The Ministry of Housing, Communities and Local Government (MHCLG) published its consultation on “Business Rates in Multi-occupied Properties” on 29 December 2017. The purpose of the consultation is to unwind the practice of the Valuation Office Agency (VOA) following the seminal Supreme Court decision in Woolway (VO) v Mazars LLP [2015] UKSC 53; [2015] EGLR 56, writes Bryan Johnston.
The significance of Woolway was that contiguous property units occupied by the same occupier became potentially assessable as separate hereditaments, whereas previously they were treated as one hereditament. As a quantum discount applies to the valuation of larger spaces, the effect of Woolway was not tax neutral and inevitably led to higher business rates bills, despite the fact the actual occupied floorspace remained unchanged. MHCLG seeks to reinstate practice pre-Woolway.
Pre-Woolway
Prior to Woolway the basic position was that, where two or more properties were contiguous and in the same occupation, they were treated as one hereditament. Where the properties in the same occupation were not contiguous, they were treated as separate hereditaments. The VOA treated contiguous properties in the same occupation as a single hereditament where the properties were separated by a wall or by a floor/ceiling, including where services existed in the wall or between the floor/ceiling.
Woolway
Woolway concerned Mazars’ lettings of floors 2 and 6 in Tower Bridge House. The units were therefore non-contiguous. Lord Neuberger held that “a hereditament is a self-contained piece of property (ie property all parts of which are physically accessible from all other parts, without having to go onto other property), and a self-contained piece of property is a single hereditament”.
While the facts of Woolway concerned non-contiguous property, the consequences of the decision very much affected contiguous property. Applying the geographic, functional and objective tests arising from Woolway, the fact of contiguity was irrelevant if each same-occupied unit was separately lettable, objectively assessed.
Response
On 8 August 2016, the VOA announced that it would change its valuation approach to align with Woolway and noted the likelihood of rates increases. Industry was justifiably concerned, especially in view of the impact of the 2017 revaluation and also the then-pending whole-scale reform of the rating appeals structure.
In addressing industry concerns, the chancellor of the exchequer, Philip Hammond, announced in the 2017 autumn Budget that the government would legislate retrospectively to address the effect of the so-called “staircase tax” (ie the increase in rates arising from the loss of the quantum discount that would have applied if one large hereditament was assessed as opposed to two smaller ones making up the same floor area).
Consultation
MHCLG has sought to start the unravelling process swiftly. The consultation proposes draft legislation to give effect to the government’s intention and invites industry and stakeholder comment on it, as well as on the practicalities of restoring ratepayers who were adversely affected by Woolway in both the 2010 and 2017 rating lists.
In the draft Non-Domestic Rating (Property in Common Occupation) Bill, separate properties in the same occupation are assumed to be separate hereditaments. However, if they meet the “contiguity condition”, then they will be treated as one hereditament.
There are two core issues:
■ what is “contiguity”; and
■ what is the “condition”?
The drafting provides that two hereditaments are contiguous if some or all of a wall of one hereditament forms part of a wall of the other hereditament. A similar provision concerns the floor and ceiling of separate hereditaments. MHCLG will need to ensure that this definition is sufficiently wide to meet the stated aim of achieving contiguity even where there are void spaces between walls and floors/ceilings.
Paragraph 29 of the consultation document envisages that, where void space or ducts exist between walls and floors/ceilings, then the property units either side of the walls or floors/ceilings will be contiguous. Whether the drafting in the proposed legislation reflects this is something that will need to be scrutinised heavily to achieve certainty and avoid further litigation.
In respect of the condition, this is satisfied where at least two hereditaments are contiguous and, where there are more than two hereditaments that are not all contiguous with each other, there is a chain of contiguity.
The draft legislation also clarifies that same-ownership contiguous property where the property units are used for different purposes will be assessed as separate hereditaments. This simply confirms the practice pre- and post-Woolway.
The consultation also proposes that ratepayers can apply to unwind backdated changes to the 2010 list and on the basis of the 2010 appeals process. In respect of the 2017 list, the VOA is obliged to maintain the list to reflect reinstatement. Ratepayers can submit prioritised “checks” to ascertain if reinstatement affects them.
Cautious optimism
The consultation is welcome news, though when any bill will become law is unknown. Further, the definition of “contiguous” will require very careful consideration to ensure that government intention is adequately reflected in any final legislation.
The consultation scope is limited to contiguous units. It does not affect non-contiguous units, such as floors 2 and 6 let to Mazars in Woolway. It does seem commercially unfair and removed from the realities of business occupation that a letting of floors 1 and 2 of a building should be liable for a higher rateable value than the combined rateable value of floors 1 and 3 (all else being equal). However, this is reflective of the tax being of property and not businesses. While commercially pragmatic, there is no present political will to extend the reinstatement, which may well be viewed by ratepayers as an opportunity missed.
The consultation is open until 23 February 2018 and can be found by clicking here
Bryan Johnston is a partner in real estate litigation at Dentons UKMEA LLP
