[2024] UKUT 204 (LC)

Non-domestic rates are a tax on property not on businesses, and the unit of taxation is the “hereditament” – a word that lawyers are saddled with despite their best efforts to use plain English and ordinary language. There is no useful statutory definition of a hereditament, and we have to look to case law to discern whether the Unit is one hereditament or two.

The issue that the Supreme Court had to decide in Woolway (VO) v Mazars LLP [2013] UKSC 53 was whether two different floors in a building, occupied by the same business, were two hereditaments or one. The two floors were independently accessed and neither needed the other in order to function. Their self-contained and independent identity meant that they were two hereditaments. At paragraph 5 Lord Sumption said this:

This appeal is not about that latter question but about the former: is the Unit “a single territorial block … where severable parts of it are used for quite different purposes”, like a factory in the grounds of a residence, and therefore two hereditaments?

The primary test is geographical. In the present case the Unit was let as a single unit of occupation and appears to us to have been very obviously designed as such. We have found as a fact that the warehouse and office parts of it are not self-contained. The geographical test points to this being one hereditament, although it is not conclusive because, as we have found, the two halves could be separated.

We have found that QNP Toys is in occupation of the warehouse. Is it in rateable occupation?

Rateable occupation was defined in John Laing & Son Ltd v Assessment Committee for Kingswood Assessment Area [1949] 1 KB 344; there must be actual occupation, exclusive for the purposes of the possessor, which is of benefit to the possessor and is not transient. On that basis QNP Toys is in rateable occupation (since 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).

But we have also found that QPL is in occupation of the whole Unit. The question therefore arises: which of the businesses is in paramount occupation so as to be the ratepayer?

That was the issue in Cardtronics, where the Supreme Court had to decide whether ATMs inside and outside supermarkets were separate hereditaments. It was held that although the ATMs were physically identifiable as hereditaments, nevertheless the retailer remained in rateable occupation. Lord Carnwath at paragraph 14 quoted Lord Herschell LC in Hollywell Union and Halkyn Parish v Halkyn District Mines Drainage Co [1895] AC 117 at 126:

So at this stage of the enquiry exclusive possession in the literal sense is important (contrast paragraph 29 above). And on the facts here, QNP Toys certainly does not have exclusive possession. It has no right to exclude QPL, and indeed QPL retains the right to require it to leave at any time (unrealistic as that may seem to the appellant; but these limited companies are separate legal persons whose ownership could change).

As Lord Neuberger put it at paragraph 49 of Mazars:

That is precisely what has not happened here. And while we agree with the appellant that separate leases of the two hereditaments might not be essential, in the absence of separate leases there would have to be in fact exclusive possession by QNP Toys, which is not the case here.

Equally important is control. Westminster Council v Southern Railway Co [1936] AC 511 was about the occupation of retail units at Victoria Station including bookstalls and a chemist’s shop. It was held that the retailers were in rateable occupation of their own units, which they operated autonomously and without the railway company playing any role in the running of their business. The same analysis – with the opposite outcome – is seen in Libra Textiles Ltd (t/a Boundary Mills Stores) v Roberts (VO) [2020] UKUT 237 (LC). In Ludgate House Ltd v Ricketts (VO) [2020] EWCA Civ 1637 the question was whether property guardians, living in a multi-storey office building with obligations to assist with the security of the building, were in rateable occupation of their rooms or whether the ratepayer remained in rateable occupation of the whole property. The Court of Appeal (at paragraph 40) said this:

Lewison LJ was quoting there the words of Lord Russell of Killowen in Westminster Council v Southern Railway. His words answer the appellant’s contention that the lease of the Unit is irrelevant; on the contrary, the House of Lords in Southern Railway looked carefully at the rights retained over the shops by the railway company, and similarly in Ludgate House the terms of the written agreement under which which the guardians occupied their rooms were crucial; as Lewison LJ put it at paragraph 44, “The critical point was the terms on which the putative hereditament was held”. In Ludgate House the guardians were obliged to change rooms when asked to do so; at paragraph 81 Lewison LJ said:

Here QNP Toys has no rights at all over the warehouse, It can be required to leave at any point; it is there as a licensee and has no control of warehouse. QPL remains in paramount occupation of the whole Unit.