Flooded car supermarket loses MCC tribunal ruling
We have had a relative dry winter so far this year, but the periodical risk of flooding is causing some head-scratching among experts and specifically if it can be interpreted as a Material Change in Circumstances (MCC) for businesses affected by it.
A recent decision of the Upper Tribunal (Lands Chamber in The Appeal of Moore (VO) (2018) UKUT 0324 (LC) was made on the basis of written representations. This appeal concerned a car supermarket site in the Hessle Dock area of Hull where the site was severely flooded in 2013, resulting in 800 cars being written off.
Following that flooding the Environment Agency re-categorised the site into its highest risk category for flooding and the occupier was unable to obtain insurance against flooding. As a result, the tenant was able to agree a 25% rent reduction with its landlord to reflect the risk and, in 2015, made a proposal seeking a reduction in its rating assessment on the basis that the flood risk represented a MCC.
The Valuation Officer (VO) initially accepted the proposal as valid but, when the matter came to be heard by the Valuation Tribunal for England (VTE), the VO changed its position and argued the ratepayer’s proposal wasn’t valid as the matters that it referred to didn’t represent a MCC.
The VTE considered the fact that the property was no longer insurable against flooding and that a rent reduction had been agreed, showed that the value of the property had been affected beyond the immediate flooding. Although there was no flooding at the date of the ratepayer’s proposal in 2015, the VTE was satisfied that the future risk represented a MCC and found that the ratepayer’s proposal was a valid one.
The VO appealed against this decision and the ratepayer didn’t respond to the VO’s appeal. The VO contended that the future risk of flooding was not a MCC and flooding is a periodic occurrence with the risk reflected in rental values at the relevant valuation date.
The ratepayer’s proposal was made in March 2015 at a date when there was no flooding, and more than a year after the last flooding. On the relevant day, the date of the ratepayer’s proposal, there was no disrepair to the property and no physical evidence of flooding.
The Upper Tribunal’s decision found that neither the rent reduction, nor the refusal of insurance were either “physical changes” or matters that were “physically manifest” at the relevant date. There was also no evidence that the Environment Agency’s re-categorisation of the flooding risk was physically manifest at the date of the appeal. As the ratepayer’s proposal had not identified any material change within the meaning of the legislation, the proposal wasn’t valid and the VO’s appeal allowed.
The Upper Tribunal’s analysis follows its earlier guidance and is likely to be seen as uncontroversial. However, we are left still with an interesting question.
The hypothetical basis of valuation for rating requires an assumption that the tenant bears the costs of any insurance for the property; but how can that be recognized in circumstances where insurance is simply not available at any premium?
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