Out-Law News 2 min. read

Council victorious in appeal over sex shop licensing fees

Westminster City Council can recover "reasonable" licensing fees and enforcement costs charged to various sex shops in Soho, London, even though these fees were later found to be in breach of an EU directive, the UK's highest court has ruled.

The Supreme Court's judgment stems from an earlier decision by the Court of Justice of the European Union (CJEU), in which it ruled that enforcement costs charged at the time of the licensing application counted as "illegitimate charges" under the EU's Services Directive. The council has since amended its fee structure so that the charges at issue are only payable once a licencing application has been successful.

Now, the Supreme Court has ruled that the correct approach to settling the repayment question is one that "restore[s] the parties to the position they should have been in".

"The scheme which the council operated was only defective in so far as it required payment up front at the time of the application," said Lord Mance, giving the unanimous judgment of the court. "Its invalidity was limited."

"Contrary to the [shops'] case, European law permits a fee to cover the costs of running and enforcing the licensing scheme becoming due upon the grant of a licence. There is no imperative under European law … to treat the whole scheme as invalid, rather than to invalidate it to the extent of the inconsistency," he said.

A number of operators of licensed sex shops in Soho, led by Simply Pleasure owner Timothy Hemming, had challenged Westminster City Council's previous practice of charging a £26,000 "management" fee over and above a £2,600 administration fee as part of the licensing application process. The fee went towards the costs of management and enforcement of the regime, and was refundable if the application was refused.

Under the EU's Services Directive, any charges payable by applicants for a licence or other authorisation procedure must be "reasonable and proportionate" to the costs of that procedure and not exceed them. In November 2016, the CJEU found that requiring applicants to "prefinance" the management and enforcement costs of the licencing regime was in breach of the directive, which was set up to restrict "overly burdensome" authorisation schemes that hinder freedom of establishment.

Following a decision by the Court of Appeal, Westminster City Council repaid amounts corresponding to the management portion of the fee to the licence holders. In the present action, it sought recovery of these repayments based on the distinction between up-front management costs and management costs charged to successful applicants drawn by the Supreme Court. The licence holders resisted recovery on the grounds that the fees were "charged in a way for which there was no warrant".

The Supreme Court disagreed.

"Here, the council was entitled to set and to require payment of a fee including enforcement costs as well as processing costs applicable to all those who, like the licence holders, actually received licences and benefitted by the council's enforcement action," Lord Mance said in his judgment. "Although it was wrong to charge the element of this fee relating to enforcement costs conditionally at the time of any licence application, this element was under the scheme due unconditionally once a licence was granted."

"Even if there might hypothetically be an exceptional case in which lapse of time and intervening circumstances might make it oppressive to set such a fee, there is no ground to put this case into that category. It follows that, in so far as the council has determined a reasonable fee, including enforcement costs, there is no answer to the council's claim to be paid or repaid it now," he said.

The case will now return to the High Court, which will settle a number of questions as to the 'reasonableness' of the fees raised by the licence holders.

"This judgment is yet another twist in this sexual entertainment venue case," said licensing law expert Christopher Rees-Gay of Pinsent Masons, the law firm behind Out-Law.com.

"The Supreme Court ruling will be seen as a victory for local authorities and certainly for Westminster City Council in relation to the fees that they had previously charged. Although local authorities will be pleased by this result, in general, it is the decision of the CJEU in November 2016 that has had the greatest say on when applicants are required to pay licensing fees," he said.

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