovable property to his immediate landlord. This is so, the Court explained, because if a letting of immovable property falls within the scope of an exemption provided for by the Sixth Directive, a change in the contractual relationship, such as termination of the lease for consideration, must also be regar- 30. Arguably, the Court adopted the same ded as falling within the scope of that approach in Henriksen,u in which it exemption.18 pointed out that 'the phrase "the leasing or letting of immovable property", which is the subject of the exemption laid down in Article 13B(b) of the Sixth Directive, neces- sarily encompasses, in addition to the letting of the property which is the princi- pal subject of the transaction, the letting of all property which is accessory to it; [t]hus, 32. Thus the Court did not attribute sig- the letting of premises and sites for parking nificance either to the fact that the parties vehicles cannot be excluded from the had entered into a new contract in order to exemption where the letting thereof is terminate the lease or the fact that the closely linked to the letting of immovable payment on that occasion was made by the property, which is itself exempt, so that the landlord to the tenant. Instead, the crucial two lettings constitute a single economic factor for the Court appears to have been transaction'.17 that the purpose of the new contract was to pass the right to enjoy the property back to the landlord; that is to say, it served the same purpose as the original contract, even though the right in question was transfer- red in the opposite direction.

37. The key factor, in my view, is that the transaction as a whole was conceived with a view to creating a landlord-tenant rela- tionship and thus the single, common economic purpose of the two acts was to 34. By its first question, the national court pass the right to enjoy the property from asks whether the phrase 'the leasing or the owner to the tenant. This view is borne letting of immovable property' covers a out, inter alia, by the fact that the induce- transaction consisting in: (1) an agreement ment was released in full to Mirror Group for lease of a property; and/or (2) the only on expiry of the period during which it acceptance of the grant by the landlord of a had a right to determine the lease (see lease of a property in return for a sum of above, point 4), demonstrating that the money paid by the landlord by way of inducement payment constituted an ele- inducement. ment of the landlord-tenant relationship.

35. On the face of it, and according to the 38. On the other hand, in my view — as in order for reference, the transaction involves that of the Commission — the fact that the two separate contractual acts. In theory, payment was made by the landlord rather therefore, these could attract different tax than by the tenant is irrelevant. Indeed, in treatments according to how each is classi- Lubbock Fine, the same fact did not fied. In the case in point, however, none of prevent the Court from finding that the the parties argued to that effect, even transaction concerned constituted a letting though their positions subsequently within the meaning of Article 13 of the diverged as to how the issue raised in the Sixth Directive. first question should be resolved.

within the meaning of the phrase 'the 42. As before, however, I believe that the leasing or letting of immovable property' difference between the two scenarios has in Article 13B(b) of the Sixth Directive. no decisive bearing on the answer to be given to the national court. Even assuming that two separate acts are involved, the fact remains, here again, that the two contrac- tual acts are closely linked by virtue of the fact that their economic purpose is identi- (b) Question 2 cal. Once again, in other words, in order to determine whether or not this transaction is exempt from VAT, we must look to the purpose which, viewed as a whole, it is called upon to serve. 40. By its second question, the national court asks the Court whether the phrase 'the leasing or letting of immovable prop- erty', as used in Article 13 of the Sixth Directive, covers a supply by which a 43. In that light, the fact that the induce- person: (a) enters into an option agreement ment is not released to Mirror Group until for the lease of immovable property in the option has actually been exercised and, return for a sum of money, on the under- above all, the fact that the sum of money standing that the money will remain in a released is directly proportional to the area special account as security for its perfor- actually let (see above, point 4) lead me to mance of its obligations under the option conclude that the purpose of the agreement agreement; and/or (b) subsequently exer- described at (a) was simply to combine cises the options and therefore takes up the with the lease in transferring the right to lease in return for the release of the money. enjoy the property from the landlord to another person. However, if that is the overall purpose of the transaction, as I believe, it follows that in this case, too, the sum paid by the owner of the property must qualify for the tax exemption provided for 41. Allow me first to point out that this by Article 13B(b) of the Sixth Directive in question is not one that is easily grasped. respect of the leasing or letting of immo- The Commission assumes in its written vable property. observations that the question refers to two quite distinct scenarios. Scenario (a), in the Commission's understanding, concerns an agreement under which one party receives an inducement in return for entering into an option agreement relating to leases of immovable property and undertakes to place the money in a special bank account. Case C-108/99 (Cantor) Scenario (b), on the other hand, concerns an agreement under which the sum of money is paid in return for the party actually exercising the option and taking 44. Let me turn finally to the question up the leases of the property. referred by the High Court in the Cantor I-7188

case, that is to say, whether the phrase 'the identity of the parties thereto. Accordingly, leasing or letting of immovable property' the principle laid down in Lubbock Fine for the purposes of the Sixth Directive must be applied. The Court explained in covers an agreement under which a tenant that judgment that Article 13B(b) of the pays a sum of money to a third party in Sixth Directive applies to agreements which return for acceptance by that third party of modify existing leases, including (but not assignment of the lease. exclusively) those which provide for 'ter- mination of the lease for consideration'. There is no reason why a different approach should be taken in respect of situations where the underlying logic is the same, that is to say, situations involving agreements, such as those at issue here, to 45. According to the view put forward by change the identity of the parties to existing the United Kingdom Government, in parti- leases. cular, a contract of this kind falls outside the scope of the exemption. This is because it consists in an agreement between a tenant and a third party which solely concerns the third party's acceptance — in return for the payment of a sum of money — of the obligations arising under the lease. In the view of the United King- dom Government, there is no connection here with the grant of the lease. 48. Nor — contrary to the view put for- ward by the Commission in its written observations — does it militate against this conclusion that in this case the pay- ment was made by the tenant to a third 46. I cannot agree. The contract in question party who had undertaken, subject to the cannot be viewed separately from the entire landlord's consent, to take over the tenant's set of agreements by which the overall obligations under the lease. Moreover, even transaction is effected. To my mind, even the Commission changed its mind on this though the transaction is contained in three point and at the hearing contended for an separate documents, these complement one approach which has regard to the economic another in furtherance of one and the same purpose of the transaction. In particular, purpose: to transfer, with the owner's the Commission pointed out that the tenant consent, the right to enjoy property from could have achieved the same economic the tenant to a third party. purpose by means of other transactions which are clearly exempt from VAT (for example, by sub-letting the property to a third party and paying that party a suitable 'premium'). Thus, the Commission espouses the view that a series of different transactions, such as these, which share the 47. In brief, the transaction is intended to same economic purpose, should be accor- vary the original lease, in terms of the ded the same tax treatment.

(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;

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MIRROR GROUP

(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.