[2024] UKUT 304 (LC)

Statute does not provide a definition of what constitutes a hereditament. Section 64(1) of the Local Government Finance Act 1988 defines a hereditament by reference to section 115(1) of the General Rate Act 1967 which in turn avoided the issue by saying only that that a hereditament is “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.” Whether a property falls to be shown as a separate item in the valuation list is determined by applying principles developed by judges through the cases.

Unsurprisingly the question of what constitutes a hereditament is not new. The leading authority is the decision of the Supreme Court in Woolway (VO) v Mazars LLP [2015] UKSC 53 which concerned two office floors occupied by a firm of accountants in a multi-let office building near Tower Bridge. The floors were not contiguous and could function independently. Lord Sumption JSC at paragraphs 5 and 6 said:

“The question which arises in a case like this is a very simple one. Given that non-domestic rates are a tax on individual properties, what is the property in question? In principle, the fact that the same occupier holds two or more properties is irrelevant to the rateable status of any of them. He must pay rates separately on each. …

6.

There are two principles on which these questions might be decided. One is geographical and depends simply on whether the premises said to constitute a hereditament constitute a single unit on a plan. The other is functional and depends on the use that is or might be made of it. The distinction was first applied in a series of rating cases in Scotland … These cases establish that the primary test is geographical, but that a functional test may in certain cases be relevant either to break up a geographical unit into several subjects for rating purposes or to unite geographically dispersed units …. By far the commonest application of the functional test is in derating cases. In these cases, the functional test serves to divide a single territorial block into different hereditaments where severable parts of it are used for quite different purposes. Thus a garage used in conjunction with a residence within the same curtilage will readily be treated as part of the same hereditament, whereas a factory within the same curtilage which is operated by the same occupier may not be. There are, however, rare cases in which function may also serve to aggregate geographically distinct subjects. It is with this latter question that the present appeal is concerned.”

The first of Lord Sumption’s tests is geographical. It can be seen from the plan that forms part of paragraph 8 that the two yards are contiguous and share a common boundary. It is easy to pass from one to the other. The same can be said of the farm as a whole; it surrounds the yards entirely. The farm and the two yards could be occupied separately but the geographical test indicates that this is one hereditament. It is not necessary to engage the functional test where two geographically distinct entities are treated as a single hereditament because the use of one is, in the words of Lord Sumption at paragraph 12 of Mazars, ‘necessary to the effectual enjoyment of the other’. I note that a licenced racing yard must have access to gallops and the gallops at Holdenby North Lodge are separated from the yards by other areas of the Farm.

In John Laing & Son Ltd v Assessment Committee for Kingswood Assessment Area [1949] 1 KB 344, rateable occupation was defined as having four ingredients: there must be actual occupation, which is exclusive for the purposes of the possessor, and the occupation must be of benefit to the possessor and not transient. In Zhylzhaxynova the Tribunal recalled that:

“the requirement of ‘exclusive’ occupation does not preclude another person being in occupation, it simply means that the occupier must be the only one occupying the property for its particular purposes.”

In Hollywell Union and Halkyn Parish v Halkyn District Mines Drainage Co [1895] AC 117 Lord Herschell LC at 126 said:

“There are many cases where two persons may, without impropriety, be said to occupy the same land, and the question has sometimes arisen which of them is rateable. Where a person already in possession has given to another possession of a part of his premises, if that possession be not exclusive he does not cease to be liable to the rate, nor does the other become so. A familiar illustration of this occurs in the case of a landlord and his lodger. Both are, in a sense, in occupation, but the occupation of the landlord is paramount, that of the lodger subordinate.”

In Westminster Council v Southern Railway Company Ltd [1936] AC 511 Lord Russell at p.529 commented:

“The question in every such case must be one of fact – namely, whose position in relation to occupation is paramount, and whose position in relation to occupation is subordinate; but, in my opinion, the question must be considered and answered in regard to the position and rights of the parties in respect of the premises in question, and in regard to the purpose of the occupation of those premises. In other words, in the present case, the question must be, not who is in paramount occupation of the station, within whose confines the premises in question are situate, but who is in paramount occupation of the particular premises in question.”

Thedegree of control over the premises in question is an important component in the determination of which of two or more occupying parties is in rateable occupation. In Ludgate House Ltd v Ricketts (VO) [2020] EWCA Civ 1637 the Court of Appeal determined that the landlord of an office building rather than property guardians who were occupying part was in rateable occupation of the whole property. The Court said at paragraph 40 that:

“If there is more than one candidate, who is in rateable occupation depends on ‘the position and rights of the parties in respect of the premises in question’”.

And referring to the landlord’s contractual ability to require the guardians to move to a different part of the building Lewison LJ said at paragraph 81:

“… it is difficult to think of a greater retention of general control over premises than the ability to require the occupier to vacate the premises without notice”.

In Cardtronics UK Ltd v Sykes [2020] UKSC 21 the Supreme Court considered whether ATM sites in supermarkets operated by banks who were part of the same supermarket chain were separate hereditaments. InKevin Prosser KC v Andrew Ricketts (VO) [2024] UKUT 264 (LC) the Tribunal, at paragraph 53, explained the Supreme Court’s reasoning as follows:

“Lord Carnwath JSC, with whom the other members of the Supreme Court agreed, relied at [46], on Lord Herschell’s illustration of the applicable principle in Holywell Union by reference to the example of a landlord and a lodger, where the landlord occupies the whole of the premises for the purpose of his business of letting lodgings. This Tribunal had been satisfied on the evidence that the retailers retained occupation of the ATM sites, notwithstanding the rights they had conferred on the banks which substantially restricted their own use of those sites, but having done so because the presence of the ATMs furthered their own business purposes. Both parties therefore derived a direct benefit from the use of the site for the same purpose and shared the economic fruits of the activity for which the space was used. That finding was sufficient, Lord Carnwath concluded, to support the conclusion that the sites remained in the occupation of the retailers.”