Woolway (VO) v Mazars LLP
Pill, Tomlinson and Kitchin LJJ
Rating – Non–domestic rates – Hereditament – Office premises – General Rate Act 1967 – Ratepayer occupying second and sixth floors in modern office building – Whether two non-contiguous floors properly listed together as single hereditament – Whether non-contiguous floors capable of being single unit of property within section 115 of 1967 Act – Whether listing contrary to “geographical” or “physical” approach to identification of hereditament
The ratepayer, a large accountancy firm, occupied two floors in a modern, eight–storey office block. The block was built in a U-shape around three sides of a glass-covered atrium, with a central lift shaft containing six high-speed lifts. The ratepayer had separate leases of the second and sixth floors in the building, each for a 15-year term from 2007 at a rent in the region of £1m pa, with five-yearly rent reviews. The appellant valuation officer entered each of the ratepayer’s two floors in the rating list as a separate hereditament. He took the view that different floors in the same occupation could only be listed as a single hereditament if those floors were contiguous.
The valuation tribunal accepted the ratepayer’s proposal to merge the two entries with effect from November 2007 so as to list the two floors together as a single hereditament. In reaching that conclusion, the tribunal found, applying Gilbert (VO) v S Hickinbottom & Sons Ltd [1956] 2 QB 40, that the two floors were within the same curtilage and that there was an essential functional link between them. Upholding that decision on appeal, the Lands Chamber of the Upper Tribunal (UT) held that floors in a modern office building occupied by the same ratepayer should generally be treated as a single hereditament regardless of whether they were contiguous, since, in the usual arrangement where travel between all floors was through the common parts by a lift service, contiguity between floors had no practical significance: see [2012] UKUT 165 (LC); [2012] 3 EGLR 73; [2012] 37 EG 128.
The appellant appealed. He contended that separate floors within a building should each be treated as a separate geographical “unit” of property, within the definition of a hereditament in section 115 of the General Rate Act 1967, since only contiguous floors were capable of being a single physical unit. He contended that the UT had erred in departing from an established geographical or physical test for the identification of hereditaments.
Held: The appeal was dismissed. The definition of a hereditament in section 115 of the General Rate Act 1967 is circular in defining a hereditament by reference to its liability for rating and to the contents of the rating list. Its reference to a “unit of such property” is simply a reference to a separate item of rateable property shown in the list and does not assist in defining what the separate item is. The geographical or physical test in Gilbert remains important in identifying the hereditament. Provided the correct test is applied, what and is not a hereditament is a question of fact in respect of which the UT has an important fact-finding role. The UT had not departed from established principles in finding that contiguity between different floors in the same office building had no practical significance. It had adopted a physical test to floors within a single building and, having accepted that different floors of office premises were in the same occupation for the purposes of the occupying firm, had been entitled to inquire no further into any functional connection between parts. The separated floors in a single tower block legitimately constitute a single hereditament. The hereditament can be “ringed around on a map” in accordance with the physical or geographical approach. Although that approach might not have been devised with the vertical plane in mind, to disaggregate premises held for a common purpose within a single “ring” in a single building would tend to defeat the geographical approach. The UT had been entitled to make a common-sense assessment of the features in the case rather than seek to have recourse to some standard formula. On the facts, which were likely to be similar to those in many other office blocks, two floors in the occupation of a single ratepayer could not legitimately be distinguished on practical grounds or in terms of the value of the occupation. In those circumstances, the contiguity test was not decisive. The physical or geographical approach can be applied flexibly. Its application did not permit a distinction, on physical grounds, between contiguous and non-contiguous floors in the circumstances of the case.
This was an appeal by the appellant valuation officer, Peter Woolway, from a decision of the Upper Tribunal (Lands Chamber) upholding a decision of the valuation tribunal to accept a proposal by the respondent ratepayer, Mazars LLP, to merge two entries in the non-domestic rating list in respect of two separate floors within the same office block.
Timothy Morshead QC and Daniel Kolinsky (instructed by the legal department of HM Revenue and Customs) appeared for the appellant; David Forsdick (instructed by the Attorney-General) appeared as advocate to the court; the respondent did not appear and was not represented.
Giving judgment, Pill LJ said:
Introduction
- This is an appeal against a decision of the Upper Tribunal (Lands Chamber) [2012] UKUT 165 (LC), Mr George Bartlett QC, President, dated 11 June 2012. The President allowed in part an appeal by Mr Peter Robin Woolway (Valuation Officer) (“the appellant”) against a decision of the Valuation Tribunal for England (“VTE”) in relation to the rateable value of premises occupied by Mazars LLP (“the respondents”) The President held, at [32]:
“The rateable value of the hereditament (Levels 2 and 6, Tower Bridge House, St Katherine’s Way, London E1W 1AA) must be entered at £1,205,000.”
It is the finding that the premises should be entered in the 2005 rating list as a single hereditament with effect from 26 November 2017 that is the point of contention.
- The appellant’s claim is that each level or floor is a separate unit of property and should be entered as a separate hereditament. Permission to appeal was granted by the President who observed that “the question of the identification of hereditaments in a modern office block is of wide importance”. The partial success of the appeal to the Upper Tribunal was in excluding from the rateable value the end allowance of 5% which the VTE had granted as a result of the floors being separated. There is no cross-appeal against that finding.
- The facts were set out by the President:
“2. Tower Bridge House is a modern 8-storey office building, which was completed in 2005. Although in Tower Hamlets it is on the opposite side of the road from the Tower of London and thus effectively serves a City of London office function. In plan form it is in the shape of an extended “U”. The open space between the three inner sides of the building consists of a glass covered atrium with a central lift shaft housing six high speed lifts that serve six floors of the building. On the first floor there is a common reception area that provides security for the entire building. On the ground floor there are restaurants and there are seven floors of offices above. The solicitors Reynolds Porter Chamberlain have offices on levels 1, 3, 4 and 5, the accountants Mazar LLP on levels 2 and 6, which are the subject of the present appeals, and there are two occupiers of space on level 7. The floorplate of levels 2 to 6 is about 2,400 sq m net, although there are small differences between levels. Mazar hold the two floors under separate leases dated 24 June 2007. Each is for a 15 year term with effect from May 2007. The rent for level 2 was £1,008,422.50 per annum and the rent for level 6 was £1,053,010 per annum, and there are five yearly reviews.
3. In the 2005 rating list there were separate entries for the Reynolds Porter Chamberlain offices on level 1, for each of the levels occupied by Mazar and for each of the two occupancies on level 7. Levels 3, 4 and 5 were entered as a single hereditament. A rate of £250 per sq m was applied to all levels, but the hereditament consisting of levels 3, 4 and 5 was accorded an end allowance for size of 6.25%. Level 2 was entered at £600,000 with effect from 24 August 2006 and level 6 at £605,000 with effect from 26 November 2007. On 10 February 2010 Paul Rabbette Ltd made a proposal on behalf of the ratepayer [the respondent] to merge the two entries with effect from 26 November 2007. It was this proposal that was the subject of the appeal before the VTE.
4. The ratepayer’s case before the VTE was that, although the levels occupied by them were separated, there was a functional dependency between them and they therefore ought to be entered as a single hereditament with effect from 26 November 2007 when they had begun to occupy the two floors.”
- The appellant, who has great experience of rating valuation, gave evidence, at [9], that:
“. . . Although the accommodation was on two floors separated from each other by intervening floors the lift service was fast enough to negate the problem of separation. It was not materially different from the logistical challenges faced by Reynolds Porter Chamberlain with their occupation of levels 1, 3, 4 and 5.”
- The respondents have not appeared and not have been represented either before the Upper Tribunal or before this court. Because of the importance of the issue involved, and at the request of the President, counsel Mr David Forsdick has been appointed by the Attorney General as advocate to the court and has made both written and oral submissions to assist the court to see both sides of the issue and to test the appellant’s case.
Judgments below
- In his judgment, the President cited extracts from the judgment of the VTE. The Panel had held that the Tower Bridge House development was contained within a single curtilage which contained the two floor levels. The test of what is “functionally essential” should be adapted to reflect the modern era of service industries. The Panel found that there is “a link between the floors which is essential to the efficiency of the working of Mazars’ overall service-provision business.” The function carried out at the two levels was “sufficiently integrated that they are essential to the effective business as a whole.” The accommodation provided by the two floor levels “was essential to the efficient operation and functioning of the business operated by the company.” The Panel’s conclusion was that there is “a sufficient degree of propinquity and an essential functional link between the two floors. Thus, the Panel also finds that on the ground the appeal premises are a single hereditament.”
- Before referring to submissions and authority, I set out the findings of the President. He held, at [20], that: “in identifying hereditaments within a modern office building the concept of the curtilage has no useful part to play.” Referring to the finding of the VTE that there was “an essential functional link”, he stated that he did not think “that an essential connection should be treated as a criterion in the present case.” A detailed enquiry into the functional relationship between parts of a building in the same occupation is “positively undesirable”. However, the President added:
“The fact that the floors of office premises are in the same occupation for the purposes of the occupying firm is by itself, in my judgment, a significant pointer.”
- The President attached more importance, at [21], to “the practical realities of the physical relationship between the floors.” He added that the functional relationship is material but there is “no justification for requiring that the functional connection between the parts should be such that each is essential to the other.” While capability of floors being let separately was a material consideration in identifying the hereditament, the President stated, at [22], that it “ought in my view to carry less weight than the facts relating to the physical nature of the premises and the purpose of the ratepayer’s occupation.”
- The President considered the issue of communication between floors of the building through the common parts. He stated that, in such circumstances, treating adjoining floors differently from floors “separated even by a single floor” was somewhat unreal. Because communication was only through the common parts of the building “contiguity between floors has no practical significance” [23]. The President added:
“The approach adopted by VOs thus risks producing values that do not fairly reflect the value of the ratepayer’s occupation and the relative worth of the different occupancies within the building.
24. . . . What has to be borne in mind, however, is that unless the hereditament is identified in a way that reasonably and fairly represents the occupier’s unit of occupation unfairness may result when the valuation stage is reached.”
- The President stated his conclusions:
“29. I have referred above to the features of this case which are common to most modern office blocks – the fact that these are floors within a single building; the fact that communication between floors, whether next to each other or not, is through the common parts of the building; the lack of any significant practical difference, from the occupier’s point of view, between floors that are next to each other and those that are separated; and the fact that, although each floor is normally the subject of a separate lease, where two or more floors in the same building are let to the same occupier this is normally done through negotiations carried out on an overall basis, albeit that there is a separate lease for each floor. To treat as a single hereditament floors next to each other that are in the same occupation but as separate hereditaments floors in the same occupation that do not adjoin each other does not, in my view, properly reflect the realities of occupation in a modern office block. The proper approach in a case such as this, therefore, in my judgment, is to treat the floors occupied within the building by the same occupier as a single hereditament. Since the occupier will be occupying the floors as offices for the purposes of his business, it is not in my view necessary to investigate the functional interrelationship between the floors at any particular time. In the present case, therefore, floors 2 and 6 are properly to be entered as a single hereditament, as the VTE determined; and the VO’s appeal on this point fails.
30. I would add that the adoption of the approach that I have concluded to be appropriate does not require that all existing entries in current lists of separate floors in the same occupation need to be changed. Only if a proposal for merger were to be made would it be necessary to make an alteration.”
- It appears to me that the President was adopting a geographical or physical approach to determining what is a hereditament for present purposes. As he stated, at [19], he was expressly addressing the issue of “occupation of floors within a modern office block.” He stated, at [20], that “a detailed inquiry into the functional relationship between parts of a building in the same occupation is of no assistance in the present case.” What was to carry weight were “the facts relating to the physical nature of the premises and the purpose of the ratepayer’s occupation” [22]. “It is not in my view necessary to investigate the functional interrelationship between the floors at any particular time” [29]. It was in that context that the President stated his general conclusion at [29]:
“The proper approach in a case such as this, therefore, in my judgment, is to treat the floors occupied within the building by the same occupier as a single hereditament.”
Non-domestic rates
- Non-domestic rates are a tax on the value of occupation of land to the occupier (Poplar Assessment Committee v Roberts [1922] AC 93). Rateability depends solely on the beneficial occupation of property (Lord Atkinson, at p113). The object of the system is to assess occupiers of rateable property equally in proportion to the value of their occupation. For the tax to apply to the occupation of any property, the property must be shown as a hereditament in the rating list for the area in which it is situated. Section 41 of the Local Government Finance Act 1988 (“the 1988 Act”) requires valuation officers to compile and maintain a local rating list for their areas for every five year period and the relevant list for present purposes is the 2005 Rating List. Section 42 provides that the list must show each hereditament and section 64 defines what constitutes a hereditament as anything which, by virtue of the definition in section 115 of the General Rate Act 1967 (“the 1967 Act”), “would have been a hereditament for the purposes of that Act”.
- Section 115 of the 1967 Act provides:
“‘hereditament’ means 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.”
That section replaced the definition in section 68 of the Rating and Valuation Act 1925 which stated:
“‘hereditament’ means any lands, tenements, hereditaments or property which are or may become liable to any rate in respect of which the valuation list is by this Act made conclusive.”
- The basis for calculating the rateable value of a hereditament is provided by section 56 of the 1988 Act which gives effect to Schedule 6. The statutory process of arriving at a rateable value for a hereditament is a subsequent step in that it necessarily assumes a prior identification of the hereditament.
Submissions
- Mr Morshead QC, for the appellant, submitted that the central question is whether the second and sixth floors of an office block should each be treated as a “unit” of property. While he states that his case does not rest on the extreme proposition that occupation can never be relevant to the correct characterisation of a hereditament, the error of the President was in moving away from the primacy of the presence or absence of a physical connection between the floors in question as the essential starting point for the analysis. Mr Morshead submitted that the appellant seeks to restore the centrality of the geographical/physical question which is an established part of the test and should not be diluted.
- It was submitted that section 115 of the 1967 Act self-evidently amends the earlier legislation. The single concept of a unit or “slice” of property was substituted for the former multiplicity of terms. The court is concerned with the parameters within which the VTE must operate when identifying any hereditament.
- It is accepted that the decision of this court in Gilbert (VO) v S Hickinbottom & Sons Ltd [1956] 2 QB 40 is the leading case on the characterisation of hereditaments though Mr Morshead referred to the change in the statutory language since Gilbert and the introduction of an express reference to “a unit of . . . property”.
- In Gilbert, ratepayers occupied premises on opposite sides of a street, those on one side being a bakery and those on the other side a depot for the repair and maintenance of the delivery vans and of the machinery in the bakery. The Tribunal had held that the two premises should be treated as one hereditament on the ground that the “functional” test applied by the Tribunal was one open to it in law. Having stated general rules, Denning LJ held that it was a question of degree and of fact for the Tribunal and the court should not reverse a decision to which the Tribunal could reasonably come.
- Morris LJ, at p52, stated that it was not appropriate to lay down propositions as being “inevitably or invariably applicable.” “If, as I think, the decision as to whether premises form one hereditament is a question of fact, then I think that it is undesirable to prescribe some formula in words or to define certain considerations as being relevant and to stipulate that others must be excluded. . . . In the borderline cases where difficulty arises it is better to employ a common-sense assessment of the features of the case than to seek to have recourse to some standard formula.” . . . “There can be no doubt that ordinarily very great weight will be placed upon what may be termed the geographical test. But the question is always one of fact and degree.”
- Parker LJ, at p54, stated:
“No doubt the most important of these other considerations is whether the premises form a geographical unit. Can they be ringed round on a map?”
Parker LJ cited the statement of Lord Keith in Glasgow University v Assessor for Glasgow [1952] SC 504, 509 that the issue falls to be decided “primarily from the geographical standpoint.”
- Mr Morshead submitted that the President has replaced a workable established framework with unsubstantiated and uncertain parameters. The appellant seeks to restore the centrality of the geographical/physical question which is an established part of the test and should not be diluted. The President has departed, it was submitted, from the general rule that physically separate properties are separate hereditaments. In doing so, he has wrongly introduced concepts of fairness.
- Mr Morshead submitted that, in the absence of contiguity, the floors occupied by the respondents were each a separate geographical “unit”. While common ownership could trigger the application for a single hereditament, it is contiguity which is determinative. Other factors become relevant only if the physical test provides no clear answer. The contiguity test applies in the vertical as well as the horizontal plane. Contiguous floors in a building constitute a cube capable of being a single physical unit but floors separated from each other do not.
- Uniformity of treatment as between ratepayers is essential and the President has defeated that requirement, it was submitted, and broken new ground by permitting non-contiguous areas to be treated as a single hereditament. There is no reason to depart from the general rule by giving benign treatment to occupiers of modern office blocks.
- Mr Morshead accepted that, while the physical test is the general rule, there may be cases where a powerful functional connection between premises crosses or bridges the gap between them. The physical test must first be applied, however, before considering whether it may be displaced by a functional connection. In Gilbert, Parker LJ, at p54, emphasised the question “whether the premises form a geographical unit” and whether they “can [they] be ringed round on a map?” By using the expression “a unit of . . . property”, section 115 of the 1967 Act underlines the importance of the physical test. The VTE’S findings on “functional link”, even if adopted, do not achieve a single hereditament if the primary physical test is not satisfied.
- There is no rational ground, it was submitted, for distinguishing between two buildings, each in the occupation of a ratepayer, and separated by a road, and two floors of a building, occupied by the same ratepayer but separated by a floor or floors occupied by others. It was submitted that the second and sixth floors in this case are plainly separate units of property, within the meaning of the statute, and should be entered onto the rating list as such. They each have a separate physical identity. The statutory definition of hereditament anchors the concept to the identification of a physically separate unit of property and the President’s approach departs from that core principle, it was submitted.
- Mr Morshead referred to the Scottish Lands Tribunal case of Burn Stewart Distillers plc v Assessor for Lanarkshire Valuation Joint Board [2001] RA 110 at 140 to 141, where the Tribunal warned against drawing a “distinction for rating purposes between a business whose operating units were in close proximity and those whose operating units were, perhaps only slightly, more remote.” That, he submitted, clearly favours the approach he advocates. Contiguity is the test so that the uncertainties involved in distinguishing between degrees of proximity can be avoided.
- We are grateful for the submissions of Mr Forsdick, as friend of the court, as we are for those of Mr Morshead. Mr Forsdick submitted that, when deciding whether premises occupied by a ratepayer are a single hereditament, it is a very important physical factor that both parts are in the same building. The physical test is not hard edged and the phrase “unit of property” is a neutral one.
- A tower block is a single geographical location and the entire area occupied by the respondents is within it. That distinguishes the present case from cases concerned with property in separate buildings. Presence in a single building goes a long way to answering the question to be posed, it was submitted, and all property in a single occupation should be treated as a unit whether it consists of floors 3 and 4 or floors 2 and 6. In both cases, it was necessary to leave the demised premises and go through the common parts of the building to move between floors. The point was also made that adjoining floors are not strictly contiguous because they are usually separated by a concrete floor/ceiling not included in the demise to the occupier. The appellant accepts that floors 3 and 4 can constitute a single hereditament; floors 2 and 6 in common occupation also constitute a single hereditament for reasons given by the President, it was submitted.
- Whether the occupied property is or is not on adjoining floors on the present facts makes no difference. The purpose of the physical/geographical test is to ensure that dispersed property is not artificially aggregated into a single hereditament and not to require the artificial disaggregation of property such as that occupied by the respondents at Tower Bridge House.
- Provided the correct test is applied, what is and is not a hereditament is a question of fact (Gilbert). Mr Forsdick accepted that the more fragmented is a holding, even within a single building, the less likely it is to be a single hereditament and that there could be cases where a holding within the building is so fragmented that it would not constitute a single hereditament. Mr Forsdick also accepted that a claim to a single hereditament in a single building could be defeated on functional or occupational grounds if, for example, the occupier was a multi-disciplinary practice.
- The physical test must be applied in the context of the occupation established. In the language of Parker LJ, a red line can be drawn around a single building in this case and the geographical threshold is crossed. Having regard to the purpose of the rating scheme, a distinction cannot properly be drawn between occupation of floors 3, 4 and 5 and occupation of floors 2 and 6. The single area test is more difficult to satisfy if property is split between different buildings but that is a legitimate distinction. Joinder may sometimes be justified on functional grounds in that situation but the respondent in the present case does not have to rely on a functional test, beyond showing occupation for the respondents’ purposes, and the President did not rely on it. I confess to a difficulty in deciding where, on the President’s reasoning, the line is to be drawn between “purpose of occupation” (President, para 22), which he says is important, and “functional interrelationship” (President, para 29), which is not, but it is not necessary to explore it further on the present facts.
- The court sought assistance from counsel as to whether the rationale for the “end allowance”, which may be given as a result of the separation of floors, throws light on the definition of hereditament but counsel did not take up the invitation and I proceed on the basis that no light would be thrown.
Conclusions
- I do not consider that the definition in section 115 of the 1967 Act changed the law. It would be surprising if it did because there was a deliberate carrying forward of hereditaments based on the pre-existing practice and definition. The definition is circular in defining a hereditament by reference to its liability for rating and to what is in the rating list. Reference to a “unit of such property” is simply a reference to a “separate item” of rateable property shown in the list and does not assist in defining what the separate item is. As Sedley LJ put it in Vtesse Networks Ltd v Bradford (Valuation Officer) [2006] EWCA Civ 1339, at [40], the definition “assumes and relies on an existing fund of knowledge of what is and is not capable of being shown as a separate item in the valuation list”.
- The importance of the geographical test is plain. However, each member of the court in Gilbert acknowledged the importance of the fact finding role of the Tribunal. In this case, the premises were undoubtedly within a single building. Further, the President has made important findings of fact, which he summarised at [29] of the judgment, and I repeat a part of the first sentence setting out “the features of this case”:
“the fact that communication between floors, whether next to each other or not, is through the common parts of the building; the lack of any significant practical difference, from the occupier’s point of view, between floors that are next to each other and those that are separated”
That followed the President’s finding, at [23], that “contiguity between floors has no practical significance”.
- The President’s decision does not appear to me to involve any departure from established principles. He expressly adopted a physical test and, accepting that floors of office premises are in the same occupation for the purposes of the occupying firm [20], did not espouse the further functional connection between parts relied on by the VTE [21]. The President applied a physical test to floors within a single building.
- Applying the approach of the court in Gilbert to the President’s findings of fact, the separated floors in a single tower block legitimately constitute a single hereditament. The hereditament can be “ringed round on a map”. I doubt whether Parker LJ in Gilbert had the present issue in mind, the vertical plane, when he used that expression but to disaggregate premises held for a common purpose within a single “ring” in a single building would tend to defeat that geographical approach. As Morris LJ put it, at p52 in Gilbert, “it is better to employ a common-sense assessment of the features of the case than to seek to have recourse to some standard formula.” That is precisely what the President has done in his fact finding and reasoning. The appellant accepts that floors 3, 4 and 5, occupied by another firm in the same building, are a single hereditament. On the facts found, which are likely to be similar to those in many other office blocks, floors 2 and 6, in the occupation of the respondents, cannot legitimately be distinguished on practical grounds or in terms of the value of the occupation. In these circumstances the contiguity test is not decisive.
- Access between floors at Tower Bridge House is possible only through the common parts of the building and there is a swift lift between floors 2 and 6 as there is between floors, 3, 4 and 5. Flexibility in applying a physical or geographical test is acceptable and its application does not permit a distinction, on physical grounds, between floors 3 and 4 and floors 2 and 6, in the circumstances of this case. I do not consider that to constitute a single hereditament, the floors must constitute the physical cube advocated by Mr Morshead. A common sense assessment of the features of the case, as approved by Morris LJ, has rightly led to the conclusion that floors 2 and 6 in this tower block constitute a single hereditament.
- I would uphold the reasoning and conclusion of the President and dismiss the appeal.
Tomlinson LJ
said:
- I agree.
Kitchin LJ
said:
Appeal dismissed.
Rating – Non–domestic rates – Hereditament – Office premises – General Rate Act 1967 – Ratepayer occupying second and sixth floors in modern office building – Whether two non-contiguous floors properly listed together as single hereditament – Whether non-contiguous floors capable of being single unit of property within section 115 of 1967 Act – Whether listing contrary to “geographical” or “physical” approach to identification of hereditament
The ratepayer, a large accountancy firm, occupied two floors in a modern, eight–storey office block. The block was built in a U-shape around three sides of a glass-covered atrium, with a central lift shaft containing six high-speed lifts. The ratepayer had separate leases of the second and sixth floors in the building, each for a 15-year term from 2007 at a rent in the region of £1m pa, with five-yearly rent reviews. The appellant valuation officer entered each of the ratepayer’s two floors in the rating list as a separate hereditament. He took the view that different floors in the same occupation could only be listed as a single hereditament if those floors were contiguous.
The valuation tribunal accepted the ratepayer’s proposal to merge the two entries with effect from November 2007 so as to list the two floors together as a single hereditament. In reaching that conclusion, the tribunal found, applying Gilbert (VO) v S Hickinbottom & Sons Ltd [1956] 2 QB 40, that the two floors were within the same curtilage and that there was an essential functional link between them. Upholding that decision on appeal, the Lands Chamber of the Upper Tribunal (UT) held that floors in a modern office building occupied by the same ratepayer should generally be treated as a single hereditament regardless of whether they were contiguous, since, in the usual arrangement where travel between all floors was through the common parts by a lift service, contiguity between floors had no practical significance: see [2012] UKUT 165 (LC); [2012] 3 EGLR 73; [2012] 37 EG 128.
The appellant appealed. He contended that separate floors within a building should each be treated as a separate geographical “unit” of property, within the definition of a hereditament in section 115 of the General Rate Act 1967, since only contiguous floors were capable of being a single physical unit. He contended that the UT had erred in departing from an established geographical or physical test for the identification of hereditaments.
Held: The appeal was dismissed. The definition of a hereditament in section 115 of the General Rate Act 1967 is circular in defining a hereditament by reference to its liability for rating and to the contents of the rating list. Its reference to a “unit of such property” is simply a reference to a separate item of rateable property shown in the list and does not assist in defining what the separate item is. The geographical or physical test in Gilbert remains important in identifying the hereditament. Provided the correct test is applied, what and is not a hereditament is a question of fact in respect of which the UT has an important fact-finding role. The UT had not departed from established principles in finding that contiguity between different floors in the same office building had no practical significance. It had adopted a physical test to floors within a single building and, having accepted that different floors of office premises were in the same occupation for the purposes of the occupying firm, had been entitled to inquire no further into any functional connection between parts. The separated floors in a single tower block legitimately constitute a single hereditament. The hereditament can be “ringed around on a map” in accordance with the physical or geographical approach. Although that approach might not have been devised with the vertical plane in mind, to disaggregate premises held for a common purpose within a single “ring” in a single building would tend to defeat the geographical approach. The UT had been entitled to make a common-sense assessment of the features in the case rather than seek to have recourse to some standard formula. On the facts, which were likely to be similar to those in many other office blocks, two floors in the occupation of a single ratepayer could not legitimately be distinguished on practical grounds or in terms of the value of the occupation. In those circumstances, the contiguity test was not decisive. The physical or geographical approach can be applied flexibly. Its application did not permit a distinction, on physical grounds, between contiguous and non-contiguous floors in the circumstances of the case.
This was an appeal by the appellant valuation officer, Peter Woolway, from a decision of the Upper Tribunal (Lands Chamber) upholding a decision of the valuation tribunal to accept a proposal by the respondent ratepayer, Mazars LLP, to merge two entries in the non-domestic rating list in respect of two separate floors within the same office block.
Timothy Morshead QC and Daniel Kolinsky (instructed by the legal department of HM Revenue and Customs) appeared for the appellant; David Forsdick (instructed by the Attorney-General) appeared as advocate to the court; the respondent did not appear and was not represented.
Giving judgment, Pill LJ said:
Introduction
This is an appeal against a decision of the Upper Tribunal (Lands Chamber) [2012] UKUT 165 (LC), Mr George Bartlett QC, President, dated 11 June 2012. The President allowed in part an appeal by Mr Peter Robin Woolway (Valuation Officer) (“the appellant”) against a decision of the Valuation Tribunal for England (“VTE”) in relation to the rateable value of premises occupied by Mazars LLP (“the respondents”) The President held, at [32]:
“The rateable value of the hereditament (Levels 2 and 6, Tower Bridge House, St Katherine’s Way, London E1W 1AA) must be entered at £1,205,000.”
It is the finding that the premises should be entered in the 2005 rating list as a single hereditament with effect from 26 November 2017 that is the point of contention.
The appellant’s claim is that each level or floor is a separate unit of property and should be entered as a separate hereditament. Permission to appeal was granted by the President who observed that “the question of the identification of hereditaments in a modern office block is of wide importance”. The partial success of the appeal to the Upper Tribunal was in excluding from the rateable value the end allowance of 5% which the VTE had granted as a result of the floors being separated. There is no cross-appeal against that finding.
The facts were set out by the President:
“2. Tower Bridge House is a modern 8-storey office building, which was completed in 2005. Although in Tower Hamlets it is on the opposite side of the road from the Tower of London and thus effectively serves a City of London office function. In plan form it is in the shape of an extended “U”. The open space between the three inner sides of the building consists of a glass covered atrium with a central lift shaft housing six high speed lifts that serve six floors of the building. On the first floor there is a common reception area that provides security for the entire building. On the ground floor there are restaurants and there are seven floors of offices above. The solicitors Reynolds Porter Chamberlain have offices on levels 1, 3, 4 and 5, the accountants Mazar LLP on levels 2 and 6, which are the subject of the present appeals, and there are two occupiers of space on level 7. The floorplate of levels 2 to 6 is about 2,400 sq m net, although there are small differences between levels. Mazar hold the two floors under separate leases dated 24 June 2007. Each is for a 15 year term with effect from May 2007. The rent for level 2 was £1,008,422.50 per annum and the rent for level 6 was £1,053,010 per annum, and there are five yearly reviews.
3. In the 2005 rating list there were separate entries for the Reynolds Porter Chamberlain offices on level 1, for each of the levels occupied by Mazar and for each of the two occupancies on level 7. Levels 3, 4 and 5 were entered as a single hereditament. A rate of £250 per sq m was applied to all levels, but the hereditament consisting of levels 3, 4 and 5 was accorded an end allowance for size of 6.25%. Level 2 was entered at £600,000 with effect from 24 August 2006 and level 6 at £605,000 with effect from 26 November 2007. On 10 February 2010 Paul Rabbette Ltd made a proposal on behalf of the ratepayer [the respondent] to merge the two entries with effect from 26 November 2007. It was this proposal that was the subject of the appeal before the VTE.
4. The ratepayer’s case before the VTE was that, although the levels occupied by them were separated, there was a functional dependency between them and they therefore ought to be entered as a single hereditament with effect from 26 November 2007 when they had begun to occupy the two floors.”
The appellant, who has great experience of rating valuation, gave evidence, at [9], that:
“. . . Although the accommodation was on two floors separated from each other by intervening floors the lift service was fast enough to negate the problem of separation. It was not materially different from the logistical challenges faced by Reynolds Porter Chamberlain with their occupation of levels 1, 3, 4 and 5.”
The respondents have not appeared and not have been represented either before the Upper Tribunal or before this court. Because of the importance of the issue involved, and at the request of the President, counsel Mr David Forsdick has been appointed by the Attorney General as advocate to the court and has made both written and oral submissions to assist the court to see both sides of the issue and to test the appellant’s case.
Judgments below
In his judgment, the President cited extracts from the judgment of the VTE. The Panel had held that the Tower Bridge House development was contained within a single curtilage which contained the two floor levels. The test of what is “functionally essential” should be adapted to reflect the modern era of service industries. The Panel found that there is “a link between the floors which is essential to the efficiency of the working of Mazars’ overall service-provision business.” The function carried out at the two levels was “sufficiently integrated that they are essential to the effective business as a whole.” The accommodation provided by the two floor levels “was essential to the efficient operation and functioning of the business operated by the company.” The Panel’s conclusion was that there is “a sufficient degree of propinquity and an essential functional link between the two floors. Thus, the Panel also finds that on the ground the appeal premises are a single hereditament.”
Before referring to submissions and authority, I set out the findings of the President. He held, at [20], that: “in identifying hereditaments within a modern office building the concept of the curtilage has no useful part to play.” Referring to the finding of the VTE that there was “an essential functional link”, he stated that he did not think “that an essential connection should be treated as a criterion in the present case.” A detailed enquiry into the functional relationship between parts of a building in the same occupation is “positively undesirable”. However, the President added:
“The fact that the floors of office premises are in the same occupation for the purposes of the occupying firm is by itself, in my judgment, a significant pointer.”
The President attached more importance, at [21], to “the practical realities of the physical relationship between the floors.” He added that the functional relationship is material but there is “no justification for requiring that the functional connection between the parts should be such that each is essential to the other.” While capability of floors being let separately was a material consideration in identifying the hereditament, the President stated, at [22], that it “ought in my view to carry less weight than the facts relating to the physical nature of the premises and the purpose of the ratepayer’s occupation.”
The President considered the issue of communication between floors of the building through the common parts. He stated that, in such circumstances, treating adjoining floors differently from floors “separated even by a single floor” was somewhat unreal. Because communication was only through the common parts of the building “contiguity between floors has no practical significance” [23]. The President added:
“The approach adopted by VOs thus risks producing values that do not fairly reflect the value of the ratepayer’s occupation and the relative worth of the different occupancies within the building.
24. . . . What has to be borne in mind, however, is that unless the hereditament is identified in a way that reasonably and fairly represents the occupier’s unit of occupation unfairness may result when the valuation stage is reached.”
The President stated his conclusions:
“29. I have referred above to the features of this case which are common to most modern office blocks – the fact that these are floors within a single building; the fact that communication between floors, whether next to each other or not, is through the common parts of the building; the lack of any significant practical difference, from the occupier’s point of view, between floors that are next to each other and those that are separated; and the fact that, although each floor is normally the subject of a separate lease, where two or more floors in the same building are let to the same occupier this is normally done through negotiations carried out on an overall basis, albeit that there is a separate lease for each floor. To treat as a single hereditament floors next to each other that are in the same occupation but as separate hereditaments floors in the same occupation that do not adjoin each other does not, in my view, properly reflect the realities of occupation in a modern office block. The proper approach in a case such as this, therefore, in my judgment, is to treat the floors occupied within the building by the same occupier as a single hereditament. Since the occupier will be occupying the floors as offices for the purposes of his business, it is not in my view necessary to investigate the functional interrelationship between the floors at any particular time. In the present case, therefore, floors 2 and 6 are properly to be entered as a single hereditament, as the VTE determined; and the VO’s appeal on this point fails.
30. I would add that the adoption of the approach that I have concluded to be appropriate does not require that all existing entries in current lists of separate floors in the same occupation need to be changed. Only if a proposal for merger were to be made would it be necessary to make an alteration.”
It appears to me that the President was adopting a geographical or physical approach to determining what is a hereditament for present purposes. As he stated, at [19], he was expressly addressing the issue of “occupation of floors within a modern office block.” He stated, at [20], that “a detailed inquiry into the functional relationship between parts of a building in the same occupation is of no assistance in the present case.” What was to carry weight were “the facts relating to the physical nature of the premises and the purpose of the ratepayer’s occupation” [22]. “It is not in my view necessary to investigate the functional interrelationship between the floors at any particular time” [29]. It was in that context that the President stated his general conclusion at [29]:
“The proper approach in a case such as this, therefore, in my judgment, is to treat the floors occupied within the building by the same occupier as a single hereditament.”
Non-domestic rates
Non-domestic rates are a tax on the value of occupation of land to the occupier (Poplar Assessment Committee v Roberts [1922] AC 93). Rateability depends solely on the beneficial occupation of property (Lord Atkinson, at p113). The object of the system is to assess occupiers of rateable property equally in proportion to the value of their occupation. For the tax to apply to the occupation of any property, the property must be shown as a hereditament in the rating list for the area in which it is situated. Section 41 of the Local Government Finance Act 1988 (“the 1988 Act”) requires valuation officers to compile and maintain a local rating list for their areas for every five year period and the relevant list for present purposes is the 2005 Rating List. Section 42 provides that the list must show each hereditament and section 64 defines what constitutes a hereditament as anything which, by virtue of the definition in section 115 of the General Rate Act 1967 (“the 1967 Act”), “would have been a hereditament for the purposes of that Act”.
Section 115 of the 1967 Act provides:
“‘hereditament’ means 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.”
That section replaced the definition in section 68 of the Rating and Valuation Act 1925 which stated:
“‘hereditament’ means any lands, tenements, hereditaments or property which are or may become liable to any rate in respect of which the valuation list is by this Act made conclusive.”
The basis for calculating the rateable value of a hereditament is provided by section 56 of the 1988 Act which gives effect to Schedule 6. The statutory process of arriving at a rateable value for a hereditament is a subsequent step in that it necessarily assumes a prior identification of the hereditament.
Submissions
Mr Morshead QC, for the appellant, submitted that the central question is whether the second and sixth floors of an office block should each be treated as a “unit” of property. While he states that his case does not rest on the extreme proposition that occupation can never be relevant to the correct characterisation of a hereditament, the error of the President was in moving away from the primacy of the presence or absence of a physical connection between the floors in question as the essential starting point for the analysis. Mr Morshead submitted that the appellant seeks to restore the centrality of the geographical/physical question which is an established part of the test and should not be diluted.
It was submitted that section 115 of the 1967 Act self-evidently amends the earlier legislation. The single concept of a unit or “slice” of property was substituted for the former multiplicity of terms. The court is concerned with the parameters within which the VTE must operate when identifying any hereditament.
It is accepted that the decision of this court in Gilbert (VO) v S Hickinbottom & Sons Ltd [1956] 2 QB 40 is the leading case on the characterisation of hereditaments though Mr Morshead referred to the change in the statutory language since Gilbert and the introduction of an express reference to “a unit of . . . property”.
In Gilbert, ratepayers occupied premises on opposite sides of a street, those on one side being a bakery and those on the other side a depot for the repair and maintenance of the delivery vans and of the machinery in the bakery. The Tribunal had held that the two premises should be treated as one hereditament on the ground that the “functional” test applied by the Tribunal was one open to it in law. Having stated general rules, Denning LJ held that it was a question of degree and of fact for the Tribunal and the court should not reverse a decision to which the Tribunal could reasonably come.
Morris LJ, at p52, stated that it was not appropriate to lay down propositions as being “inevitably or invariably applicable.” “If, as I think, the decision as to whether premises form one hereditament is a question of fact, then I think that it is undesirable to prescribe some formula in words or to define certain considerations as being relevant and to stipulate that others must be excluded. . . . In the borderline cases where difficulty arises it is better to employ a common-sense assessment of the features of the case than to seek to have recourse to some standard formula.” . . . “There can be no doubt that ordinarily very great weight will be placed upon what may be termed the geographical test. But the question is always one of fact and degree.”
Parker LJ, at p54, stated:
“No doubt the most important of these other considerations is whether the premises form a geographical unit. Can they be ringed round on a map?”
Parker LJ cited the statement of Lord Keith in Glasgow University v Assessor for Glasgow [1952] SC 504, 509 that the issue falls to be decided “primarily from the geographical standpoint.”
Mr Morshead submitted that the President has replaced a workable established framework with unsubstantiated and uncertain parameters. The appellant seeks to restore the centrality of the geographical/physical question which is an established part of the test and should not be diluted. The President has departed, it was submitted, from the general rule that physically separate properties are separate hereditaments. In doing so, he has wrongly introduced concepts of fairness.
Mr Morshead submitted that, in the absence of contiguity, the floors occupied by the respondents were each a separate geographical “unit”. While common ownership could trigger the application for a single hereditament, it is contiguity which is determinative. Other factors become relevant only if the physical test provides no clear answer. The contiguity test applies in the vertical as well as the horizontal plane. Contiguous floors in a building constitute a cube capable of being a single physical unit but floors separated from each other do not.
Uniformity of treatment as between ratepayers is essential and the President has defeated that requirement, it was submitted, and broken new ground by permitting non-contiguous areas to be treated as a single hereditament. There is no reason to depart from the general rule by giving benign treatment to occupiers of modern office blocks.
Mr Morshead accepted that, while the physical test is the general rule, there may be cases where a powerful functional connection between premises crosses or bridges the gap between them. The physical test must first be applied, however, before considering whether it may be displaced by a functional connection. In Gilbert, Parker LJ, at p54, emphasised the question “whether the premises form a geographical unit” and whether they “can [they] be ringed round on a map?” By using the expression “a unit of . . . property”, section 115 of the 1967 Act underlines the importance of the physical test. The VTE’S findings on “functional link”, even if adopted, do not achieve a single hereditament if the primary physical test is not satisfied.
There is no rational ground, it was submitted, for distinguishing between two buildings, each in the occupation of a ratepayer, and separated by a road, and two floors of a building, occupied by the same ratepayer but separated by a floor or floors occupied by others. It was submitted that the second and sixth floors in this case are plainly separate units of property, within the meaning of the statute, and should be entered onto the rating list as such. They each have a separate physical identity. The statutory definition of hereditament anchors the concept to the identification of a physically separate unit of property and the President’s approach departs from that core principle, it was submitted.
Mr Morshead referred to the Scottish Lands Tribunal case of Burn Stewart Distillers plc v Assessor for Lanarkshire Valuation Joint Board [2001] RA 110 at 140 to 141, where the Tribunal warned against drawing a “distinction for rating purposes between a business whose operating units were in close proximity and those whose operating units were, perhaps only slightly, more remote.” That, he submitted, clearly favours the approach he advocates. Contiguity is the test so that the uncertainties involved in distinguishing between degrees of proximity can be avoided.
We are grateful for the submissions of Mr Forsdick, as friend of the court, as we are for those of Mr Morshead. Mr Forsdick submitted that, when deciding whether premises occupied by a ratepayer are a single hereditament, it is a very important physical factor that both parts are in the same building. The physical test is not hard edged and the phrase “unit of property” is a neutral one.
A tower block is a single geographical location and the entire area occupied by the respondents is within it. That distinguishes the present case from cases concerned with property in separate buildings. Presence in a single building goes a long way to answering the question to be posed, it was submitted, and all property in a single occupation should be treated as a unit whether it consists of floors 3 and 4 or floors 2 and 6. In both cases, it was necessary to leave the demised premises and go through the common parts of the building to move between floors. The point was also made that adjoining floors are not strictly contiguous because they are usually separated by a concrete floor/ceiling not included in the demise to the occupier. The appellant accepts that floors 3 and 4 can constitute a single hereditament; floors 2 and 6 in common occupation also constitute a single hereditament for reasons given by the President, it was submitted.
Whether the occupied property is or is not on adjoining floors on the present facts makes no difference. The purpose of the physical/geographical test is to ensure that dispersed property is not artificially aggregated into a single hereditament and not to require the artificial disaggregation of property such as that occupied by the respondents at Tower Bridge House.
Provided the correct test is applied, what is and is not a hereditament is a question of fact (Gilbert). Mr Forsdick accepted that the more fragmented is a holding, even within a single building, the less likely it is to be a single hereditament and that there could be cases where a holding within the building is so fragmented that it would not constitute a single hereditament. Mr Forsdick also accepted that a claim to a single hereditament in a single building could be defeated on functional or occupational grounds if, for example, the occupier was a multi-disciplinary practice.
The physical test must be applied in the context of the occupation established. In the language of Parker LJ, a red line can be drawn around a single building in this case and the geographical threshold is crossed. Having regard to the purpose of the rating scheme, a distinction cannot properly be drawn between occupation of floors 3, 4 and 5 and occupation of floors 2 and 6. The single area test is more difficult to satisfy if property is split between different buildings but that is a legitimate distinction. Joinder may sometimes be justified on functional grounds in that situation but the respondent in the present case does not have to rely on a functional test, beyond showing occupation for the respondents’ purposes, and the President did not rely on it. I confess to a difficulty in deciding where, on the President’s reasoning, the line is to be drawn between “purpose of occupation” (President, para 22), which he says is important, and “functional interrelationship” (President, para 29), which is not, but it is not necessary to explore it further on the present facts.
The court sought assistance from counsel as to whether the rationale for the “end allowance”, which may be given as a result of the separation of floors, throws light on the definition of hereditament but counsel did not take up the invitation and I proceed on the basis that no light would be thrown.
Conclusions
I do not consider that the definition in section 115 of the 1967 Act changed the law. It would be surprising if it did because there was a deliberate carrying forward of hereditaments based on the pre-existing practice and definition. The definition is circular in defining a hereditament by reference to its liability for rating and to what is in the rating list. Reference to a “unit of such property” is simply a reference to a “separate item” of rateable property shown in the list and does not assist in defining what the separate item is. As Sedley LJ put it in Vtesse Networks Ltd v Bradford (Valuation Officer) [2006] EWCA Civ 1339, at [40], the definition “assumes and relies on an existing fund of knowledge of what is and is not capable of being shown as a separate item in the valuation list”.
The importance of the geographical test is plain. However, each member of the court in Gilbert acknowledged the importance of the fact finding role of the Tribunal. In this case, the premises were undoubtedly within a single building. Further, the President has made important findings of fact, which he summarised at [29] of the judgment, and I repeat a part of the first sentence setting out “the features of this case”:
“the fact that communication between floors, whether next to each other or not, is through the common parts of the building; the lack of any significant practical difference, from the occupier’s point of view, between floors that are next to each other and those that are separated”
That followed the President’s finding, at [23], that “contiguity between floors has no practical significance”.
The President’s decision does not appear to me to involve any departure from established principles. He expressly adopted a physical test and, accepting that floors of office premises are in the same occupation for the purposes of the occupying firm [20], did not espouse the further functional connection between parts relied on by the VTE [21]. The President applied a physical test to floors within a single building.
Applying the approach of the court in Gilbert to the President’s findings of fact, the separated floors in a single tower block legitimately constitute a single hereditament. The hereditament can be “ringed round on a map”. I doubt whether Parker LJ in Gilbert had the present issue in mind, the vertical plane, when he used that expression but to disaggregate premises held for a common purpose within a single “ring” in a single building would tend to defeat that geographical approach. As Morris LJ put it, at p52 in Gilbert, “it is better to employ a common-sense assessment of the features of the case than to seek to have recourse to some standard formula.” That is precisely what the President has done in his fact finding and reasoning. The appellant accepts that floors 3, 4 and 5, occupied by another firm in the same building, are a single hereditament. On the facts found, which are likely to be similar to those in many other office blocks, floors 2 and 6, in the occupation of the respondents, cannot legitimately be distinguished on practical grounds or in terms of the value of the occupation. In these circumstances the contiguity test is not decisive.
Access between floors at Tower Bridge House is possible only through the common parts of the building and there is a swift lift between floors 2 and 6 as there is between floors, 3, 4 and 5. Flexibility in applying a physical or geographical test is acceptable and its application does not permit a distinction, on physical grounds, between floors 3 and 4 and floors 2 and 6, in the circumstances of this case. I do not consider that to constitute a single hereditament, the floors must constitute the physical cube advocated by Mr Morshead. A common sense assessment of the features of the case, as approved by Morris LJ, has rightly led to the conclusion that floors 2 and 6 in this tower block constitute a single hereditament.
I would uphold the reasoning and conclusion of the President and dismiss the appeal.
Tomlinson LJ
said:
I agree.
Kitchin LJ
said:
I also agree.
Appeal dismissed.
