APPEAL BY TESCO STORES LIMITED AGAINST FIFE COUNCIL ASSESSOR
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 the present case did not amount to a material change in circumstances. The Committee made no finding that the steeper drop in sales at the subjects following the opening of Morrisons was attributable to the opening of Morrisons. The subjects were an older, poorer supermarket in an inferior location. Turnover was in decline prior to the opening and it was not surprising that turnover declined to a greater extent following the opening. There was nothing exceptional or extraordinary in that. Trading conditions at the subjects mirrored the drop in sales experienced by the big four nationally in that not only were all of them experiencing a drop in sales prior to Morrisons opening, but the drop in sales for all of them appears to have increased after the opening. This was a typical example of the ebb and flow of a dynamic and changing retail industry.
[18] The committee was entitled to find that the opening of the Morrisons supermarket did not amount to a material change in circumstances. There was no necessity to assess the effect on value. The appellant’s case depended upon an offer from the landlord which post-dated the appellant’s decision to close the store, and the effective date of the material change of circumstances as contended for by the appellant. It was not an agreed rental. In any event, the committee found that the offer was driven by the landlord’s desire to retain its anchor tenant, not the opening of the competitor.
Analysis
[19] The nature of a material change of circumstances for the purposes of section 3(4) was considered by the Lord Justice Clerk (Gill) in Assessor for Glasgow v Schuh Limited 2012 SLT 903 as follows:
“[30] In the retail world change is constant. Retailers and shopping centres compete with one another. In competitive conditions retailers gain and lose market share. Fashions and customer tastes change. New Centres and new transport links emerge. Some shops or centres prosper while others fail. Changing patterns of retail, the rise and fall of individual retailers, long term decline in the fortunes of individual retail locations and the emergence of new shops and centres are all part of the ebb and flow of a dynamic industry. The effect of these changes on individual rentals will be discovered in the course of the assessor’s pre-revaluation survey and will be reflected in the net annual values at which the subjects are assessed in the next revaluation. These are the normal manifestations of the free market in retail. Where the rental value of a shop falls in consequence of such changes, the fall cannot in my view constitute a material change of circumstances for the purposes of s.3(4).
[31] Likewise, in my opinion, where there is a fall in rental value in consequence of a fluctuation in the economy, rather than an abnormal economic crisis, such a fall cannot constitute a material change for the purposes of s.3(4). That too is the sort of change that is taken into account to the extent that it is reflected in rental evidence at the next revaluation.”
[20] In paragraphs 32 and 33 the Lord Justice Clerk made reference to a number of events which might be of such significance and impact as to constitute a material change of circumstances. He noted that in Tesco Stores Limited v Fife Assessor 2011 SC 316 the court impliedly accepted that a reduction in the rental value of a local shop caused by the opening of a superstore next to it could amount to a material change in circumstances. (In that case the appeal had failed because although a reduction in turnover had been proved it had not been established that there had been any reduction in the rental value of the subjects). The Lord Justice Clerk continued:
“[34] The distinction between the normal processes of change and the occurrence of significant changes of this latter kind is, in my opinion, the key to a proper understanding of s. 3(4). If I am right in making this distinction, it follows that s. 3(4) is severely limited in its scope.”
In Schuh 2 the court re-affirmed the decision in Schuh 1.
[21] Whether there has been a material change of circumstances must in every case be a matter of fact and degree; but it is clear from Schuh 1 and Schuh 2 (i) that a fall in the rental value of retail subjects in the years between revaluations caused by the normal manifestations of the market in retail rather than some other significant cause will not be a material change of circumstances; (ii) that s. 3(4) is severely limited in its scope.
[22] It is clear from the decision of the committee that they considered that any effect on the subjects from the opening of Morrisons did not go beyond the normal ebb and flow to be expected in a competitive business. The landlord’s offer to the appellants, or their difficulty in marketing the subjects, were related to a desire to keep an anchor tenant and the unattractiveness of a dated unit with poor layout and access. The committee found that they were not related to the opening of Morrisons.
[23] It is true that in expressing themselves the committee from time to time made reference to the reasons for the closure of the subjects, rather than addressing the effect of the opening of Morrisons, but looking at the stated case as a whole I do not think it is correct to suggest, as the appellant did, that the committee had addressed the wrong question. The formulation used by them came about because of the way in which the evidence for the appellant was presented, and because of the way the appellant’s argument was advanced. The primary factors relied upon by the appellant as proof of the impact on the subjects of the opening of Morrisons were the rental offer, the turnover impact and the store closure. As the matter was put in argument before us: the argument was not that the worse drop of itself established the change in circumstances, but it was an effect specific to these subjects, raising the question whether it could also constitute a material change of circumstances as showing more than the normal process of change. Looked at in this way, one can understand why the committee considered matters in the way they did and we do not consider that they misdirected themselves.
[24] In their findings the committee noted that:
“The big four supermarkets had found their sales under pressure since around 2009. The turnover of the big four supermarket companies reduced as a consequence of shoppers’ changing habits and price competition both within the big four and from Lidl and Aldi with all showing similar drops in sales growth to that of Tesco in Kirkcaldy. The drop in sales in Tesco, Kirkcaldy became larger after Morrisons opened on 2 December 2013. Tesco’s turnover at Kirkcaldy fell from December 2008 onwards. From December 2012 the turnover was indexed at about 75% of February 2007 levels reducing the following year to figures indexed generally at under 65%. Asda and Sainsbury’s did not suffer this level of fall although no turnover figures were produced and did not claim any material change in circumstances, although advised by the same agents as Tesco”.
[25] There appears to have been minimal evidence as to the position relating to Asda or Sainsbury’s but the position does seem to be that there was evidence that they had suffered a level of fall in turnover. Whatever the extent of the evidence, it is clear from the terms of their decision that the committee’s conclusion on that evidence was that;
“Trading conditions at the subjects of appeal mirrored the drop in sales being felt by the other big four supermarkets countrywide. This combined with the inferior aspects of the subjects of appeal, and its surrounding area, along with Tesco’s own internal difficulties are what ultimately brought about the closure of the subjects of appeal. Similarly, the Landlord’s desire to retain their “anchor tenant” had nothing to do with the opening of the Morrisons supermarket. ”
[26] The drop in turnover was found by the committee generally to be in line with the drop felt nationally by other supermarkets since as far back as 2009. The fact that the drop at the subjects increased after the opening of Morrisons is hardly in the circumstances an exceptional factor. The argument for the appellant depended on the court accepting that the proper construction to the reference by the committee to events which occurred after the opening or Morrisons, or until then, as being causally connected to the opening, rather than temporally connected. In our view that is not a correct interpretation. In paragraphs 1 and 2 of the findings in fact it seems clear that a temporal connection is being considered: that is clear from the observation that in 2008 the shopping centre in which the subjects was located was not in a particularly healthy state, and from the consideration of the way turnover for big four changed over time.
[27] In all the circumstances therefore I am of the view that the grounds of appeal have not been established and the appeal should be refused.
LANDS VALUATION APPEAL COURT, COURT OF SESSION
[2016] CSIH 76
XA78/16
Lord Justice Clerk
Lord Malcolm
Lord Doherty
OPINION OF LORD MALCOLM
in the Appeal by
by
TESCO STORES LIMITED
Appellant
against
FIFE COUNCIL ASSESSOR
Respondent
Appellant: Gill; Morton Fraser LLP
Respondent: Stewart, QC; Clyde & Co
13 October 2016
[28] I agree with your Ladyship and your Lordship that his appeal should be refused. The question before the committee was whether the opening of the rival supermarket amounted to a material change of circumstances in terms of the relevant legislation, all as recently explained in Assessor for Glasgow v Schuh Limited 2012 SLT 904. Emphasis was placed upon the closure of the Tesco store, and this notwithstanding the greatly reduced rental offer. The committee concluded that the closure was attributable to a number of factors unrelated to the new Morrisons supermarket. Reference was made to the “inferior aspects of the subjects of appeal”; “Tesco’s own internal difficulties”; and difficult trading conditions for the big four supermarket operators countrywide. The rental offer from the landlords reflected “their desire to retain their ‘anchor’ tenant”.
[29] Given the nature of the case as presented to the committee, none of this can properly be described as a misdirection. In any event, it is clear that the committee applied its mind to the guidance laid down in the above decision. It concluded that there was nothing beyond the “ebb and flow” of a dynamic industry, and that there was no “exceptional, extraordinary or significant event affecting value”. Having regard to the findings in fact, not only were the committee entitled to take this view, in my opinion they were correct to do so. The arrival of the remaining big four operator (Asda and Sainsbury’s were already present in the area) was part of “the normal process of change in retail” in this sector, not an “exceptional and extraordinary event” such as would constitute a material change of circumstances (Schuh paras 40/41).
[30] Nor am I persuaded by the submission that the new store caused “a fundamental alteration in the nature of the subjects of appeal”. This was not suggested to the committee and, on the face of it, seems a surprising proposition. The subjects of appeal remained an operating supermarket until April 2015, more than 15 months after the event claimed to be a material change of circumstances; and they still have no different user, albeit now vacant. It was said that the new store caused the Tesco to fall from “a dominant position” to “a marginal unit”. On a proper reading of the findings in fact and the committee’s reasoning, I consider that this premise is not made out. As explained earlier, the committee referred to a number of other factors. However, even if it was established, it would not alter the status of the opening of the new store as but part of the “ebb and flow” of competition and change. In Schuh the court gave a flavour of what is required for a material change of circumstances by the example of the impact on the value of grouse shootings on a sporting estate after a statutory prohibition on blood sports, or the permanent extinction of the grouse population on the subjects in question. If a Morrisons of similar size opening a mile away from a Tesco supermarket amounted to a material change of circumstances, this would run counter to Lord Gill’s comment, with which the other members of the court agreed, that “section 3(4) is severely limited in its scope”.
LANDS VALUATION APPEAL COURT, COURT OF SESSION
[2016] CSIH 76
XA78/16
Lord Justice Clerk
Lord Malcolm
Lord Doherty
OPINION OF LORD DOHERTY
in the Appeal by
by
TESCO STORES LIMITED
Appellant
against
FIFE COUNCIL ASSESSOR
Respondent
Appellant: Gill; Morton Fraser LLP
Respondent: Stewart, QC; Clyde & Co
13 October 2016
[31] I agree with your Ladyship in the chair and with your Lordship that this appeal should be refused.
[32] From the time of the revaluation until 2 December 2013 there were three large supermarkets in Kirkcaldy - the appeal subjects, the Asda store at Carberry Road, and the Sainsbury’s store at Chapel Park. The appeal subjects were in the town centre and the other two large stores were in other locations elsewhere in the town. The Asda store and the Sainsbury’s store were better than the appeal subjects in several respects. That was reflected in the lower unit rate applied to the appeal subjects (£150 per square metre compared with £200 (Sainsbury’s) and £205 (Asda) per square metre). On 2 December 2013 a Morrisons supermarket opened at 439 Esplanade, just under a mile from the appeal subjects. That store was also superior to the appeal subjects. It was valued at a rate of £200 per square metre. The appellant’s case before the committee and before this court was that the opening of this fourth large supermarket in Kirkcaldy was a material change of circumstances affecting the value of the appeal subjects.
[33] Counsel for the appellant recognised that in the ordinary case the arrival of an additional supermarket in a town was unlikely to be a relevant material change of circumstances so far as existing supermarkets there were concerned. The consequences of the addition for competitors was likely to be merely the ordinary ebb and flow of retail: Assessor for Glasgow v Schuh Limited 2012 SLT 904 and Schuh Limited v Assessor for Glasgow 2014 SLT 184. What made the present case different was, he submitted, that the opening of the Morrisons store caused “a fundamental change in the nature” of the appeal subjects. Before the opening they had been the dominant supermarket in the town centre. After the opening they had become a marginal unit. Had they been vacant and to let, it was unlikely that a supermarket operator would have taken on a tenancy. Rather, it was likely that the only potential alternative occupiers would have been large household/gardening store operators. The committee had erred in failing to recognise that the opening of Morrisons had caused that fundamental change.
[34] I do not accept that the committee committed any such error. As Lord Malcolm has observed, the appellant did not submit to the committee that the opening of Morrisons caused “a fundamental change in the nature” of the appeal subjects. Rather, its position was that the opening of Morrisons had affected the appellant’s beneficial occupation (in the sense that it had reduced the rental value of the subjects) (written submissions for the appellant paragraphs 1.2 and 5.1). The committee can hardly be faulted for failing to accept and give effect to a submission which was not in fact made to them.
[35] In any case, in my opinion the facts found by the committee do not support the proposition that “a fundamental change in the nature” of the appeal subjects occurred because of the opening of the Morrisons store. The finding that the appeal subjects were “the dominant supermarket in Kirkcaldy town centre” is not a finding of any real significance. They were the only large supermarket in the town centre: but there were two other large supermarkets in Kirkcaldy, and all three were competing in the same market for customers. Furthermore, on a proper reading of the committee’s findings, decision and reasons, I am clear that they were not attributing the unlikelihood of the subjects being let to another supermarket operator (or their becoming a marginal unit) solely (or even largely) to the opening of the Morrisons store. On a fair reading of the stated case the committee found that the major change which had affected the appeal subjects had been the difficult market conditions for large supermarkets which had been experienced since the revaluation. Competition from discounters such as Aldi and Lidl, and price discounting among the “big four” supermarkets, had resulted in falling turnovers and reduced profit margins for the big four’s supermarkets nationwide. The position in Kirkcaldy had reflected the position nationally. Moreover, the facts found do not support the contention that there was any significant change in the nature of the subjects (let alone a fundamental one) on 2 December 2013, or by 1 April 2014. The subjects were in fact let to the appellant (and that continued to be the position until the expiry of the lease on 15 December 2015). The rent was not reduced for the period of the lease remaining after the Morrisons store opened. More importantly, there had been no change to the existing use of the subjects on 2 December 2013 or by 1 April 2014 - they continued to be used as a large supermarket. Subjects require to be valued in their actual state and having regard to their existing use. It would be wrong in principle to value them as if they had some different existing use. Of course, had the use of the appeal subjects in fact changed from use as a supermarket to use as a household/gardening store (which on the evidence would have been a less valuable use) the position would have been different. That change of use would have been likely to have been a material change of circumstances affecting value. However, there was no such change of use here.
[36] The appeal to this court was predicated upon showing (i) that the opening of Morrisons had caused “a fundamental change in the nature” of the appeal subjects and (ii) that the committee had erred in not holding that there had been such a change and in not treating it as a material change. Since the appellant has failed to demonstrate those matters the appeal cannot succeed.
[37] The committee were fully entitled to decide that the addition of a fourth supermarket, and the consequences of that for the appeal subjects, were no more than the normal manifestations of the free market in retail, and were not extraordinary or exceptional features sufficient to justify the conclusion that they constituted a material change of circumstances in terms of s.3(4). For my part, I would go further. On the facts found, and on a proper application of the guidance provided in the Assessor for Fife v Schuh and Schuh v Assessor for Fife, I am in no doubt that the committee’s decision was right.