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More than one storey: business rates liability

04 March 2016

A business may occupy a single unit of accommodation, such as a floor in an office building. Or it may occupy more than one unit, such as a number of floors within the office building. Such floors might adjoin, or they might be separated by other floors, or by common areas, or structural parts of the building. Or neighbouring properties might be occupied by the same business.

When a business occupies separate properties, including floors in a building, as part of a single business operation, what effect does this have on business rates liability?

The point came before the Supreme Court last year in the case of Woolway v Mazars [2015] UKSC 53.Mazars is an accounting firm and for the general purposes of its business it occupies floors two and six in an eight storey office building, under two separate but similar leases for the same term. The question before the Supreme Court was (for the purpose of calculating Mazars’ business rates liability) whether Mazars’ occupation of the two floors constituted a single occupation (of two premises together) or two separate occupations (of two premises separately).

Rates legislation defines a “hereditament” as “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”. In the Supreme Court decision in Woolway v Mazars, Lord Sumption gave the first judgment and started off by observing that:“The core concepts underlying the assessment of rates are that they are a tax on property and not on persons or businesses, and that the "hereditament" is the unit of assessment. Each hereditament is separately identified in the rating list and separately assessed, notwithstanding that the same occupier may have more than one.”

Whilst it is accepted that a floor within a building constitutes a hereditament, will two different floors under common occupation in the same building be classed as one hereditament, or two?

Lord Sumption identified three broad principles:

  • The primary test is geographical – where are the two premises relative to each other? Are they accessible only via common parts in the building? If the answer to this second question is yes, this suggests that the two premises are separate hereditaments. A connecting internal staircase (by way of example), on the other hand, would suggest that the two premises are one hereditament.
  • Where the primary test finds that two premises are geographically distinct, a functional test should be applied – is the use of one premises necessary to the enjoyment of the other? Could the two premises be let separately? If it can be said that the two premises function together, this would suggest that they are one hereditament.
  • In assessing whether one premises is necessary to the enjoyment of the other, it is not the business needs of the ratepayer that should be considered, but instead an objective necessity, to ascertain the character of the premises in question. 

Applying these principles to the facts in the Mazars case, the Court held that the two floors were two separate hereditaments. The fact that the accounting firm used two floors together for its business was not held to be relevant. Instead, the fact that each floor could only be accessed through the common parts and that each floor could be let separately were held to be the decisive factors.

This decision, and in particular the specific focus on the lack of any internal geographical connection (such as a staircase) between the two floors in the Mazars building, represents a departure from prior practice, as adjoining floors in buildings have traditionally been treated as one hereditament for rating purposes, whether or not there is any such internal geographical connection. In this case, the premises (floors two and six) were separated not just by structural parts of the building (e.g. floor slabs), but also by other office floors. However, the Court has highlighted that it seems illogical (though not impossible) to have two different tests; one for those floors that directly adjoin and one for those floors that do not. Therefore, the implications of this decision seem clear: if a tenant occupies different floors within a building pursuant to several leases (or perhaps even pursuant to one single lease) but without some sort of internal connection between the floors, and if each floor is in principle capable of being separately let, it is likely that each floor will be classed as a separate hereditament and will attract separate business rates liability.

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