When Two Does Not Become One

The recent Supreme Court decision in Woolway (VO) v Mazars LLP is likely to increase the business rates burden for occupiers of premises on multiple floors of a building or in adjoining units.

Business rates are a tax on property and not persons or businesses. Each property is individually identified in the rating list and assessed separately. Mazars demonstrates that this rationale is at the heart of the current business rates crisis and its detrimental effect on businesses.

Until the Mazars case, a ratepayer holding two or more leases of floors within a multi let building would expect the interest to be listed as one hereditament on the ratings list if an essential functional link existed between the floors, for example the same business was being carried out on each floor of the building. This was the case whether or not the floors adjoined each other. Consequently the ratepayer received a discount in respect of their rates liability which was less for one large hereditament than two separate smaller hereditaments. The case which established the law in this area involved a bakery business operated from two properties on different sides of a street. It was ruled that both premises comprised one hereditament for the purpose of the rating list.

The Mazars case has changed the legal tests to establish the ratepayer's liability for premises occupied by one business on multiple floors of a building or in adjoining units. In Mazars the tenant occupied the second and sixth floors of a London office block under separate leases. There was a common reception area on the first floor which contained lifts to the other floors. The Valuation Officer initially entered the two floors as two separate hereditaments on the rating list. This was appealed by the tenant and the matter was challenged by HMRC all the way to the Supreme Court. The Supreme Court unanimously ruled that the floors demised in the two leases should be treated as two separate hereditaments. The Court set out criteria to determine whether or not a tenant in occupation of two or more leases of non-contiguous floors in a building is a ratepayer for one or more hereditaments.

Three tests were established by the Court:

The geographical test - if the premises can only be accessed through another property (such as a lift in the common parts) then they are separate hereditaments. The functional test - this enables two spaces that are geographically distinct to be treated as a single...