Appeal By Tesco Stores Limited Against Fife Council Assessor
| Jurisdiction | Scotland |
| Judge | Lord Doherty,Lord Malcolm,Lord Justice Clerk |
| Neutral Citation | [2016] CSIH 76 |
| Date | 13 October 2016 |
| Docket Number | XA78/16 |
| Court | Court of Session |
| Published date | 13 October 2016 |
LANDS VALUATION APPEAL COURT, COURT OF SESSION
[2016] CSIH 76
XA78/16
Lord Justice Clerk
Lord Malcolm
Lord Doherty
OPINION OF LADY DORRIAN, the LORD JUSTICE CLERK
in the Appeal
by
TESCO STORES LIMITED
Appellant
against
FIFE COUNCIL ASSESSOR
Respondent
Appellant: Gill; Morton Fraser LLP
Respondent: Stewart, QC; Clyde & Co
13 October 2016
Introduction
[1] This is an appeal against a decision of the valuation appeal committee for Fife dated 16 July 2016. The subjects are a supermarket which, until their closure in April 2015, were operated by the appellant at 20 The Postings, Kirkcaldy, Fife. At the 2010 revaluation the assessor entered them in the roll at an NAV/RV of £755,000. A running roll appeal against the entry was brought under sections 3(4) of the Local Government (Scotland) Act 1975, as amended, on the ground that the opening on 2 December 2013 of a rival supermarket less than one mile away from the subjects constituted a material change of circumstances reducing the value of the subjects with effect from 1 April 2014.
The decision of the committee
[2] Such an argument had been rejected by the committee. The committee concluded that the opening of a competitor store, the closure of the subjects or the landlord’s offer of a much reduced rent did not, either cumulatively or individually, amount to a material change of circumstances within the meaning of section 37 of the 1975 Act.
[3] Trading conditions at the subjects mirrored the drop in sales being felt by the other big four supermarkets nationally. There was no material change in circumstances. The reality was that the closure of the subjects came about due to the ebb and flow of a dynamic industry. The scope of section 37 of the 1975 Act was severely limited. There had to be some exceptional, extraordinary or significant event affecting value which was absent in this case.
The committee’s findings in fact
[4] The subjects were a ground floor retail property formed from three units in a shopping centre in Kirkcaldy town centre, with associated basement storage. They were leased to the appellant until 15 December 2015 and were operated by it as a supermarket until closed in April 2015. The subjects had been the dominant supermarket in Kirkcaldy town centre until Morrisons opened a new store, about 1000 square metres larger than the subjects, less than one mile away, in December 2013. However elsewhere in Kirkcaldy there were two other large supermarkets operated by Asda and Sainsbury’s, and three smaller supermarkets operated by Aldi and Lidl.
[5] The subjects were old-fashioned and poorly maintained. The shopping centre was in the process of failing with several empty units. Location and access were poor, with car parking only on a pay and display basis.
[6] The four main players in the supermarket sector - Tesco, Asda, Sainsbury’s and Morrisons (known as “the big four”) had found themselves under pressure since around 2009. They had been squeezed by discounters such as Aldi and Lidl. The Morrisons supermarket, when opened, was in competition with Aldi, Lidl, Asda and Sainsbury’s, as well as the subjects of the appeal. The turnover at the subjects fell from December 2008 onwards and the drop in sales increased after Morrisons opened on 2 December 2013. That mirrored the sales of the big four nationally.
[7] The appellant’s profitability dropped by 79% between 2013/2014 and 2014/2015 following an accounting scandal in which they were involved in 2014 and the price cutting war between competitor supermarkets. The appellant decided to close unprofitable stores, including the subjects. The decision was taken for commercial reasons, including the low profitability of the subjects and the expiry of the lease in December 2015. In 2015 sales across the big four continued to fall.
[8] At the 2010 revaluation Tesco, Asda, and Sainsbury’s were present in Kirkcaldy. Asda was valued at £205m² and Sainsbury’s at £200m², both including fit-out. Tesco had originally been entered at £160m², reduced during negotiations to £147.50m². This figure was fixed having regard to the actual rent. Although many businesses were affected by the economic upheaval of 2008, supermarket rental values had continued to rise until 2010.
[9] By 1 April 2014, after Morrisons had opened, it was unlikely that another supermarket operator would have rented the subjects had they been vacant and to let. They would have become a marginal unit. In January 2014, there were discussions between the appellant and the landlord regarding renewal of the lease following its expiry on 15 December 2015. On 28 January 2015, the appellant announced its intention to close the subjects. On 24 February 2015, an offer was made by the landlord to renew the lease for a 5 year term. Annual rental payments and break clauses were discussed. Unsurprisingly, the landlord was very keen to keep its “anchor” tenant, and to offer incentives to achieve that. However, the landlord’s offer was not accepted by the appellant. The landlord had extensively marketed the property since, without success.
The legislation
[10] The Local Government (Scotland) Act 1975, as amended, provides:
“3.— … (4) Without prejudice to subsection (2) above, the proprietor, tenant or occupier of lands and heritages … which are included in the valuation roll may appeal against the relevant entry but only on the ground that there has been a material change of circumstances since the entry was made or that there is such an error in the entry as is referred to in section 2(1)(f) of this Act; and, notwithstanding the definition of ‘material change of circumstances' as set out in section 37(1) of this Act, if in an appeal under this subsection on the ground of a material change of circumstances it is proved that there has been a change of circumstances which has materially reduced the extent to which beneficial occupation of the lands and heritages can be enjoyed, the appeal shall not be refused by reason only that the change of circumstances has not been proved to have affected the value of the lands and heritages to any specific extent. …
“37.— (1) … ‘material change of circumstances' means in relation to any lands and heritages a change of circumstances affecting their value and, without prejudice to the foregoing generality, includes any alteration in such lands and heritages any relevant decision of the Lands Valuation Appeal Court or a valuation appeal committee the members of which are drawn from the valuation appeal panel serving the valuation area in which the lands and heritages are situated or the Lands Tribunal for Scotland under section 1(3A) of the Lands Tribunal Act 1949 , and any decision of that Court, committee of Tribunal which alters the net annual value or rateable value of any comparable lands and heritages.”
Submissions
Appellant
[11] For the appellant it was contended that the committee misdirected itself as to the correct questions to be considered and in the conclusions that it drew from the primary facts. The committee decided an appeal that the appellants had not made. The appellant’s case was not that the closure of the subjects or the landlord’s reduced rental offer were, individually or cumulatively, a material change of circumstances, but that the opening of the Morrisons supermarket was itself such a change, of which the reduced rental value and the subsequent closure of the store were evidence.
[12] The committee failed to recognise that the opening of the Morrisons supermarket fundamentally altered the nature of the subjects and had a specific and permanent effect on their rental value. By focussing on the causes of the closure the committee failed to have proper regard to its own primary findings in fact, which reflected the fundamental alteration in the nature of the subjects and the reduction in their rental value.
[13] The important findings which demonstrated that fundamental change included that:
- The subjects had been the dominant supermarket until Morrisons opened;
- After that, it was unlikely that a supermarket operator would rent the subjects if they became vacant;
- The subjects were transformed from the dominant supermarket to a marginal unit.
- That the only potential occupiers would then be a large homeware or home and gardens unit;
- the drop in sales increased after Morrisons opened and was not apparently felt by Asda and Sainsbury’s;
- the landlord’s offer, followed by unsuccessful marketing of the subjects.
[14] Had it given proper consideration to these and other primary findings, the committee could not reasonably have concluded that the effect of the opening of Morrisons was simply part of the ebb and flow of a dynamic industry.
[15] The committee gave no consideration to the question of the extent of the reduction in value. The appellant’s expert witness’s opinion was that one-half of the reduction in rental value could be attributed to the opening of Morrisons. He proposed a reduction in the net annual value from £755,000 to £500,000. In the absence of any competing figure by the respondent, the court should accept the appellant’s figure.
[16] The appellant acknowledged that an appeal on the basis of sections 3(4) and 37 of the 1975 Act was restricted to “extraordinary or exceptional factors” rather than “the ordinary processes of change” (Assessor for Glasgow v Schuh Limited 2012 SLT 903 (“Schuh 1”); Schuh Limited v Assessor for Glasgow 2014 SLT 184 (“Schuh 2”)). However, the opening of a nearby competitor was capable of being such an extraordinary or exceptional factor, rather than merely part of the “ebb and flow” of a dynamic industry (Schuh 1, Lord Justice Clerk (Gill) at para. 32). The opening of the Morrisons supermarket was a “new and significant event fundamentally altering the nature of the subjects” (Schuh 1, Lord Justice Clerk (Gill) at para. 32). It had more than merely a generalised effect on the area.
Respondent
[17] The circumstances of...
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