Business rates - Bad news for tenants who occupy separate spaces in a building

In August 2016 the Valuation Office Agency (VOA) announced a revision to the way it calculates business rates where a tenant occupies separate spaces in an office or other non-domestic building.

The change may result in a considerable increase in the overall rates bill of affected tenants and is also retrospective.

Rates are a property tax assessed on the basis of the number of property units - hereditaments - occupied. The change in VOA practice has been prompted by the Supreme Court decision in Woolway-v-Mazars. The ratepayer in Mazars occupied the 2nd and 6th floors of an 8-storey office block, held under separate leases and linked by a series of central lifts located in the communal parts of the building. The question was whether the two floors under common occupation should be treated as one rateable unit or two.

The issue is significant as substantial quantum allowances may be available if the premises are assessed as a single unit, thus leading to a lower rates liability. Not surprisingly then, the ratepayer in Mazars claimed that the two floors should be treated as one rateable unit and claimed a quantum allowance of 10%. The valuation officer argued that non-adjoining floors occupied by the same occupier but linked only through communal areas, as in this case, should be treated as separate units.

The ratepayer lost and the Supreme Court declared that as the two floors did not adjoin and did not directly intercommunicate, they were two distinct taxable units. The Supreme Court also cast doubt on the VOA practice of treating all adjoining spaces linked only through common parts as one rateable unit.

The VOA has announced that, as a result of Mazars, it is legally obliged to treat as separate rateable units different areas in a building that are occupied by the same tenant but do not directly intercommunicate and are only linked through communal areas such as lifts and stairwells.

This is the case even if the separate areas adjoin, thus reversing its previous practice. For example two consecutive floors in a multi-let office building occupied by the same tenant and connected only by a communal lift were treated as one unit for business rates purposes but will now be treated as two. However if the separate spaces do directly interconnect, for example by private internal lift or stairs, they will be treated as one unit. Further, a building with numerous floors all leased separately to a single occupier will be assessed as one unit even if the only access to each floor is through communal areas.

• The VOA change of practice is significant as this type of arrangement is common particularly in the office leasing sector. It will come as bad news to tenants who have enjoyed substantial quantum discounts as a result of the previous practice of treating separate floors as one hereditament. For example we are aware of one occupier of a large office building which occupies 7 out of 10 floors in the building, whose rates liability has increased by about £1 million per annum as a result of the loss of a 18.75% quantum discount.
• The change is retrospective and any increased rates payable will be backdated to the later of April 1, 2015 in England (April 1, 2010 in Wales) and the date that the tenant became the occupier.
• The change applies to spaces separated horizontally as well as vertically, for example adjoining or adjacent industrial units.
• Tenants who are affected by the change need take no action until they are contacted by the VOA. However they would be well advised to consider the financial impact of the change particularly if any increased liability will be backdated.
• Business tenants should be aware of the new VOA practice when devising their occupation strategy, as should landlords and developers when designing the lay-out of business premises.