Woolway v. Mazars  – One building, one business, two hereditaments
The Supreme Court has handed down judgment in a non-domestic ratings case that has overturned the approach to determining hereditaments where there are floors separated by common parts occupied by a tenant in the same building.
Section 41 of the Local Government and Finance Act requires a valuation officer to record each hereditament in his/her area and update the ratings list every five years. Previously, a ratepayer holding two or more non-contiguous leases within a multi-let building would expect the interests to be listed as one hereditament on the ratings list if an essential functional link existed between the floors let to the ratepayer.
The Supreme Court's decision changes this position. The consequence of this is that ratepayers with two or more hereditaments in a single building will likely be liable for more business rates than if the various demises had been treated as a single hereditament.
The Tower Bridge office block in question had eight floors. There was a common reception on the first floor, which contained lifts to the other floors as well as an atrium. Mazars occupied the second and sixth floors of the building. It had separate leases for each but they shared the same term.
The valuation officer initially entered them on the rating list as separate hereditaments. This was successfully appealed as the Valuation Tribunal determined that they should be treated as the same, concluding (on the facts) that there was no significant difference between floors that were contiguous and floors that were non-contiguous.
This was upheld by the Court of Appeal – there was sufficient connection through the common parts and there was no need for the floors to be a "physical cube".
The Supreme Court granted leave for appeal.
On appeal, the Supreme Court unanimously upheld the decision of the valuation officer – that floors demised in the leases should be treated as two separate hereditaments. The decision was based on three tests:
The geographical test
It is likely that if the parts of the property can only be accessed through some other property (i.e. common parts) then they are separate hereditaments. A common-sense approach is taken here as to whether the unit in question visually appears to be single or two or more units which are separated. However, where the use of one space is necessary to be able to use the other, the fact that they are geographically separate may be irrelevant. The remaining tests must be used to answer the question.
The functional test
The key question is whether the parts of the property could be used without each other. For example, could the units be let separately, or would this render either obsolete? Where they could be, this is a resilient argument that they are separate hereditaments for the purposes of ratings liability.
The objective necessity test
The character of the property will also dictate the position. A valuation officer must use his/her professional common sense to objectively ascertain whether the property itself constitutes a number of hereditaments, and ensure that this is not linked to the tenant's/occupier's individual business needs.
Points to consider
The position on whether non-contiguous lettings to the same ratepayer constitute a single hereditament has now been clarified. However, whilst there is more clarity than previously, there is still an element of subjectivity. The individual facts concerning each relevant set of lettings will have to be considered and there is still scope for arguments. The tests seem to qualify each other and make the scope for argument smaller, albeit still present.
The case is clearly bad news for ratepayers holding non-contiguous leases in one building. However, it is also potentially bad news for ratepayers holding contiguous leases. Lord Sumption's judgment in particular suggests that if adjoining floors are geographically separate then they form two hereditaments. What is the difference between leaving the demised floor 2 and taking the lift in the common parts to access floor 6 and taking the lift from floor 2 to floor 3? Further, under Lord Sumption's test, the fact that there is a single letting of two "contiguous" floors separated by services and common parts is irrelevant to determining the geographic test. Lord Neuberger's judgment endorses this approach – if the floors are separate self-contained units, they will not satisfy the test for a single hereditament, regardless of whether or not the floors are contiguous, save in exceptional circumstances. The logical extension of this could be where the majority, or possibly the whole, of a building is let, but the landlord retains common parts and plant areas. If the floors are geographically separate, the default position would suggest separate hereditaments.
It is commonplace for businesses to have a demise of more than one floor in a building. The Supreme Court's decision in Woolway is likely to have a big impact on ratings liabilities when the Valuation Office Agency compiles the next rating lists. Separate hereditaments may not be taxation neutral, so businesses should plan for split hereditaments and take appropriate expert advice. In respect of future business decisions, the shape and layout of a potential building should be a consideration when ascertaining potential costs associated with any potential letting of the building or part of it. Further, a tenant may wish to ensure that it is able to effect alterations to the premises to ensure that there is sufficient interconnection between separate areas to minimise ratings liability risk.