23es

A TALE OF TWO STOREYS – DEFINING THE UNIT OF VALUATION FOR BUSINESS RATES

‘Business rates’ are amongst the oldest taxes in England. They are a tax not on persons or businesses but on property and that is the key to understanding them. They give rise to those limited circumstances in which members of 23ES Commercial may be found appearing in the Magistrates’ Courts. It is those courts which, pursuant to the civil jurisdiction, deal with the bulk of this type of work. Once in a while, an issue arises which merits the consideration of the Senior Courts, and even the Supreme Court. That was certainly the case in Woolway v Mazars [2015] UKSC 53.

The facts were as follows. Tower Bridge House is an eight-storey office block in London. A firm of accountants (Mazars) occupied the 2nd and 6th floors, under different leases. Those floors were separated by common areas. They were entered in the rating list as 2 different hereditaments. Mazars applied to the Valuation Tribunal to merge the two. The Valuation Tribunal agreed. But the valuation officer (Woolway) did not. He appealed to the Upper Tribunal (Lands Chamber). He was unsuccessful. So he appealed to the Court of Appeal. Again, he was unsuccessful. So he appealed to the Supreme Court.

The question for the Supreme Court to address was put succinctly by Lord Neuberger, ‘whether two physically separate pieces of property, namely the second and sixth floors of an office building, can be a single hereditament for rating purposes because they are occupied by, and let to, the same person in connection with the same business (at [45]).

Essentially, the argument for Mazars was that, though the 2nd and 6th floors were physically separate, they were ‘functionally inter-dependent’ (at [2]). That the ‘integrated use of them was essential to the efficiency of the ratepayer’s business as a whole’ (at [25]), as the Valuation Tribunal had found. For Woolway, it was confirmed that the ordinary practice was to list properties as a single hereditament if they are ‘contiguous’. Not being contiguous, the properties in question were listed separately.

The definition of a hereditament for the purposes of rating is ‘property which is or may become liable to a rate, being a unit of such property which is, or would fall to be, shown as a separate item in the valuation list’ (ss. 64(1) of the Local Government Finance Act 1988 and 115(1) of the General Rate Act 1967). So not especially helpful. Lord Gill believed this to mean simply a unit of property which would constitute a separate hereditament. The preceding statute (the Rating and Valuation Act 1925) suffered from circularity in the definition and it does not appear its replacement does much better on that front.
The 5 member court were unanimous in allowing the appeal. Lord Sumption, delivering the leading judgment, identified 3 principles to apply in cases concerning distinct spaces in common occupation (at [12]):

(1) The primary test is geographical. Is there visual or cartographic unity?
(2) Secondly, if the spaces are geographically distinct, can they functionally be treated as a single hereditament?
(3) Thirdly, the answer to (2) depends not on business needs of the ratepayer but on the ‘objectively ascertainable character’ of the property (at [12]).

Those 3 principles were elaborated on. As to (1), Lord Sumption noted that, whilst contiguous spaces normally possess the characteristic of unity, unity is not simply a question of contiguity. Lord Gill went further, noting that adjacency of spaces is less important than connection between those spaces by means of some access which negates the need to enter onto other property when travelling between the two (at [43]). As to (2), the question is whether the use of one space is necessary to the effectual enjoyment of the other. One must pose the question, could the two spaces reasonably be let separately? In respect of two self-contained properties, Lord Neuberger was of the view that it would ‘require relatively exceptional facts’ ([51]) to treat the two as one hereditament. Merely having one occupier is not such an exceptional fact. One looks to the relationship between the actual properties themselves (at [55]).

The mere fact that the same entity owned both the 2nd and 6th floors is and was irrelevant. This is a tax on property and not persons. One must look to the property itself.
It was noted that to move between the 2nd and 6th floors, one had to leave the demised premises, pass over common parts and travel in a lift. Lord Sumption thought it analogous to the situation of leaving a building, crossing the street and entering another building. He doubted the valuation officer’s concession as to vertically or horizontally contiguous spaces. For that to be correct, the two spaces would have had to ‘intercommunicate’ (at [21]).

Lord Gill gave a concurring judgment. He confirmed that, in respect of the 3 principles ‘the concept of fairness… has no place’ (at [40]). Again, that is consistent with the thread running through the entire fabric of this case, and field, that we are here concerned with a tax on property, not on a ratepayer or a ratepayer’s business. Lord Carnwath, though concurring, expressed no firm view on the question of contiguous floors (at [62]) as the matter was not before the Court.

It is very often the case that ratepayers own more than one floor of an office building. The common nature of the situation renders the decision of increased significance to practitioners active in this field. It is certainly a boon to valuation officers, whose own practices were (at least prior to this decision) in many respects more lenient than the law requires. Fairness need no longer (if it ever did) play a part. Doubtless we will see a sea change in approach as news of the decision percolates. For those representing ratepayers, this case is an injunction to return to first principles. This is a tax on property and, if an argument on merger of properties is to be had, energies are best expended in considering the nature of the properties themselves, and not the activities of the lay client.

ASA JACK TOLSON
23ES Commercial
23 Essex Street Chambers
21 August 2015

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