Rating – Non-domestic rates – Hereditament – Office premises – Respondent ratepayer occupying second and sixth floors in modern office building – Whether two non-contiguous floors properly listed together as single hereditament – Whether listing contrary to “geographical” or “functional” tests for identification of hereditament – Appeal allowed
The respondent ratepayer, a large accountancy firm, occupied two floors in a modern, eight–storey office block, E1. 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 respondent 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 Court of Appeal upheld that decision: see [2013] EWCA Civ 368; [2013] 2 EGLR 129; [2013] EGILR 10. The appellant appealed to the Supreme Court.
Held: The appeal was allowed.
(1) In principle, the fact that the same occupier held two or more properties was irrelevant to the rateable status of them. If the law was to be rational and consistent, the circumstances in which a continuous territorial block was treated as several separate properties, or geographically separate properties treated as one for rating purposes, had to be determined according to some ascertainable and defensible principle. Three broad principles were relevant when deciding whether distinct spaces under common occupation formed a single hereditament.
First, the primary test was geographical, based on visual or cartographic unity and whether the premises said to be a hereditament constituted a single unit on a plan. Contiguous spaces would normally possess that characteristic, although unity was not simply a matter of contiguity. If vertically or horizontally contiguous units did not intercommunicate and could be accessed only via other property, such as a public street or common parts of the building, of which the common occupier was not in exclusive possession, then that would be a strong indication that they were separate hereditaments.
Second, where two sections were paces were geographically distinct according to that test, they might nevertheless be treated as a single hereditament by applying a functional test, if the use of one was necessary to the effectual enjoyment of the other. That question could often be tested by asking whether the two sections could reasonably be let separately.
Third, the question of whether the use of one section was necessary to the effectual enjoyment of the other did not depend on the business needs of the ratepayer and the uses which, for its own purposes, it chose to make of the property, but instead depended on the objectively ascertainable character of the property. Geographically separate premises could not be valued as one hereditament simply because the ratepayer chose to link its use of one with its use of the other: Bank of Scotland v Assessor for Edinburgh (1890) 17 R 839 and (1891) 18 R 936, University of Glasgow v Assessor for Glasgow 1952 SC 504, Midlothian Assessor v Buccleuch Estates Ltd [1962] RA 257, Hambleton District Council v Buxted Poultry Ltd [1993] AC 369 and Burn Stewart Distillers plc v Lanarkshire Valuation Joint Board [2001] RA 110 applied.
(2) While the application of those principles could not be a mere mechanical exercise, and would commonly call for a factual judgment on the part of the valuer and the exercise of a large measure of professional common sense, the tribunal was not free to give such weight as it chose to the functional test or to allow the business choices of the occupier to determine the bounds of the hereditament. Although both the geographical and functional principle required an evaluation of the facts by the tribunal of fact, the relationship between them was not itself a question of fact but was a question of principle to be resolved by the application of the three tests set out above, with the geographical having primacy. The concept of fairness had no place in applying the three principles, which provided straightforward and workable guidance that was consistent with the underlying theory of rating law that rates were a tax on a ratepayer’s property and not on its business. It was important to proceed by reference to clear and principled rules which were capable of uniform application.
(3) In the instant case, the Upper Tribunal had applied neither a geographical test nor a functional one. It had not asked whether the possession of both floors was necessary to the enjoyment of either, or whether they could be let separately, or whether they intercommunicated. It had erred in taking the view that, when separate premises were located in the same building, the geographical test should not be applied. It had therefore failed to ask whether the alleged single hereditament could be “ringed around on a plan”, the answer to which would have been negative. Its approach introduced an arbitrary distinction between horizontal and vertical separation which responded to no discernible principle. In order to pass from the second to the sixth floor, it was necessary to leave the demised premises and pass over common parts over which the respondent had a licence no right of possession. That was no different, either geographically or functionally, from leaving one building, crossing land belonging to someone else and entering another building under the same occupation. The respondent had two distinct taxable properties in the same way as it would have done had they been on opposite sides of the street. The premises demised to the respondent on the second and sixth floors of the building should accordingly be entered in the rating list as separate hereditaments: Gilbert distinguished.
Per curiam: Although the present case was concerned with non-contiguous floors of a building, it was not necessarily the case, unless the two spaces directly intercommunicated, that vertically or horizontally contiguous spaces in the same building should fall to be treated as one hereditament.
Timothy Morshead QC and Daniel Kolinsky QC (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.
Sally Dobson, barrister
Click here to read the transcript of Woolway (VO) v Mazars LLP
