12 October, 2017
Woolway v Mazars [2015] UKSC 53 (UK Supreme Court)
Introduction
In 2015 the Supreme Court of the United Kingdom held that non-contiguous floors occupied in the same building by the same business, whether or not held under the same lease, should be treated separately for rating purposes. This was a decision stemming from the Rating Act in England and Wales, a statute which differs materially from Hong Kong’s Rating Ordinance.
There has been some suggestion from the surveying profession that, following this decision, the Rating and Valuation Department in Hong Kong (RVD) has reviewed the long-established basis on which rates are assessed which may have significant financial implications for major landlords and tenants in Hong Kong.
This note reviews the decision, comments on the comparable rating principles in Hong Kong and considers the possible implications of the decision for Hong Kong landlords and tenants.
The Woolway Case
Facts
Mazars occupied levels two and six of Tower Bridge House, an eight storey office block in London, under two separate but similar leases for an identical term. The two floors are separated by common areas and were entered in the rating list as separate hereditaments. Mazars applied for and the Valuation Tribunal for England (VTE) agreed to merge the two entities to form a single hereditament.
Mr. Woolway, the valuation officer, challenged the VTE’s decision on the ground that the properties were two separate hereditaments. The Upper Tribunal disagreed, confirming that the premises could be treated as one hereditament, a decision which the Court of Appeal agreed with.
Mr. Woolway appealed to the Supreme Court of the United Kingdom.
The legal issue
The question before the Supreme Court was how different storeys under common occupation in the same block are to be entered in the rating list for the purpose of non-domestic rating.
The Supreme Court’s reasoning
In a unanimous decision, the Supreme Court held that levels two and six comprised two separate hereditaments (the UK unit of assessment; in Hong Kong the unit of assessment is a tenement). Highlighting that the existing UK authorities were not entirely consistent, Lord Sumption set out clear statements of the principles to be applied, with Lords Neuberger, Carnwath and Gill giving separate concurring judgments. It did so on the basis that these principles were applicable in the absence of any clear definition in the Rating Act as to what constitutes a hereditament.
The Supreme Court stated that three broad principles are relevant when determining whether distinct spaces under common occupation form a single hereditament. While it did not name the principles, they can be categorised as the geographical test, the functional test and the objective necessity test.
The geographic test is the primary test and based on visual or cartographic unity. In other words, does the property look like it comprises a single unit and can it be delineated by drawing a continuous line on a plan? Contiguous spaces will normally possess this characteristic, but unity is not simply a question of contiguity: if contiguous units do not inter-communicate and can only be accessed via other property of which the tenant is not in exclusive possession (for example, a public street or the common parts of a building), this will be a strong indication that they are separate hereditaments.
Lord Gill added that the discontiguity between the offices in question lay in the fact that the only access between them was through the public parts of the building, not whether they are vertically or horizontally adjacent. This would mean that if two units were joined by a staircase or the removal of a dividing wall then they would form one hereditament, but if access between the same two units was only over land used in common by other tenants in the building, then they would form two hereditaments.
Where two spaces are geographically distinct, a functional test may nevertheless enable them to be treated as a single hereditament, but only where the use of one space is necessary to the effectual enjoyment of the other. This can usually be tested by considering whether the two spaces could reasonably let separately; if so, this will ordinarily indicate that they comprise separate hereditaments.
The question of whether the use of one section is necessary to the effectual enjoyment of the other depends not on the business needs of the individual ratepayer but on the objectively ascertainable character of the premises, which requires a factual judgment on the part of the valuer exercising professional common sense. (Arguably, the “objective necessity test” is not a separate principle in its own right but simply clarifies the way in which the “functional test” applies).
Lord Neuberger added that where premises consist of two self-contained pieces of property, it would require relatively exceptional facts before they could be treated as a single hereditament. Further, the mere fact that each property had the same occupier should normally make no difference, although he accepted that if one property could not sensibly be occupied or let other than with the other property, they should normally be treated as a single hereditament.
Decision
On the facts before it, the Supreme Court, reversing the decision of the Court of Appeal, held that levels two and six in the same building occupied by the same business should be treated separately for rating purposes.
Rating in Hong Kong
Rating Ordinance
Rating matters in Hong Kong are governed by the Rating Ordinance (Cap. 116). Rates are assessed on the basis of a rateable value which is equivalent to the annual rental value of a tenement calculated according to a statutory hypothesis. Ratepayers are notified of the rates payable every April at the General Revaluation, or through an Interim Valuation, which may be issued at any time.
There are two key sections of the Rating Ordinance which impact the applicability of Woolway in Hong Kong.
Section 2 defines “tenement”, the unit of assessment in Hong Kong, as follows:
“any land (including land covered with water) or any building, structure, or part thereof which is held or occupied as a distinct or separate tenancy or holding or under any licence”.
Section 10(1)(a) provides as follows:
(1) Subject to this Ordinance, the Commissioner shall separately estimate the rateable value of each tenement, except in the following cases –
(a) if –
(i) the value of a tenement is affected by the value of any other tenement; and
(ii) the tenements are used in connection with one another,
the tenements may, in the discretion of the Commissioner, be valued together as a single tenement”.
Historic approach by RVD
RVD’s longstanding approach has been to delineate each “tenement” on the basis of the structure of the relevant lease, licence or holding, an approach that appears consistent with the intent expressed in Section 2. Rates on property have, therefore, been assessed on what might be termed a “lease-centric” or “holdings-centric” basis.
Further, where a tenant holds separate spaces or floors in a building under several leases, or separate properties that operate functionally as one unit, the RVD has generally merged those tenements together for rates assessment purposes under the powers provided in Section 10.
Is there a change in the wind?
Surveyors in Hong Kong have reported that, apparently on the strength of Woolway, RVD is now seeking to revalue as multiple smaller tenements, premises that had previously been valued as one tenement.
This change in direction is important since rents for large premises (whether held under a single lease or not) tend to take account of the size of the premises being leased with larger premises having a smaller unit rate. Since the rent payable forms one of the comparables on which the rateable value of the property is calculated, if the RVD adopts the Woolway approach, the rates payable for these premises could increase substantially.
Although tenants usually pay the rates due on a property, Landlords are not immune for they are usually liable for payment of government rent which is in many cases also assessed on the rateable value. If landlords now seek to pass the government rent to tenants as well, the tenant’s occupancy costs will raise still further.
The fundamental question is whether Woolway is applicable in Hong Kong.
Commentary
Is Woolway applicable in Hong Kong?
It bears remembering that Woolway is a decision of the highest court in the United Kingdom. However, while English law is persuasive, it is not binding on the Hong Kong courts particularly where local statute differs.
In England and Wales, the Rating Act does not contain a specific definition of hereditament. In Woolway the Supreme Court therefore stepped in to give guidance as to how the boundaries of a hereditament should be set based upon common law precedent, mostly Scottish law.
However, and crucially, the Supreme Court expressly stated that the principles set out were only applicable “in the absence of further statutory definition”. Of course, Section 2 of the Rating Ordinance gives just such a definition. RVD has for decades interpreted that Section according to the natural meaning of the language, that is, that the tenement is the whole property held under a separate lease, licence or holding. The interpretation of this provision in a different way is arguably contrary to the statute and indeed to other authority.
In respect of Section 10, it is to be noted that Woolway relegates the functional test to a secondary test, whereas Section 10 expressly allows the RVD to value tenements together where they are functionally connected. There are many ways in which major premises may objectively be functionally connected particularly when one considers the deemed condition of the premises for the rating hypothesis. While the powers under Section 10 are discretionary, Woolway should not be taken as providing any judicial guidance as to how the statutory discretion should be exercised, particularly in light of Section 2.
There appears to be a compelling case for interpreting the Rating Ordinance in a way that renders Woolway in conflict with Section 2 and other case-law, such that it should not apply in Hong Kong.
It should be noted that as at the date of this note, Woolway has not been judicially considered in Hong Kong.
Options for landlords and tenants
If the RVD is to adopt the Woolway approach, there may well be a significantly higher financial burden on tenants and landlords for rates and government rent – that would be the whole point of following the UK decision after all. What can be done?
The RVD usually gives scant justification for its approach to an assessment (which brings into question the transparency and fairness of the rating tax system – but this is for another day). The rate or rent payer is therefore left with a stark choice – it can choose to pay the amount demanded (which may be the preferred option for modest amounts of space) or to object to the assessment by bringing an action in the Lands Tribunal challenging the assessment.
(click here for the Press Summary)
Hilary Cordell, Partner, Cordells Rompotis
hilary.cordell@cordells.com.hk
