A decision of the Supreme Court at the end of July, Woolway (Valuation Officer) v Mazars LLP  UKSC 53 has potentially altered the way that business rates will be applied to the occupation of multiple floors in a building.
Business rates are charged on a “hereditament”, which is a unit of property. What constitutes a separate hereditament for rating purposes is a question of fact.
Prior to this case, valuation officers had for some years adopted the practice of treating neighbouring storeys under common occupation as one hereditament, but storeys separated by other floors as distinct hereditaments for rating purposes. Put simply this meant that if one business occupied floors 1, 2 and 3 it could be rated as a single unit but if it occupied floors 1, 3 and 5 it may be rated as three distinct units with any increased rates liability this may entail.
In the case before the Supreme Court, the valuation officer was seeking to overturn a decision that the occupation of floors 2 and 6 in a modern eight storey office building under separate leases should be treated as a single hereditament for rating purposes.
In allowing the appeal the Supreme Court set down three key principles to use when considering whether the occupation of the floors should be treated as single or multiple hereditaments:
- Geographical test; are the units contiguous; by which they mean adjoining. If they do not intercommunicate without the need to have access to other property (ie common parts) that is a strong indication they are separate hereditaments
- Functional test; if the units are geographically distinct, is the use of one necessary to the enjoyment of the other
- In determining whether the use of one unit is necessary for the use and enjoyment of the other, consideration should be given not to the use made of it by the occupier but to the objectively ascertained physical character of the premises.
In applying these principles Mazars occupation of floors 2 and 6 failed the geographical and functional test. However, more importantly three of the Lords in the Supreme Court made it clear that, if these principles were applied, they did not see why premises on separate floors, even if they are neighbouring floors in a building, should be treated as a single hereditament unless they intercommunicate (eg there is an internal means of access such as a staircase so that the common parts do not need to be used to move between them).
It is not clear what the approach of the Valuation Office Agency will be to the case. If this approach is adopted by valuation officers, rate payers with multiple floors in buildings (even if the floors are held under a single lease) could face higher rates bills if floors are rated as multiple hereditaments, unless they can present arguments that the floors are interlinked or unable to be let separately.