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Supreme Court: unconnected floors in office building were separate units for ratings purposes


The Lands Chamber was wrong to find that two unconnected floors in a London office building should be treated as a single 'hereditament' for the purpose of calculating business rates liability, the UK's highest court has ruled.

In a case involving accountancy firm Mazars, the Supreme Court overturned a ruling that had been backed by the Court of Appeal in 2013. In his leading judgment, Lord Sumption said that the firm's office space failed both a "geographic" test and a "functional" one, because the use of one was not "necessary to the effective enjoyment of the other".

Lord Sumption said that the particular facts of the case, in which it was only possible to get from one of the floors to the other by means of a common lift and corridor space, was "no different, either geographically or functionally, from leaving a building which is exclusively occupied by the ratepayer, crossing land belonging to someone else and entering another building under the same occupation".

"The president [of the Lands Chamber] remarks that the lifts were fast and the move from one level to the other simple, but why should that be any more relevant than the fact that the separate building was only a short distance away or could be reached at high speed by car?" he said.

"There is nothing anomalous about the notion that the result is different [to when the two floors are connected] when the spaces are not contiguous and do not directly intercommunicate. It simply shows that the same occupier has two distinct taxable properties, just as he would have if they were on opposite sides of the street," he said.

Business rates are charged on individual hereditaments, a word which is used to mean units of occupation. Mazars occupied the second and sixth floors of the eight-storey office building in dispute in this case, while law firm Reynolds Porter Chamberlain occupied the first, third, fourth and fifth floors. The court heard that valuers generally recorded contiguous floors as a single hereditament, but non-contiguous floors as separate hereditaments. In 2010, Mazars applied to merge its two floors into one single hereditament. The Valuation Officer disagreed.

In its judgment, the Supreme Court listed "three broad principles", derived from case law, relevant to whether distinct spaces under common occupation formed a single hereditament. These were geographical, "based on visual or cartographic unity"; and functional, "but only where the use of the one is necessary to the effectual enjoyment of the other". The functional test was subject to an additional test, where its use depended "not on the business needs of the ratepayer but on the objectively ascertainable character of the subjects".

Lord Sumption said that although spaces that were joined together would normally pass the geographical test, "unity is not simply a question of contiguity".

"If adjoining houses in a terrace or vertically contiguous units in an office block do not intercommunicate and can be accessed only via other property (such as a public street or the common parts of the building) of which the common occupier is not in exclusive possession, this will be a strong indication that they are separate hereditaments," he said.

In this case, the Lands Chamber had applied neither of the tests, he said. The president's ruling "introduces an arbitrary distinction between horizontal and vertical separation which responds to no discernible principle", he said.

In a concurring judgment, Lord Gill emphasised that the functionality test was "not a reference to the use that the ratepayer chooses to make of the premises". "It is a reference to the necessary interdependence of the separate parts that is objectively ascertainable," he said.

"To the three general principles that Lord Sumption has laid down, I would add only the comment that in the application of them, the concept of fairness, alluded to in this case by the president of the [Lands Chamber], has no place. In my opinion, these general principles provide straightforward and workable guidance that is consistent with the underlying theory of rating law that rates are a tax on a ratepayer's property and not on a ratepayer's business," he said.

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