Business Rates: Don't pull the Woolway over your eyes
A recent Supreme Court decision on business rates had the RPC Real Estate team talking, and not just because it related to our second & sixth floor neighbours, Mazars.
The case of Woolway v Mazars[1] is being hailed as a landmark case for the future of business rates in England & Wales, and will also have a major impact on the Valuation Office rating list.
What are business rates though? Effectively, they're council tax for commercial property. Rates are calculated by the Valuation Office, who work out the rateable value of your property (broadly speaking, the open market annual rent) and multiply it by a standard multiplier. The rateable values are then added to a list for businesses to compare their own rateable values with.
In the case of Mazars, the Supreme Court considered whether Mazars' occupation of two separate floors of Tower Bridge House in St Katharine Docks should be entered into the rating list as separate hereditaments or a single hereditament. If entered as a single hereditament, Mazars could make a significant saving on the business rates it paid.
The case has rattled on for five years, making its way through four courts, three of which ruled it was a single hereditament. Unfortunately for Mazars, in the decision that really mattered, the Supreme Court deemed it to be separate hereditaments.
In its decision, the Court dismissed the previous leading English case on hereditaments, Gilbert v Hickinbottom[2] as "unsatisfactory", and instead opted to follow the more logical steps taken by our Scottish neighbours.
The Court looked at three principles in deciding whether the occupation of separate floors constitutes a single hereditament:
- Geography
- Functionality
- Enjoyment
Reviewing the geography of the tenancy, the panel considered that Mazars would have to leave the confines of their tenancy and use the lifts or stairs in the common parts (whilst trying to avoid an inevitable static shock from the Tower Bridge House lifts!) to move from one level to the other. They deemed this the same as leaving a building and re-entering another, which would undeniably be considered separate hereditaments.
However the Court didn't completely rule out it being a single hereditament just because it didn't fit the geographical test. Instead, it also considered the functionality of the space― was the use of one floor necessary for the enjoyment of the other?
The Court defined the phrase "enjoyment" used in the functionality test as being dependent on the objectively ascertainable character of the property, not the business needs of the ratepayer. In Mazars' case, neither the functionality nor the enjoyment test were found to be applicable to the facts, and it wasn't considered a single hereditament.
But in reality, what does this all mean for ratepayers? Well the key issue for Mazars, and any other ratepayers in a similar position, is that with a tenancy over separate floors now considered as separate hereditaments, they may receive a reduced discount on any business rates paid. And for future tenants (and their lawyers) it provides another consideration to think about when reviewing the potential costs of a tenancy.
[1] Woolway v Mazars [2015] UKSC 53
[2] Gilbert v Hickinbottom [1956] 2 QB 40