Vtesse Networks Ltd v Valuation Officer

The Appellant, Vtesse Networks Ltd (Vtesse), provides fibre optic telecommunications networks for customers. This appeal is about a network which runs between Henley-on-Thames and Goswell Road in London, via Marlow, Slough, Ruislip and Stoke Newington, with spur extensions from Reading to Theale and from Acton to Brentford. As at 1 April 2003 the network extended over some 147 kilometres, of which about 4 km was in cables and ducts owned by Vtesse and 143 km in cables and ducts belonging to third parties. The question on the appeal is whether the entire network constitutes a rateable hereditament, of which Vtesse is in occupation, so that Vtesse is liable for non-domestic rates on the whole, rather than only on such parts of it as are within areas otherwise owned and occupied by Vtesse. The Respondent valuation officer proposed to enter the whole network in the rating list for Slough, to which Vtesse objected. The Berkshire Valuation Tribunal upheld Vtesse’s objection. The Respondent appealed to the Lands Tribunal, which allowed his appeal, on the basis of a statement of agreed facts, amplified by oral and written evidence. Vtesse appeals, with permission granted by Jonathan Parker LJ. (There were two decisions by the Berkshire Valuation Tribunal, and two appeals to the Lands Tribunal, resulting from an original decision by the Respondent and a later decision as regards an extension to the network. Nothing turns on this.)

There is an entirely separate issue as to valuation, with an unusual feature, namely that Vtesse contends that it has been discriminated against as compared with the basis on which similar installations by BT are treated. The latter point has been taken up by the European Commission. The question of the extent of the rateable hereditament was the subject of a preliminary issue ordered by the Lands Tribunal. The appeal is from the decision on that issue, which was heard with oral evidence. The issue was defined as follows:

The Local Government Finance Act 1988 deals with non-domestic rates, but refers back to the General Rate Act 1967 as to what constitutes a rateable hereditament, in section 64(1):

The definition in section 115(1) of the 1967 Act is as follows:

Under the 1988 Act, local non-domestic rating lists are required to include each hereditament which fulfils various conditions, including that “it is a relevant non-domestic hereditament”: see section 42(1). No issue arises as to the non-domestic condition. A relevant hereditament is defined by section 64(4):

A fibre optic telecommunications network is not itself land, or otherwise within a relevant description. By itself it is a chattel, or a series or collection of chattels. However, there is no rule that, just because something is a chattel, it can never be rated. This question was considered in LCC v. Wilkins (Valuation Officer) [1957] AC 362 in relation to builders’ huts placed on a building site (otherwise not rateable) and used for the purposes of the building process on the site over a considerable period, though not fixed to the land. Viscount Kilmuir LC said at 373-4 that the test was whether the structures were enjoyed with the land and enhanced its value. Lord Radcliffe, at 378, said this:

We were shown a number of decided cases about rating giving examples of the treatment of conducting media, such as telephone or telegraph wires or cables. In each case attention has to be given to the particular facts, both as to the physical position and as to the use made of the relevant things. Accordingly, before looking at the assistance to be obtained from decided cases, I must refer to the facts.

The parties before us agreed that the President’s decision fairly summarised the facts at paragraphs 7 to 16, and I gratefully quote that part of his decision.

Thus, what the Respondent contends for as a rateable hereditament is a network consisting of a pair of optic fibres, connecting two premises of a customer of Vtesse, of which the parts at the connection with the customer’s premises are Vtesse’s own-build, and some intermediate parts may also be own-build, but the majority of the network consists of fibre provided by third parties passing through cables and ducts in trenches dug by those third parties, to which connections have been made pursuant to agreements between Vtesse and the third party under which Vtesse has the right to the exclusive use of the particular pair of fibres. Once all the connections have been made, at each end and all along the network, the fibre is able to be brought into operation, or “lit”. It is at that stage that the Respondent contends that the network consisting of the pair of fibres, extending between the two relevant premises of Vtesse’s customer, is a rateable hereditament, of which it is said that Vtesse is in occupation. Vtesse denies that conclusion, and argues that the limits of the hereditament of which it is in occupation coincide with the limits of the area within which it has provided the fibre itself. It argues that the length of fibre which is the subject of an exclusive use agreement with a third party is a separate hereditament (or more than one if there are several agreements for different lengths of the connecting fibres). To judge from the plan which accompanies the statement of agreed facts before the Lands Tribunal, the network which runs between a customer’s premises in Finsbury Square and in Henley includes own-build areas at or adjacent to each of those premises, and three other lengths of own-build fibre, but also lengths of fibre which are the subject of agreements with as many as three different third parties.

No doubt the third parties’ fibres over these lengths of the network run through cables and ducts which enclose many other fibres, some of which may already have been lit at the relevant time, and others which may not yet have been lit by then. The Respondent would argue that the other lit fibres form part of one or more quite different hereditaments from that at issue in the present case, but on a similar basis, together with the own-build areas of whatever other telecommunications operator, comparable to Vtesse, obtained the right to use those particular fibres by agreement with the third party. The Appellant, on the other hand, would argue that either all the lit fibre, or possibly all the fibre whether lit or not, in the third party’s ducts and cables forms part of the third party’s hereditament, separate from that in respect of which Vtesse is rateable.

One might suppose that, in economic terms, the end result might be much the same sooner or later (subject to the question whether dark fibre is rateable), in that, if the third party is rateable in respect of lit fibre in its own ducts, it would pass on the economic burden of the obligation to pay the appropriate part of those rates to its customer under an agreement for the exclusive use of a given pair of fibres. Similarly, Vtesse would presumably pass on to its customer the economic burden of the obligation to pay rates on the network which Vtesse provides for the customer, whether levied directly on Vtesse (at least in respect of own-build areas or, if the Lands Tribunal is right, for the whole network) or passed on to Vtesse by a third party provider. However, the economic circumstances have not been investigated, and I do not assume that nothing turns, in real terms, on the result of the appeal in this respect.

The Berkshire Valuation Tribunal decided the case in favour of Vtesse by drawing an analogy with the way in which parts of the British Telecom copper wire network is treated for rating purposes. It held that Vtesse was not in paramount control of the fibres provided by third parties, and therefore was not in occupation of anything other than its own-build areas. In coming to this conclusion they relied above all on two propositions: first that Vtesse can be disconnected by the third party if there is an accident to the cable, or a failure of the third party’s network, or if Vtesse fails to met prescribed quality standards, and secondly that Vtesse does not occupy a specific fibre in the cable and their traffic can be routed through any particular fibre at the discretion of the third party.

The Lands Tribunal disagreed, having considered the written and oral evidence placed before it. The essence of the President’s decision is set out at paragraphs 38, 39, 40 and 42, as follows:

Because liability for rates depends on occupation, many of the cases about what is a hereditament have focussed on the question of occupation, rather than on the physical characteristics of what is said to be the hereditament. Even when an issue arises as to the extent of the hereditament, it is often affected by questions of occupation, for example as to whether adjacent premises are to be treated as all one rateable hereditament, or as several, either answer to which may be beneficial or otherwise to the occupier depending on the circumstances.

In this case, unusually, the Appellant’s case is that the extent of the hereditament must be determined without regard to occupation, or at least on the basis that the factor of occupation is not decisive, because occupation is a secondary issue and ought not to be addressed until one knows what is the hereditament in question.

For the Appellant, Mr Wood Q.C. contended that this was a case in which to start with the question of occupation would beg the question of what was the right unit of property. He described as separate installations the aggregate of trenches, ducts, sub-ducts, cables and fibres as they lay within a given area over which either Vtesse or a third party provider had relevant rights. He argued that separate installations belonging to Vtesse and to third party providers were complete and separate units of property which constituted separate hereditaments. While Vtesse was rateable in respect of all fibres within its own separate installation, it was not rateable in respect of a given pair of fibres embedded within a cable in a sub-duct and in turn a duct in a trench provided by the third party, because that pair of fibres was not separate or separable from the aggregate but was an integral part of the whole. It made no difference that Vtesse had the right, by agreement, to enjoy the use of a pair of fibres. The fibre optic telecommunications network constituted by Vtesse’s connection of a pair of its own-build fibres with those of third parties to connect premises of a customer could not, he said, sensibly be called a “unit of property” at all.

Exploring the implications of the Lands Tribunal’s decision, he asked rhetorically what was the status, as regards rating, of other fibres in the third party’s installation. It seems to me, with the benefit of Mr Holgate Q.C.’s submissions, that the answer would be that dark fibre is not rateable at all, and other lit fibres are rateable as part of other hereditaments consisting of the particular network of which they form part, on the same principle as that applied by the Lands Tribunal to Vtesse’s network, but I do not need to, and I do not, decide whether that is so. Mr Wood criticised the conclusion that dark fibre was not rateable, on the basis that, even without being connected up, the presence in a duct of fibres could of itself enhance the value of the land through which it passed and which it could serve. By analogy, a building which was equipped with ducts for a communications network, and all the more so one equipped with fibre optics in those ducts, could command an enhanced letting value for office use as compared with one into which ducts and fibres had yet to be installed. He made that point in his oral submissions in reply; so far as I am aware it had not been made previously, so that we do not have the benefit of the Respondent’s or the Lands Tribunal’s comments on it. He made the point in response to Mr Holgate asserting that unconnected fibre, even if capable of occupation at all, was not capable of beneficial occupation, and therefore not rateable. Mr Wood did not accept Mr Holgate’s analogy between dark fibre and premises which are under construction or undergoing major alteration so as not to be capable of beneficial use in the meantime, which were held not to be rateable in Arbuckle Smith & Co Ltd v Greenock Corporation [1960] AC 813. Whether that is the right proposition, or whether it is a question of unconnected fibres being mere chattels until they are connected up to a user’s premises so as to be capable of functioning as a communications network, it is unnecessary to consider. Equally, it is unnecessary to decide how dark fibre falls to be treated for rating purposes. If the Lands Tribunal is right, lit fibre is part of a separate rateable hereditament consisting of the particular network connecting two sites of a particular user. If the Appellant is right, the lit fibre which forms part of a network is part of several hereditaments, according to the identity of the provider of the particular stretch of fibre.

There is something rather striking and, at first sight, surprising about the idea that a network consisting of two fibres, themselves not much more than the size, in cross-section, of a human hair, though each encased in a protective plastic coating, but stretching for some 147 kilometres, should constitute a single hereditament. However, cables have for many years been treated as separate hereditaments. Though not, perhaps, as narrow as optic fibre, they can be seen as analogous to a fibre optic network. They may not have extended over so great a distance, and in any event only the cables situated within the area of a particular rating authority would have been involved in any given case in the past, because of the different rules then applicable about the contents of a local rating list, before the enactment of the provisions as to “cross-boundary property” in regulation 6 of the Non-Domestic Rating (Miscellaneous Provisions) Regulations 1989, SI 1989/1060, which apply to any unit of property which by virtue of section 64(1) of the Act comprises separate hereditaments solely by reason of being divided by a boundary between billing authorities. Such a unit of property is to be treated as one hereditament. (This was only possible with the change, in 1990, from the position in which a separate rate was set by each rating authority, to the setting of a uniform business rate by the Government.) Nevertheless the cases are of assistance in setting out the correct approach in principle.

In R v Chelsea Waterworks (1833) 1 B & Ad 156 the waterworks company was held rateable in respect of water pipes under St James’ Park leading to and from a reservoir which it maintained. In Electric Telegraph Co v. Salford (1855) 11 Ex 181, the company which had constructed posts, with fastenings, wires and apparatus for telegraphic communication along the line of the London and North Western Railway Company’s track, was held rateable in respect of the posts and the wires, though they passed through the air above ground rather than passing under the ground itself, and this notwithstanding a right of the railway company to vary the location of the posts if they interfered with the running of the railway. In Pimlico Peckham and Greenwich Street Tramway Company v Greenwich (1873) LR 9 QB 9, the tramway company was held rateable in respect of the tramlines laid on the road. In Lancashire and Cheshire Telephone Exchange Company v Manchester (1884) 14 QBD 267 the telephone company was held rateable in respect of telephone wires connected to fittings on the houses of subscribers. The principles applied in these cases were not questioned in the more recent cases of Amalgamated Relays Ltd v Burnley [1950] 2 KB 183, and Jackson (Valuation Officer) v London Rediffusion Service Ltd (1951) 44 R & IT 439.

A similar principle was applied in Halkyn District Mines Drainage Company v. Holywell [1895] AC 117. In that case the owner of land had granted to the drainage company the exclusive right of drainage though a tunnel and a watercourse in his land, with the right of placing works in the tunnel and the watercourse and of making other tunnels in connection therewith, reserving to himself mineral and other rights. The Court of Appeal held that the company had no more than an easement, and was not in rateable occupation of anything. The House of Lords allowed the appeal, holding that the company was in occupation of the tunnel and watercourse for the purposes of and in connection with the enjoyment of the easement, and had the exclusive use of them for the purposes of drainage, the rights reserved to the landowner being subordinate to those granted to the company. In response to the submission on the part of the company that occupation, to be rateable, had to be exclusive, and that the rights reserved by the landowner showed that the company did not have exclusive occupation, Lord Herschell LC said, at page 126:

Similarly, at page 133-4 Lord Davey said this:

The question of paramount and subordinate occupation recurred in the leading case of Westminster Council v. Southern Railway [1936] AC 511. Lord Russell of Killowen said this at 529:

He expressed his conclusion on this point at page 532:

That principle is said to be relevant to the present case, in the sense that Mr Wood submitted that Vtesse did not have actual or exclusive occupation of the fibres. That, however, is a secondary submission, in case his first point, that the network is not a unit of property at all, fails.

Turning back, therefore, to the question whether the network is a unit of property, the analogy of a network of telegraph or telephone wires suggests that it could be. Mr Wood differentiated the decided cases about conducting media on the basis that, in those cases, the same party had installed the media as owned them and was in control of them, being thus in occupation of them. Here, on the other hand, Vtesse had only installed the own-build sections whereas third parties had installed the largest parts of the network. However, it is clear that ownership is not a relevant factor for the decision whether something is a unit of property so as to constitute a hereditament (see, for example, Halkyn v Holywell [1895] AC at 125, and Westminster Council v. Southern Railway [1936] AC at 533, 552). He also relied on the characteristics of the physical structures involved, and the inaccessibility to Vtesse of the pair of fibres in a third party’s ducts. No doubt it is right to have regard to the physical features of the installations, the network and what else is within the ducts and sub-ducts through which the fibres pass. Among the relevant physical features, however, are the connections effected between the third party fibres and those installed by Vtesse itself, and, in turn, the customer’s premises. This is what is necessary to enable the network to be used and thus to be of value.

Mr Holgate pointed out that the pair of fibres was not so small as to be incapable of being the subject of a commercial agreement for their use as a network, and submitted that there was therefore no reason why they should be regarded as too small to comprise a hereditament. As the President said at paragraph 38, in the second sentence, the fibres in a third party’s duct are capable of forming part of a hereditament with the rest of the network provided by Vtesse; the question for him to decide was whether they did.

Mr Holgate showed us the decision of this court in Gilbert (Valuation Officer) v. S Hickinbottom & Sons Ltd [1956] QB 40. That case was concerned with two premises on opposite sides of a street, the one being a bakery and the other being a depot for the repair and maintenance of delivery vans and of the machinery of the bakery, thereby providing facilities which it was essential should be available in or close to the bakery in order that the supply of bread to customers should be maintained. Both premises were in the same occupation and both were entered in the rating list as a single hereditament, with beneficial consequences for the occupier because if the depot had been a separate hereditament it would not have been entitled to industrial derating, which it was as part of a single hereditament. The valuation officer proposed that the list be amended to include the two premises as separate hereditaments. The Lands Tribunal rejected the proposal. The valuation officer’s appeal failed. The Court of Appeal held that, the question being one of fact and degree to be decided by the tribunal of fact, the court could not allow the appeal unless there had been a misdirection. In particular Lord Denning MR at page 50 found it difficult to see how the Lands Tribunal had distinguished a number of previous cases in which premises on opposite sides of the road had been held to be separate hereditaments, but he said this:

In the present case, as is apparent from the passage which I have already cited from the President’s decision, he addressed the question whether the network, being capable of forming a hereditament, did in fact constitute one. He dealt with the physical characteristics of the installations in paragraph 38, and came to Mr Wood’s argument from practical common sense at paragraph 42. He rejected that argument. Mr Wood submitted that he misdirected himself by giving too much importance to the question of occupation. He also questioned the last sentence of paragraph 42, as to what the President meant by “the hereditaments with which they are occupied” (my emphasis).

More fundamentally, Mr Wood took issue with the proposition, put forward in Ryde on Rating, at C [113]-[123], that “the concept of the hereditament for rating purposes is inextricably bound up with the concept of rateable occupation”. He said that it was certainly closely connected with the question of occupation, which might in some cases be decisive, but that it was logically a distinct question, prior to that of occupation.

It does not seem to me that it is necessary to decide whether the proposition in Ryde is correct, or whether it overstates the interdependence of the two concepts, in order to decide this appeal. Plainly the physical features of the items under consideration are relevant, and were considered by the President. Equally plainly their use may be relevant, not least because it is the use of chattels that makes them relevant to rating, as discussed above. For the same reason, it may be relevant to consider the terms of agreements entered into as regards their use.

I can see no basis for saying that the President misdirected himself in any way when he considered the question whether the network was a unit of property, so as to form a hereditament. It seems to me that what he meant in the last sentence of paragraph 42 is clear from the penultimate sentence of paragraph 38, where he spoke of the fibres provided by third parties as being “connected to property owned and occupied by” Vtesse, that is to say the own-build fibres, by way of contrast with the facts of the Westminster Council v. Southern Railway case. I do not feel anything of the surprise at the result which Lord Denning felt at the decision of the Lands Tribunal in the Gilbert case. The President’s conclusion in this case was one which was open to him and was not reached as a result of any error of law.

Turning then to Mr Wood’s alternative ground of appeal, that Vtesse was not in occupation of the third party’s fibres, in John Laing & Son Ltd v. Kingswood [1949] 1 KB 344, at 350, Tucker LJ said that there were four necessary ingredients to rateable occupation: “first, there must be actual occupation; secondly, that it must be exclusive for the particular purposes of the possessor; thirdly, that the possession must be of some value or benefit to the possessor; and, fourthly, the possession must not be for too transient a period.” The question in the present case, as in that case, concerns actual occupation and exclusive occupation. Mr Wood submitted that, even if Vtesse has the right to the exclusive use of the pair of fibres, that is not the same as actual occupation, and he said that even if Vtesse did have any form of occupation, it was subordinate to that of the third party provider.

Taking first the question of use as opposed to occupation, it is clear from the terms of the relevant agreements, which Mr Wood showed us and which the President summarised at paragraphs 17 to 21 of his decision, that Vtesse has the right under them to the exclusive use of the particular pair of fibres. There are limitations on what Vtesse can do, so that, for example, the third party controls access to the fibres, and is responsible for maintenance. However, Vtesse is the only person entitled to use the fibres for the only purpose for which they are useful and valuable. Given the connection between its own fibres and the third party’s fibres, it does not need physical access to the third party’s fibres in order to make use of them. It seems to me that the question whether a party is in occupation of a particular hereditament must be decided by reference to the nature of the hereditament in question. That follows from what Lord Russell of Killowen said in Westminster Council v. Southern Railway at page 532, cited above. In the case of a different kind of hereditament, it could be meaningful to differentiate between possession, occupation and use. In relation to these optical fibres, it seems to me that the party who has the sole right to use them for the sole purpose for which they are intended can, at the very least, properly be held to be in actual occupation. I do not need to decide whether that is the only possible conclusion; it is certainly a possible conclusion.

The next question is whether that occupation is exclusive, or whether the third party is also in occupation and, if so, whose occupation is paramount. Mr Wood submitted that Vtesse’s rights were very similar to those of a lodger as compared with the position of the landlord, so that the third party, equivalent to the landlord, should be regarded as in paramount occupation. The President did not expressly refer to the discussion of lodgers in the cases, but he cited extensively from Westminster Council v. Southern Railway, including from passages which include discussion of the lodger. He cannot have overlooked that discussion.

In support of this submission Mr Wood relied on the fact that Vtesse had no right to physical access to the fibres in question and to the fact that the third party allocates them, effects the necessary connection with Vtesse’s own fibres, maintains the fibres and, if necessary, can change them for others.

The President rejected this argument in paragraphs 39 and 40 of his decision. He held that the third party had no control over Vtesse’s use of the fibres, which he regarded as essential if the third party was to be regarded as having paramount occupation. It seems to me that he was right to regard this as essential: it follows from the third paragraph quoted from Lord Russell of Killowen at paragraph [22] above. He also held that the third party’s right to change the fibres in use for others was insufficient to deprive Vtesse of exclusive occupation. Unless that conclusion is one which cannot stand in law on the facts found, the appeal must fail. Mr Wood submitted that on the facts found the only possible conclusion was that Vtesse was not in occupation at all, or not in exclusive but rather in subordinate occupation to that of the third party.

It seems to me, however, that it was open to the President to conclude that Vtesse was in actual occupation, and that this occupation was exclusive, not being shared with, and therefore not subordinate to, that of the third party. He considered the questions which fell for decision, and did so by reference to the relevant facts as regards the physical circumstances and the terms of the agreements. I cannot detect any misdirection in what he said at paragraphs 39 and 40 on this point. The points most relevant to this argument which he identified in his decision are the second and third mentioned in paragraph 39, which are really different aspects of the same point. For my part I too find those significant and cogent.

I would therefore dismiss the appeal, on the basis that the President was entitled to hold, as he did, that the network was a single hereditament and that Vtesse was in occupation of it for rating purposes.

I agree that the decision of the President of the Lands Tribunal contains no error of law, including in that class perversity of fact-finding. It is nevertheless a matter of concern that liability to business rates can depend so heavily on the uncertain meanings of the two key concepts, hereditament and rateable occupation.

Mr Wood is right to segregate the two things and to insist that until a hereditament is identified, occupation cannot arise, if for no other reason than that what amounts to occupation will ordinarily depend upon the physical and legal character of the hereditament. The key to the apparently circular definition given by s.115(1) of the General Rate Act 1957, which defines a hereditament by its liability to rating, is that it assumes and relies on an existing fund of knowledge of what is and is not capable of being shown as a separate item in the valuation list. Hence the centrality of an expert tribunal’s sense of the case, and the troubling fact that here two such tribunals have reached different conclusions. If the President had reached the conclusion for which Mr Wood contends on this limb of the appeal, I doubt whether we could have overset it; and for the reasons given by Lord Justice Lloyd, I do not consider that we may overset his decision that a fibre-optic cable link, at least when lit, is a hereditament.

As to whether it is in rateable occupation, I would reject Mr Wood’s analogy with the lodger in a boarding house. The lodger is a recognised anomaly in rating law. Lord Russell of Killowen, in the passage of his speech in Westminster Council v Southern Railway [1936] AC 511 quoted at paragraph [22] above by Lord Justice Lloyd, recognised this and acknowledged that the landlord’s liability arose as a matter of practicality from “the frequently fleeting nature of the occupancy of a lodger”.

Although Lord Russell goes on to offer legal grounds for his conclusion, I would respectfully venture two comments on these. First, it seems doubtful that the ordinary landlord really does have “a continual right of access to the lodgers’ rooms”. Secondly, if he did, the want of rateable occupation on the lodger’s part would not need to be described, as Lord Russell described it, as “exceptional”.

It therefore seems to me useful, in deciding the present argument, to decide whether in truth the lodger’s position in rating law is orthodox or heterodox. I would hold that it is the latter. It follows that unless Mr Wood can demonstrate similar or analogous reasons of practicality in the case of fibre-optic cables – and he cannot - he derives no assistance from the nature of a lodger’s occupancy.

I agree that the appeal should be dismissed for the reasons given by Lord Justice Lloyd.