Introduction
[1] This case is an application for determination of a question of disputed compensation. The subjects are 56/58 Ferry Street, Montrose. They were owned by the applicant who operated a tyre depot there. The respondent acquired the subjects compulsorily with effect from 31 July 2017 (“the relevant date”).
[2] The applicant makes three claims. The first claim is for the value of the subjects taken. The second claim is for disturbance in the form of loss of profits prior to the relevant date, and thereafter for extinguishment of the business carried on at the subjects. The third claim is for compensation for the cost of professional fees incurred.
[3] In respect of the first claim, parties are agreed that the market value of the subjects as at the relevant date was £170,000. There is no dispute that this figure represents a bricks and mortar value and excludes any goodwill. The respondent paid £153,000 on 27 January 2018 as advance compensation, being 90% of the foregoing value. Parties are agreed that the applicant is entitled to the remaining £17,000.
[4] The second claim for disturbance is made up of two parts. Firstly, the applicant seeks compensation for lost profit which it contends would have been earned between 2012 and 2016 from conducting MOTs and repairs associated with MOT work at the subjects. The applicant estimates lost profits in the sum of £256,892. Secondly, the applicant contends that the extinguishment of the Montrose business has resulted in loss of goodwill, valued at £654,000.
[5] In the third claim, the applicant seeks compensation for the cost of professional fees stated at £61,451.
[6] Amongst other things there are significant issues as to proof of loss, remoteness and mitigation in respect of the disturbance claim. There is also an issue of proof of loss in respect of the third claim.
Procedure
[7] This case involved significant procedure involving the recovery of written records of the applicant and others. These have been the subject of analysis by forensic accountants for each side. We carried out site visits on 7 and 8 November 2022, viewing the site of the former subjects, two of the applicant’s other depots in Brechin and Forfar, and a number of other sites in Montrose suggested as alternative locations for the applicant to continue its Montrose business. We held an eight day hearing commencing on 10 November 2022. There was a joint minute of admissions and a joint statement between the forensic accountants, including a list of outstanding issues between the experts.
[8] The applicant was represented by Ms Catherine MacColl, Advocate. She led the evidence of Mr William Annandale and his son Mr Graeme Annandale. They are directors and shareholders of the applicant company, and of a property company named Abbey Express Limited. She led the evidence of Mr Steven Taylor, certified accountant of Murray Taylor Limited who provide accountancy services to the applicant. She also called Mr Callum McLeish, architectural technician of C M Design & Build, Arbroath, who drew up various plans for the applicant between 2014 and 2016. The applicant also led Mr David Bell, CA of Quantuma Advisory Limited as an independent expert in forensic accounting.
[9] The respondent was represented by Mr Michael Upton, Advocate. He led the evidence of Mr Edward Taylor, who had been a senior planning officer with the respondent at the relevant time; Mr Steve Wilson who had been a regeneration officer of the respondent; Mr Steven Thomson, a senior environmental health officer of the respondent and Mr Damian Brennan, a development standards officer with the respondent. The applicant also led the evidence of Mr Greig Rowand, CA of GR Forensic Accounting Limited as an independent expert.
Legislation
Lands Tribunal Act 1949
“3(5) Subject to the following provisions of this section, the Lands Tribunal for Scotland may order that the costs of any proceedings before it incurred by any party shall be paid by any other party and may tax or settle the amount of any costs to be paid under any such order or direct in what manner they are to be taxed.”
Land Compensation (Scotland) Act 1963
“12. Rules for assessing compensation.
Compensation in respect of any compulsory acquisition shall be assessed in accordance with the following rules:—
…
(2) The value of land shall, subject as hereinafter provided, be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise:
…
(6) The provisions of rule (2) shall not affect the assessment of compensation for disturbance or any other matter not directly based on the value of land: …”
Cases
Texts
Background facts and circumstances
[10] At the relevant date the applicant operated four tyre depots in Angus. In addition to the Montrose subjects, it operated depots at Arbroath, Brechin and Forfar. The applicant would fit tyres to vehicles at all the depots. It also operated a mobile business supplying and fitting tyres to vehicles at the roadside or at customers’ premises. Its customers included the domestic, commercial and agricultural sectors involving large and small vehicles. The sites at Arbroath, Brechin and Forfar also provided MOTs and servicing, but this was not the case at Montrose.
[11] The applicant acquired the Montrose subjects in 2010. A tyre business had previously operated there since about 1980. The site is adjacent to the docks area of the town, and is also in walking distance of the town centre. The applicant had previously rented a site in Montrose in 2008 at Unit 1B Broomfield Industrial estate. This is an out of centre site to the north of the town. This site features later in the negotiations and argument about an alternative site. The applicant moved from the Broomfield site to the Ferry Street subjects in 2010.
[12] The applicant had previously acquired premises in Hill Street, Arbroath and commenced business there in 2001, which business continues. It acquired premises at 22 Commerce Street, Brechin in 2002 and continues to operate business there. More recently it acquired a site at Queen Street, Forfar and commenced business there in 2015.
[13] The respondent promoted and ultimately obtained the Angus Council (South Montrose Spine Road) Compulsory Purchase Order 2016 (“the CPO”). The purpose was for the construction of a new spine road serving the commercial and harbour areas of Montrose. The new road would require the demolition of a number of properties, including the subjects, which were being acquired under the CPO. The consultation process commenced in 2011. The CPO was made and notified on 15 February 2016. Scottish Ministers confirmed the Order on 1 December 2016 and it was served upon the applicant on 12 January 2017. The date of vesting in the respondent was 31 July 2017. Work commenced in the area of the applicant’s former depot in September 2017.
[14] The respondent first contacted the applicant in August 2011 about the plans for the spine road. Discussions commenced in 2013 for the acquisition of the subjects, involving the respondent’s estates surveyor Mr Neil MacKenzie. The discussions involved a purchase price for the subjects and an additional sum in respect of compensation for closure of the depot. In essence the latter involved an acceptance by the respondent that the applicant could not relocate the Montrose branch of their business, which business would be extinguished. It would appear that by 6 June 2014 parties were close to agreement in principle.
[15] The applicant acquired a site at 2 Hill Street (also known as 43 Lower Balmain Street) on 30 May 2014. The site included a derelict laundry building and a disused garage. The site is approximately 250 metres from the Ferry Street subjects, also in walking distance of the town centre. This acquisition came to the knowledge of the respondent’s officers. They thought it likely that the acquisition was for the purpose of opening a new tyre depot in Montrose. The officers thus departed from a position of being willing to offer compensation for extinction of the business, but were prepared to consider a claim in the context of relocation to alternative premises.
[16] On 25 August 2014, the respondent’s solicitor, Mr Allison, emailed the applicant’s solicitor indicating that it was not clear why the applicant could not relocate to the Lower Balmain Street (“LBS”) site and challenged a suggestion that the access arrangements were unsuitable. The applicant’s solicitor replied by email dated 4 September 2014. The email complains that in discussions about compensation on the basis of extinguishing the business, where parties were not too far apart, the respondent had introduced a requirement for the applicant to sign a restrictive covenant. The solicitor further indicated that in the event of closure of the Montrose premises, the applicant would continue to trade from its remaining premises elsewhere, and also intended to continue with its mobile business within Montrose, accepting that no depot was required within Montrose for it to continue the mobile business there. He stated that the applicant did not intend to relocate to other premises in Montrose. He also advised that the acquisition of the LBS property in Montrose had been an investment and it was not the intention to relocate to the new site. He did not feel it was necessary to address matters about the suitability of the site for relocation. By October 2014, the discussions had stalled.
[17] On 31 October 2014, the applicant applied for planning permission for six Class 4 business units on the site of the disused laundry. Planning permission was granted on 13 March 2015. There was a condition restricting use to Class 4 business uses, ie not Class 5 industrial use. During the process the planning officer had asked the applicant for a reassurance that the proposed units would not be occupied by the applicant or anyone else for use as premises for the maintenance of motor vehicles including the changing of tyres. Such assurance was given. Other correspondence during 2015 indicated that the respondent remained committed to developing the spine road.
[18] During 2015, the respondent’s project manager Mr Wilson suggested to Mr William Annandale to submit a sketch to the planning department to see whether the former garage could be renovated in order to be occupied as a tyre depot. Mr McLeish submitted a plan on behalf of the applicant on 10 May 2016 as a pre-planning application. The plan showed a new build garage and stores, replacing the existing stone building. It was L-shaped so as to create a small yard and parking area at the “front” of the garage, albeit that the “front” did not face Lower Balmain Street. The proposal was designed so as not to interfere with the units and parking allowed, but not yet built, under the 2015 permission on the laundry site. The proposed garage site was significantly smaller than the Ferry Street subjects, comprising an area of some 500 sqm as opposed to some 990 sqm.
[19] The environmental health officer Mr Thomson observed that there were several fairly new residential properties within 15m of the proposed development. These run along John McKay Place to the north. Mr Thomson considered that the proposed layout of the garage was poor in terms of minimising noise since the business side of the development – including three large access doors – faced directly towards the residential properties. The officer made the point that the existing access points of the building faced away from the residential properties and the wall of the existing garage would provide significant noise attenuation. He advised a better solution would be to re-orientate the layout so that the rear wall of the proposed garage faced the existing houses. In a covering letter from a senior planner Mr Taylor to Mr McLeish of 26 May 2016, the former stated:
“I think the existing lawful use of the site is likely to have a significant bearing in assessing the acceptability of a relocated Angus Tyres but I am happy to work with you to explore this option further.”
He also highlighted Mr Thomson’s comments suggesting that a redesign where the proposed operation turned its back on the houses to the north might be worth exploring. The option was not however explored further. During 2016, the six new units were built behind the former garage in terms of the 2015 planning permission. On 10 November 2016, the applicant sold the LBS subjects to Abbey Express Limited. Messrs Annandale control both companies.
[20] On 6 April 2017, being prior to the relevant date, the applicant’s solicitor submitted a compensation schedule. This sought compensation, amongst other things, for disturbance based upon the future cessation of the Montrose business. It stated there were no suitable alternative premises in Montrose. In particular it stated that the Broomfield premises previously occupied by the applicant’s business were no longer suitable. To return to the site would be a retrogressive step and would have significant financial consequences. It also stated that the LBS site had been purchased by the applicant as a possible location for their business to relocate:
“However, given the length of time the CPO has been ongoing, and the uncertainty surrounding matters, the company took a commercial decision to construct several units within the site to offer for rent. All of the units constructed are now tenanted and accordingly the remaining site is unsuitable for their business requirements.”
[21] The schedule also indicated that the applicant would require to settle redundancy claims; four employees were said to have the requisite length of service to qualify for redundancy payment and the remaining staff would be entitled to pay in lieu of notice depending upon the date of cessation of business.
[22] Unit 1B Broomfield Industrial Estate had been available to let by the respondent at various times during the discussions, at least up to September 2017. It is a Grade A listed large aircraft hangar going back to the WW1. As we have indicated, it had formerly been occupied by the applicant, and featured in the discussions between parties as to possible relocation. The respondent also had available an adjacent unit 1A, of similar construction, slightly larger, which was also available in September 2017.
[23] On or about the relevant date, 31 July 2017, a company, Balmain Garage Limited (“BGL”) commenced trading as a tyre depot from the existing garage building on Lower Balmain Street. The company was incorporated on 8 February 2017. It has a license agreement to occupy the garage dated 1 February 2017 granted by Abbey Express Limited. The principal of BGL was a Mr David Pert. Mr Pert appears to have operated retail businesses in Arbroath as well as a car washing and valeting service. The papers setting up BGL had been submitted by Murray Taylor who are also the applicant’s accountants. The operator of the garage was, and remains, a Mr Scott Yeats who had been the manager of the applicant’s Montrose depot. On or about March 2019 Mr Yeats became the sole director and shareholder Limited of Balmain Garage Limited, following the exit of Mr Pert.
[24] By 26 February 2018, a further two business units were constructed at the LBS property, we infer by the owners Abbey Express Limited. The new units involved the demolition of the north section of the garage and run along the north side of the now re-used garage.
Applicant’s witnesses
William Annandale
[25] Mr William Annandale is the father of Graeme Annandale. He has been in the tyre business for many years. He is 82 and retired, although he has been involved in the CPO discussions. He assisted Graeme to set up the applicant’s business in 2001. He was involved in operating the business in Montrose from the Broomfield site, rented from the respondent in 2008. He described this as a temporary move to get a foothold in the Montrose business. They supplied tyres and tyre repairs to lorries, tractors, trailers and farm machinery. The Broomfield site was not ideal as it was on the periphery of Montrose town, there was no yard where they could work from and there was no dedicated parking.
[26] The Ferry Street site was identified in about 2010. McConechy’s Tyres had previously operated a business there for many years. It was in a good location in the town. There was a large outside yard with off and on-street parking and was larger than the Broomfield site. Customers were able to link trips with the town centre for shopping. Tractors and trailers were able to enter the site.
[27] In 2011, works were carried out to raise roof beams slightly, in order to allow for ramps. The work was carried out by the applicant’s staff. The intention was to carry out MOTs to vehicles under class 5 (cars) and class 7 (vans and other larger vehicles). The latter required extra height for ramps, thus requiring the works to be carried out. In order to install the equipment necessary for an MOT bay, it would have cost £25,000-£30,000. He had asked Mr Wilson of the council if an MOT station were to be installed, whether they would be recompensed should the CPO require it to be knocked down, and the answer was that they would not be compensated. If he had known then, in 2011, that it would take the respondent until 2017 to complete the CPO process, he might well have installed the MOT station at that time.
[28] The Ferry Street depot had been a success. He described the mobile business as more of a breakdown service. If tractors or lorries became stuck, local farmers and contractors and other businesses would call the applicant. The yard had been large enough to work on one or two lorries at a time; work could be carried out inside the building on cars. The depot catered for a wide range of customers.
[29] Abbey Express Ltd is a property holding company. It owns over 20 properties which are let out commercially. Some of these have been redeveloped. The LBS property had been acquired for development purposes so new and existing units could be rented out. Mr Annandale had not considered using the site as a tyre depot. It had been more tax efficient for the LBS subjects to be acquired by the applicant for tax reasons, since Abbey Express Ltd was not registered for VAT.
[30] Mr Annandale had asked Mr McLeish to submit the sketch to the planning department following a meeting with Mr Wilson of the council, to see if the site could be occupied as a tyre depot. Mr Annandale had not been enthusiastic about the possibility, since the site was small, but was prepared to consider the option. In view of the council’s comments about the three main doors, Mr McLeish indicated that he could not come up with another way of locating the doors which would not also breach planning guidelines. Other options would place the doors closer to other residential properties. Moving the doors elsewhere would involve substantial renovations to the buildings. Demolishing the building and rebuilding was prohibitive on cost grounds. It was never suggested that an amended planning application should be resubmitted. It would be poor business to spend more money on obtaining full plans and full costings for the project. He accepted that the Lower Balmain Street garage, when previously operated, had carried out MOTs, although he was not, he said, aware of this at the time.
[31] The applicant had engaged Westport Property Limited of Dundee to keep a watching brief for relocation sites since mid-2014. Mr Annandale referred to an email from Mr Fergus McDonald MRICS of that company to his solicitor dated April 2017. This confirmed Westport had been “actively seeking well located modern workshop accommodation with yardage and car parking, ranging in size from 5,000 sq ft to 8,000 sq ft.” The email also indicates:
“As you will appreciate only visibly prominent locations that have clear easy access are suitable for this type of operator. This will allow customers to drop their car off and stay in the local area while work is being done to their vehicle”.
The email further indicates that Westport had been unable to identify suitable premises to satisfy the requirement. Mr Annandale did not accept that the applicant’s other depots did not fulfil all these criteria. There had been no property on the market available that suited the applicant’s business model. He regarded the Broomfield property as representing a step back for the business in that any business there would be less profitable than the Ferry Street site. He had also contacted a number of other well-known commercial property agents in the Angus area for a relocation site, but no properties were identified. Other potential relocation sites put to him by the respondent were also unsuitable. There were no written records of discussion with the surveyors or particulars of possible sites.
[32] Mr Annandale accepted that he had not insisted BGL make all the payments due under the licence agreement; he had helped the business to get started. He hoped that Mr Yeat’s business would be successful “for his sake”. He did not consider BGL to be a competitor. He denied saying to Mr Wilson in September 2015 that the Montrose depot did not do as well as other depots from street trade, or that income was largely generated from the mobile business. The opposite was the case.
[33] The applicant had no financial relationship with BGL; there were no shares held in that company and no investment had been made in it, no profit was derived from that company; no takeover was intended in the future.
Graeme Annandale
[34] Mr Graeme Annandale is also very experienced in the tyre business. He and his father had wanted to open up premises in Montrose and had wished to purchase a property as a tyre depot there. Instead they found and rented the Broomfield property. It was large enough for four work bays. It was not a long term solution for their ambitions and was not in accordance with the business model. There was no yard area to carry out works on vehicles outside the building and no-site parking. Had it been a long term proposition, they would have offered to purchase it, and did not do so.
[35] The Ferry Street subjects came on the market and were ideal since they had a large courtyard area, on and off-street parking, and a mezzanine level in the building for storage of tyres which could be distributed to other sites in Angus. The Ferry Street business was more successful than Broomfield. It was five minutes’ walk from the town centre, and there was room to park large vehicles. It was near to a fertiliser plant and thus the premises would become known to farmers picking up material there. There was also the GSK factory in the harbour area which resulted in a large number of motorists driving past the entrance on their way to and from the town.
[36] The business had been growing in Montrose. Street trade was doing well and would have been better with an MOT station. There were also monthly account customers involving farmers, businessmen and hauliers.
[37] The business serviced a large agricultural area which extended east to Laurencekirk and north as far as Stonehaven. At the time the Montrose depot closed, the mobile business had been busy with numerous trips per day. There was nothing like that amount of business any more.
[38] Mr Annandale had identified the LBS site in 2014. He and his father considered it was an excellent opportunity to develop and rent out and Mr McLeish was employed to prepare plans to build six individual units for leasing. The site did not have the frontage on a busy road like on Ferry Street, since it was tucked away. He accepted “it could be argued” that the site was acquired as a possible relocation site, but it was more a redevelopment proposition. He was aware the disused garage there had had an MOT station, but was not sure when the garage last operated.
[39] Discussions with the council became difficult when the respondent advised that the Annandales would require to sign a restrictive covenant preventing the business operating in the Montrose area. This was in the context of extinguishment of the business. Mr Annandale did not wish to create undue restrictions on the business from expansion in the future in the Angus area and wished to carry out mobile work in the same area for the respondent and other businesses. As matters transpired a draft restrictive covenant never appeared.
[40] As at October 2015, there had been a general lack of alternative commercial premises on the market in Montrose. This had been accepted by the council.
[41] The respondent had suggested that the applicant resubmit a draft plan to locate a depot on the LBS site. In effect this would have created a unit half the size of the site at Ferry Street. The LBS unit would have had two work bays whereas the Ferry Street subjects had four or five bays. He understood from Mr McLeish that the submitted plan of 2016 was a non- starter because of the positioning of the doors being too close to adjoining residential properties. Should the doors be repositioned the entrance to the unit would require to be taken over a shared access road, shared with other tenants of the units on site. There would be a narrow roadway entrance. There would be no courtyard area for outdoor work on vehicles and it would be difficult for larger vehicles. There could be parking difficulties. The applicant also had to provide for onsite parking for the six units; an earlier requirement for 12 spaces had risen to 20 spaces since a number of the units were conjoined for a gym.
[42] He described the existing LBS garage premises as a large tube, ie a door at either end. No real alterations were carried out since they had bought it. It could probably take two or three cars within it, but could not work on all of them at the same time. He would not use premises with only two bays although another operator might survive in such a smaller unit.
[43] Mr Annandale did not consider that other premises suggested by the respondent were suitable for the business.
[44] Mr Annandale did not know the term of the licence agreement between Abbey Express Ltd and BGL. Abbey Express Ltd were landlords of a number of properties and used both leases and licenses; he considered that licences gave the licensor more flexibility. The initial owner of BGL was a Mr Pert. He was a golfing friend. Mr Pert had employed Mr Yeats as manager there. Mr Yeats was the former manager of the applicant’s tyre depot. The applicant would wholesale tyres to Balmain Garage, but the applicant had no business interest in that company. The similar looking websites for “montrosetyres”, “arbroathtyres” , “brechin tyres” and “forfartyres” in which the former website named Balmain Garage Ltd as supplier and the latter three named the applicant as supplier, was due to the fact that the websites were hosted by the same tyre wholeseller, namely Micheldever. Mr Annandale was sure that Balmain Garage would have had some of the trade which the applicant had had at Montrose. This trade would essentially be car only. He would not expect cash sale customers going from one Angus town to another to buy car tyres; ie he would not expect such customers who formerly used the Montrose depot to follow the applicant to its remaining premises in Brechin, Arbroath or Forfar. The applicant had no financial interest in BGL other than as its landlord. On closure of the Montrose depot it would be more difficult to operate the mobile business for customers situated in Montrose, since it was less easy coming the greater distance from another depot to do so.
[45] When the Montrose depot was closed, Mr Annandale as a director of the applicant had 25% more time to devote to the other three depots. This would partly explain the increase in turnover at two of the other depots. Following closure of the Montrose depot, he did not think that all the increase in turnover at Arbroath could be connected with Montrose based trade. Some customers would have been lost. He accepted that the applicant’s largest customer, namely Tayside Contracts Limited – a service company for a number of local authorities including the respondent – was the applicant’s largest customer. This customer had not been lost and was probably able to be looked after from the three remaining depots. Mr Annandale would defer to Mr Bell on the question how much of Arbroath’s increased turnover post CPO might have transferred from Montrose. He considered Montrose to have been the most profitable depot, but very much doubted the other depots were making a loss. Differences in the accounts between depots could be explained by the fact that at Arbroath, Brechin and Forfar there were more staff carrying out servicing work; mechanics and testers were paid significantly more than tyre fitters.
[46] Mr Annandale confirmed that following the vesting of the Montrose subjects in the respondent, none of the employees were paid redundancy payments. Mr Yeats became manager of BGL and two others were transferred to the Arbroath premises. The other three left but he was not clear as to the circumstances. He accepted that the applicant helped Mr Yeats to get started, saying there was a likelihood that some good would come of it.
Calum McLeish – architectural design
[47] Mr McLeish had submitted the planning application in 2014 for the six units on the site of the old laundry at LBS. These units could be adapted so as to merge into one or more units. In 2016 he was consulted by the Annandales and asked to submit a pre-application drawing for the old garage building. The planning officer’s reaction (email 26th May 2016) –
“I think the existing lawful use of the site is likely to have a significant bearing in assessing the acceptability of a relocated Angus Tyres but I am happy to work with you to explore this option further”
he took to be a reference to the class 4 restriction existing at the laundry site. The site was tight, as he put it. In his opinion, to pursue a different orientation of the proposed tyre depot would be, as he put it, flogging a dead horse with the planners. If the three doors were relocated on the existing building, there would be insufficient access via the lane. To “turn” the building on its axis – ie implying a new build, would be prohibitively expensive. There could still be noise issues and roads department issues. Access would be insufficient for large vehicles. There would also be parking issues in the light of a large amount of parking required for the new units. He had not prepared alternative drawings or written costings, but he had mentioned costings to the Annandales at a meeting. He accepted that Mr Taylor’s description “the existing lawful use of the site” could be interpreted as meaning the use as a garage, in the context of Mr Thomson’s email of 13 May 2016.
Stephen Taylor - accountancy
[48] Mr Taylor has provided accountancy services to the applicant for many years. He had also provided financial documentation to Mr Bell for the purposes of the present claim.
[49] The applicant’s statutory accounts did not break down figures on a depot by depot basis. But Mr Taylor had prepared “profit and loss analysis” for years 2014, 2015 and 2016, which did contain a Montrose depot breakdown. These were reproduced in Appendix E to Mr Bell’s main report. We also understood Mr Taylor had been involved or assisted in the preparation of more detailed profit and loss statements for 2014, 2015 and 2016 for each of the depots, initially termed “management accounts.” These were reproduced in attachments A to Mr Rowand’s comments of 13 November 2022. None of the depot breakdowns were contemporaneous financial statements for use by management, but were prepared for the purposes of the claim.
[50] The tables set out by Mr Bell showed a reduction in total turnover for the applicants as a whole after 31 July 2017, namely for the years between 30/11/16 and 30/11/18, in the sum of approximately £189,000. It was accepted this reduction was much less than the projected 2017 turnover for Montrose had it not been closed (£571,000). In Mr Taylor’s opinion there was still a fall in turnover. It could be seen that there was a large increase between 2016 and 2018 for the Arbroath depot but much of this could be put down to reasons other than migration of customers from the Montrose depot. Mr Bell had addressed the amount of Montrose trade retained by the business. He thought that the directors had tried to increase performance at the other depots; had the Montrose depot still been available there would have been very much larger increases in total turnover. It could also be seen that there was a reduction in operating profit for 2017 of over £45,000, reflecting the four months loss of trade from Montrose to the end of the financial year, ie to 30 November 2017.
[51] The Forfar depot had been running at a loss in 2015 and a larger loss in 2016, business there having commenced only in 2015, but turnover was rising and it subsequently started to make a profit. Apart from turnover, figures by depot for 2017 and thereafter were not produced.
[52] The breakdown figures showing that the Montrose depot made a substantially larger profit than the other depots could be explained by the fact that Montrose had fewer payroll costs. Only tyre fitters were employed there earning £15,000-£17,500 per annum as opposed to qualified mechanics at the other depots earning £25,000-£30,000.
[53] The applicant’s accounting system had enabled wages costs to be attributed to each depot, but overheads were allocated on a turnover basis, with the exception of rent and rates. Mr Taylor would defer to Mr Bell on the matter of how to allocate the amount of trade which had been retained from the Montrose depot by the other depots and how much had been lost.
David Bell, Forensic Accounting
[54] Mr Bell spoke to his main report of 2 March 2020, to his supplementary report of 13 October 2022, and the joint statement of 9 November 2022. He also commented upon Mr Rowand’s reports.
[55] Mr Bell’s main report indicates that he had not performed any independent verification of the information presented to him. His supplementary report indicates however that he had undertaken some verification work on the information, as discussed where relevant, but should not be construed as representing an audit.
[56] Mr Bell outlined the applicant’s trading pattern between 2014 and 2018. In the last full financial year prior to the Montrose depot closing, namely the year to 30 November 2016, the depot had turned over £583,000. Trade at Montrose was impacted by the closure on 31 July 2017. Trading levels at the Brechin site had not increased since 2016 and had remained consistent at just over £600,000 in 2017 and 2018. Trading levels at Arbroath had increased since 2016 with growth in both 2017 and 2018. Forfar trading levels had been growing consistently since the site opened in 2015 through to 2018. Both Arbroath and Forfar had thus shown increased trade since 2016.
[57] The Brechin depot was approximately 9 miles from the Montrose site, the Arbroath depot was 13 miles and the Forfar depot was 19 miles distant from Montrose respectively. Any Montrose customers who would have remained loyal following closure of the Montrose depot would be expected to travel to the closest site of the applicant, namely Brechin. But this was not apparent from the turnover movements since Brechin had not shown any increase in trade since Montrose closed.
[58] It was also the case that there were four other tyre and MOT businesses based in Montrose, namely two national providers KwikFit and McConechy’s Tyre Services, and two local businesses, namely Just Tyres Angus and Balmain Garage. Existing customers of the applicant based in Montrose would therefore have had a range of options all within Montrose: there would have been no need for them to travel to another town.
[59] Mr Bell also understood that the growth in trade at the Forfar site – being the site situated furthest from Montrose – was unrelated to the CPO. The growth in sales at Arbroath was initially understood to be unrelated to the CPO as opposed to management efforts to win customers and specifically picking up more council work in Arbroath. He records that management was of the view that the sales movements in Arbroath and Forfar would have happened whether the Montrose site closed or not and was not due to customers moving sites following the CPO.
[60] Mr Bell thus concluded that the Montrose site could be considered independently from the other sites when considering the loss to the company due to the CPO. He therefore used the historic results for the Montrose site in his analysis and had not considered the performance of the applicant as a whole following the closure of the Montrose site. One had to be careful in interpreting the reduced operating profit figure for 2017 since one did not have the 2017 figures for Forfar which may or may not have become profitable by that time.
[61] Mr Bell considered the loss of profits claim due to an MOT station not being installed at the Montrose depot. It was the position of the applicant that but for the CPO being promoted in 2011, it would have proceeded with installing an MOT station in 2012. The other three depots had MOT testing stations and the applicant considered that was a key part of its trade, since in addition to MOT sales there was associated trade from repairs and services to vehicles which had come to the garage for a test. He understood that the applicant had been given verbal approval by an Alex Williams of the Ministry of Transport so that an MOT testing station could be operated at the Montrose depot. Work was undertaken to heighten the internal ceiling to incorporate the testing facility. Once the CPO was notified in 2011 no further work was done in connection with the MOT testing station since the applicant understood it would be mitigating its loss by not incurring set up costs.
[62] Mr Bell assumed 175 tests being carried out in 2012, rising to 1750 in 2016, based on the number of MOT tests performed at other depots. He made various assumptions as to private/trade customers, average price per test dependent on customer, the length of staff time to carry out a test, appropriate staff costings, as well as various overheads. In the five years to 2016 he estimated MOT sales in the sum of £217,990 and a profit of £117,790.
[63] He also set out loss of turnover and profit from servicing and repairs associated with the MOT tests. He based his assumptions upon trading information for the other three sites for the month of March 2019. This provided assumptions as to the percentage of MOT customers who would also require repair work, an average sales price per repair subject to average cost of parts and average cost of labour, and an average profit per repair. In the five years to 2016, he calculated repair sales in the sum of £310,552 and a repairs profit of £177,789. The combined loss of profits for MOTs and repairs was accordingly £296,579, say £297,000.
[64] Mr Bell adjusted these figures in his supplementary report. He reduced the number of annual MOT tests to 1,400, but to be achieved more rapidly by year 3 of trade, in line with the applicant’s experience in Forfar. He also included the MOTs testers’ higher salary at a full annual rate from year one. He adjusted timings for the start date. This resulted in MOT sales for the five years to 2016 at £263,233 producing a profit of £48,870. His figures for repairs sales associated with MOTs were accordingly adjusted whereby sales for the five years to 2016 would have amounted to £375,006 and a repair profit of £214,689. This resulted in a revised combined loss of MOT and repair profits in the sum of £263,559, rounded to £264,000.
[65] Mr Bell then considered the loss of goodwill claim due to the CPO. Goodwill was to be calculated by deducting the net tangible assets from the value of the business. Once the business operations had been valued, the net tangible assets should be deducted on the basis that the assets were required to operate the trade. The business itself would be valued by applying a multiplier to a maintainable EBITDA (earnings before interest, tax, depreciation and amortisation) to give an enterprise value (EV). He adjusted the EBITDA to obtain a figure more consistent with maintainable earnings.
[66] In order to arrive at an EBITDA figure, Mr Bell considered the profit and loss account analysis which sought to extrapolate results for the Montrose site from the accounts for years 2014, 2015 and 2016. He adjusted the profit before tax figure for each year with reference to depreciation, amortisation, and interest (both payable and receivable) to obtain the EBITDA figure. He used a weighted average which put more emphasis on recent years. An adjustment was made in respect of directors’ remuneration. Mr Bell considered that a market rate salary for Mr Graeme Annandale would be in the region of £40,000, which split evenly between the four depots would result in a salary of £10,000 per depot, which was a greater amount than the amount stated in the profit and loss account analysis. Mr Bell made another adjustment for profit and losses on disposal of fixed assets, which had been understood to relate to non- trading income and expenditure. Another adjustment related to abnormal accountancy costs in 2015. A major adjustment was made for the MOT profits claim which, it was contended, would have increased the annual profits for the three years in the analysis.
[67] Mr Bell noted that the accounts analysis included a “notional rent” payment for the Montrose depot (£10,000 pa) which had been contained in a previous valuation, representing the rental value of the Montrose subjects. There was also a figure for rent receivable at Montrose (£14,493 in 2016) which he did not adjust, on the basis that it was part of the trading income of the business and not part of the heritable valuation which had been carried out on a vacant possession basis. After applying the weightings he calculated a weighted average or future maintainable EBITDA at £200,944.
[68] Mr Bell then sought a multiplier for the EBITDA. He selected a multiplier based upon the BDO Private Company Price Index (“PCPI”) as well as EBITDA multiplier data for comparable quoted companies. The PCPI for Q2 of 2017 indicated a multiple of 10.7 being applied to historic EBITDA in payment for businesses. The EV for such cases was considerably larger than that of the applicant, and the multiple was based upon publicly available information on reported profits; ie it was a figure to some extent based upon interpretation. There was also a risk that the reported profits in managed businesses were suppressed by discretionary expenditure that would be non-recurring under a new owner; thus the deal value when compared to reported profits may overstate the multiplier. Mr Bell therefore reduced the multiplier by 50% to give an EBITDA multiplier of 5.35.
[69] Mr Bell sense checked the above by considering EBITDA multiplies of quoted companies which operate in the same sector, namely Halfords Group plc, Inchcape plc and Lookers plc. A calculation was based upon share price. This suggested an average multiplier of 7.9. This figure required to be reduced to take account of the applicant’s smaller asset base, limited income streams and spread of business compared to the listed companies, and the fact that the applicant’s shares could not be freely traded. He suggested a risk factor reduction of 40% in this respect. However, a premium for control was also necessary to reflect that, unlike the applicant’s business as a whole, the quoted figures were based upon small trades on a minority share basis. He thus added 15% as a premium factor. This resulted in an adjusted multiple of 5.4, which appeared a valid check upon the multiplier of 5.35 established earlier.
[70] When the multiplier of 5.35 was applied to the maintainable EBITDA of £200,944, it resulted in an EV of £1,075,062, rounded to £1,075,000.
[71] Turning to the goodwill calculation, it was necessary to deduct the net assets from the EV. The company balance sheet as at 30 November 2016 showed a net asset position of £42,088, but this included a historic goodwill balance of £162,500. It followed that the net asset position excluding the goodwill balance would show a net liability. Thus there was effectively no value of assets required to operate the trade from Montrose at the relevant time. He also pointed out that a market value rent had been applied in the calculation of maintainable EBITDA to account for the cost of the premises to a willing buyer. However, the calculations also assumed the existence of an MOT testing station which would have cost in the region of £20,000, which applying depreciation would have been valued at £13,333. This would reduce the value of goodwill in the business to say £1,062,000.
[72] Mr Bell also considered additional costs incurred and losses sustained. He advised that the directors had confirmed there were no redundancy costs. Vans which had been disposed of had a nil book value and there were no proceeds in respect of the disposals.
[73] Mr Bell indicates professional fees have been incurred by the applicant totalling £68,700. This included accountancy costs of £10,000 in the year to 30 November 2015 for Murray Taylor in connection with the CPO. There was also unbilled work in progress from Murray Taylor and Whelan & Co, Solicitors. There were legal costs from Thorntons in dealing with a specification of documents in the Tribunal process, and forensic accounting costs.
[74] Mr Bell’s supplementary report includes comments, amongst other things, in the light of Mr Rowand’s main report. Mr Bell indicates that since his initial report it has become apparent that not all of the trade that went through the Montrose depot has ceased and been lost by the applicant. Some of that trade has been serviced out of the remaining sites. When discussing this with the applicant’s management team it was identified that two customers required to be considered. In the first place, Tayside Contracts was a customer serviced out of all four depots prior to Montrose closing, in which Montrose held the majority of the trade for the contract, and this trade has remained with the company. Secondly, Balmain Garage Ltd (“BGL”) was understood to have commenced trading from a smaller garage in Montrose around the same time that the applicant closed in Montrose. BGL purchased tyres from the applicant and it would appear that the applicant had therefore picked up sales to BGL which it would not have had, had the CPO not forced the closure of the depot.
[75] Sales to Tayside Contracts for 2016 from Montrose amounted to some £100,000, and these sales were not lost following the closure. Sales to BGL amounted to approximately £63,000 in 2018, but in subsequent years dropped to between £20,000-£24,000 per annum. Applicant’s management were not aware of any other customers that should be included for further adjustment. Mr Bell accordingly reduced the maintainable EBITDA by £140,000, representing a figure of £100,000 for Tayside Contracts plus £40,000 of estimated sales to BGL on a maintainable basis, giving an additional level of comfort in relation to any other smaller customers who might have remained with Angus Tyres following the Montrose depot closing.
[76] Applying a profit margin of 8.4% for Montrose for years 2014 - 2016, an adjustment to maintainable EBITDA amounted to £25,792. This resulted in a reduced weighted average EBITDA of £155,635. Applying the multiple of 5.35 the EV would be of the order of £833,000.
[77] In calculating goodwill the value of the MOT station after depreciation would result in a value of say £820,000. Mr Bell disagreed with the suggestion that the property value of the Montrose site should be taken into account, since the EV had already been calculated with a notional rent and the rent cost assumes that a property was rented to operate the business.
[78] Mr Bell dealt with issues raised by Mr Rowand. In Mr Bell’s opinion it was not appropriate to compare the fixed costs applicable to Arbroath or Brechin depots. Here there would be a loss of incremental profits for the MOT work over and above the existing trade at Montrose, based upon a variable increase in sales and direct costs. Sales to BGL were predominantly for the supply of tyres which would provide less gross profit than trade where labour was also included. Mr Bell considered that Mr Rowand’s multiplier to be too low. The latter’s figures were based upon “Europe” data and it was unclear how much of that related to the UK as opposed to say Eastern Europe. The operating profit for Montrose was not out of line with the other depots in 2016. Allowance required to be taken for the fact that Forfar was a new start-up site and only in its second year of trading, and had also suffered a bad debt of £24,000.
[79] Mr Bell had ascertained that payroll figures for Arbroath for 2014 and 2015 had been substantially reduced by 2016, on account of four members of staff leaving, two of whom had a combined salary of £74,000. In effect the head count had been too high and the directors had not realised this. It had also been realised that a member of staff who had been working in Montrose had been misallocated in the figures to Arbroath. This meant that for 2014 and 2015, a salary of £19,000 had been in the Arbroath figures, thus making the Arbroath depot appear less profitable and ought to have been in the extrapolated figures for Montrose. This had been corrected in the 2016 figures.
[80] It was still the case that the Montrose depot was the most profitable of all, which for 2016 had an operating profit of £72,940 (after deduction of £10,000 notional rent) as opposed to an operating profit for Arbroath at £56,470. He did not think the difference to be significant. Montrose was more profitable since wages were lower, relating to employment of tyre fitters rather than qualified mechanics. The directors had said that it was the best site.
[81] Mr Bell did not have profit and loss figures extrapolated for the depots after the CPO relevant date (31 July 2017). He would have expected the turnover for the applicant to be reduced for the year ending 30 November 2017 on account of the closure of the Montrose depot. It was difficult to provide a loss of profit figure since he did not know whether Forfar, which ran at a loss in 2016, made a profit in 2017. He accepted there had been a reduction in MOT income for Forfar between 2017 and 2019, on account of vigorous competition by Halfords in Forfar.
[82] It could be concluded that some of the increase in Arbroath’s trade could not have come from Montrose, since it could be seen that for year ending 30 November 2017, Arbroath’s MOT sales had gone up, and Montrose did not do MOTs, thus the increase was unlikely to have been related to loyal Montrose customers. On the other hand it was conceded that some of the tyre fitting work carried out at Montrose was likely to have been taken by BGL and other businesses based in Montrose, since there would be no need for existing customers based in Montrose to travel 13 miles to Arbroath.
[83] Mr Bell’s appendices indicated that for the Montrose depot, between 2014 – 2016, EBITDA as a percentage of sales was between 17.7% and 19.1%. It was not appropriate to compare the profitability of Montrose with other depots since there were factors which affected each individual site’s profit. The very high increase in EBITDA of the combined depots between 2016 and 2018 (Mr Rowand, supplementary report, para. 3.2.7) could be explained by Forfar breaking even after 2016.
[84] Differences between the Montrose and Brechin figures could be explained by the fact that Brechin had more expensive wages and had smaller margins in dealing more with the agricultural industry. Mr Bell pointed out his understanding that the configuration of the Arbroath depot was such that it was difficult to get large vehicles into the premises. It was reasonable to assume that Montrose could have obtained 1,400 MOTs per annum since Forfar had done so from a standing start, and Montrose already had an existing amount of trade.
[85] In conclusion, Mr Bell’s analysis for the loss of MOT profits claim resulted in a figure of £264,000. His position on the loss of goodwill claim for extinction of business can be summarised thus:
|
Key assumptions–
Income includes rent receivable at Montrose Expenses include “notional rent” payable at Montrose EBITDA adjusted upwards for MOT related profit EBITDA adjusted downwards for £140,000 retained trade turnover and assumed director’s remuneration |
|
| Future maintainable weighted average EBITDA | £155,635 |
| EBITDA multiplier | 5.35 |
| Enterprise Value | £832,635 |
| Say | £833,000 |
| Deduct net asset value (MOT station) | (£13,333) |
| Adjusted loss of goodwill say | £820,000 |
Respondent’s witnesses
Edward Taylor - planning
[86] Mr Taylor spoke to the correspondence in May 2016 with Mr McLeish for the applicant and Mr Thomson, the council’s environmental health officer. The purpose of the correspondence was to ascertain the planning authority’s views as to the acceptability of the proposed tyre depot and garage on the submitted plans for the Lower Balmain Street site. His reference in the email to Mr McLeish to the “existing lawful use of the site” was a reference to the previous garage use. If it could have been demonstrated that the established lawful use of the site was not materially different to the proposed use as a tyre and garage workshop, then weight would have been given to that; ie the existing use was a point in favour of a potential new application for a tyre depot. The reference to the proposed alteration which “might be worth exploring” would have turned the new structure on its axis so that a small yard faced Lower Balmain Street and the back of the building would face the new houses at John McKay Place, thus reducing potential noise impact. There were multiple access points.
[87] He conceded however that the brief could be challenging and had not been surprised to hear that the applicant thought it was too challenging in all the circumstances, including the amount of parking to be taken by the six units to the north-east.
Steve Wilson – project manager
[88] Mr Wilson had been involved in the Montrose South regeneration project since its commencement in 2011. His first discussions with the applicant took place in August 2011. There was public consultation later in the year and in 2012 the council adopted relevant planning guidance. Officers were authorised in 2013 to take the project further. Discussions commenced with the applicant as to compensation in April 2014. Mr Wilson set out the history of negotiations between the parties as outlined above.
[89] When officers discovered on 17 June 2014 that the applicant had purchased a business property at 43 Lower Balmain Street, approximately 250m from the existing depot, their immediate thought was that the applicant had acquired the property in order to relocate their depot. This would be contrary to the compensation claim, at that time under discussion, which was based on the premise that the Montrose business would close. As he put it, the respondent could not pay for the extinguishment of a business, which business the applicant would then relocate. Looking at the evidence of a connection between the applicant and the Lower Balmain Garage as currently being operated, he was concerned that the applicant was seeking maximum compensation for extinguishing the business, but then in the future seeking to have a depot in Montrose, including in the Lower Balmain Street premises.
[90] A public exhibition was held on 21 January 2015 for the development of the spine road. On 22 July 2015, the applicant’s solicitor asked for an update on the CPO and advised that the applicant was “making enquiries into alternative accommodation from which to operate its business from”. Later in August the respondent emailed the solicitor confirming that the respondent was continuing to prepare the compulsory purchase order application.
[91] Mr Wilson had a meeting with Messrs Annandale on 30 September 2015. The Annandales indicated an intention to claim compensation on the basis of business extinguishment. He recollected the Annandales saying that the Montrose depot did not do as well as their other depots from street trade and income was largely generated from the mobile business. Mr Wilson thought the admission to be significant. He also mentioned that in the following months he regularly drove past the Ferry Street depot, and it was noticeable that the business did not appear that busy, the work days were generally quiet with few vehicles parked in the forecourt, other than Angus Tyre’s vans, which appeared as if they were to service the mobile activities. He also thought that the nearby KwikFit tyre/servicing centre, also in Ferry Street, appeared busier.
[92] Mr Wilson accepted that there was a shortage of commercial property available on the market in Montrose in 2014, and similarly for the first three quarters of 2015. However, in the latter part of 2015 onwards there was a downturn in the oil and gas sector which meant more properties coming on to the market. He felt that the applicant could have relocated its business to Lower Balmain Street or to Unit 1B Broomfield where it had previously operated.
[93] Following the making of the CPO, the applicant had submitted a valuation of the Montrose business at £675,000, and on 5 April 2017, a solicitor had made a disturbance claim for this amount and additionally for potential redundancy payments of £21,499. Mr Wilson felt that the claim lacked supporting evidence, and in particular evidence that the applicant had tried to mitigate its loss. More evidence was requested.
[94] The respondent had received an email on behalf of the applicant on 24 April 2017, enclosing a brief email from Fergus McDonald MRICS stating that his company, Westport Property Ltd had been seeking alternative accommodation on behalf of the applicant, instructions having been received mid-2014. The email indicates that Westport Property had been unable to identify suitable premises to satisfy the requirement. The requirement was for:
“well located modern workshop accommodation with yardage and car parking, ranging in size from 5,000 sq ft to 8,000 sq ft. … Only visibly prominent locations that have clear easy access are suitable for this type of operator. This is to allow customers to drop their car off and stay in the local area while work is being done to their vehicle”.
[95] Mr Wilson indicated that he would have expected a more comprehensive report. He also thought that the specification, such as it was, would appear to be contrary to other depots of the applicant. For example, the Forfar depot was somewhat hidden, located off a narrow, one-way lane and set back meaning it had no visibility to potential customers and thus not a prime location. Nor was he convinced that the LBS site was unsuitable, since the planning officers remained open to the idea that the design rejected in 2016 could have been re- orientated. He did not accept the applicant’s position that the LBS premises would be unworkable as a relocation option.
[96] Nor did he agree with the applicant’s position in April 2017 that the Broomfield location was poor. A business named Just Tyres Angus operated from property there, and McConechy’s Tyres also operated from a property in that part of town.
[97] In dealing with the claim as currently made, it was noted that there was no claim for redundancy payments for staff who had previously worked at the Montrose depot. Mr Wilson spoke to the fact that BGL was primarily providing a tyre fitting service similar to that undertaken by the applicant previously at the Ferry Street premises. The business there used a similar website to that of the applicant. He noticed an Angus Tyres vehicle parked there during 2018. The former manager of the applicant’s Montrose depot became the manager for BGL. A van with advertising boards was used to promote the Balmain Garage business, which was the same method of promotion as previously used by the applicant. He thought that any mobile business previously undertaken from the Montrose depot could have been transferred to the Arbroath, Brechin and Forfar depots.
Damian Brennan – development standards
[98] Mr Brennan had been involved in determining the application for planning permission in 2014/2015 for the six units at the LBS site of the disused laundry building. The application had sought planning permission for “industrial” units. Mr Brennan sought reassurance from Mr McLeish that the proposed units would not be occupied by the applicant or any other potential occupant for use as premises for the maintenance of motor vehicles, including the changing of tyres. He also sought an amendment of the application that the use be for Class 4 business units, as opposed to Class 5 industrial units. Mr McLeish provided the assurance requested, and was content to amend the application accordingly. Mr Brennan’s request for reassurance related solely to the site for the six business units, and not to any other area of land.
Steven Thomson – Environment Protection
[99] Mr Thomson spoke to his email to Mr Taylor of 13 May 2016. This related to the applicant’s proposed layout of a new garage at LBS. He considered the proposed layout to be poor in terms of minimising noise. There were several fairly new residential proposes within 15m of the proposed development, and the business side of the development directly faced those properties. He would have required a noise impact assessment for the determination of any application and there was no guarantee that such assessment would show the development to be acceptable.
[100] His email indicated that there was an existing building, previously used as a garage, and the proposed use might result in similar impacts to that garage. The existing building had access points facing away from the residential properties, and the wall of the existing garage would provide significant noise attenuation. He also indicated that a better solution would be to re-orientate the layout so that the rear wall of the proposed garage faced the existing houses and the development used an existing access. He would have been happy to look at a redesign in more detail.
Greig Rowand – Forensic Accounting
[101] Mr Rowand spoke to his main report dated 1 August 2022, his supplementary report of 12 October 2022, written comments upon each depot’s profit and loss accounts between 2014-2016 dated 13 November 2022, comments upon MOT sales information dated 13 November 2022, and the experts’ joint statement. He also commented upon Mr Bell’s reports.
[102] In Mr Rowand’s comments upon Mr Bell’s main report, he notes that the closure of the Montrose depot on the face of it had not appeared to have had a significantly detrimental impact upon the profitability of the applicant. Turnover of £1,758,000 in 2018 was the lowest in the five year period but only 6% down on the previous year and 10% down on the 2016 peak year. Operating profit of £63,000 in 2018 (ie without Montrose) was up from 2017 (£28,000) and only £12,000 lower that the peak profit of £75,000 in 2015.
[103] He noted Mr Bell’s comments that on the face of it there did not appear to have been a significant reduction in turnover during the last eight months of trading at Montrose. Turnover at Brechin had been relatively steady between 2015 and 2018. There had been growth both at Arbroath and Forfar. The latter opened during financial year 2015, and turnover at Arbroath increased in 2017 (year of closure of Montrose) and in 2018 (when no trading at Montrose). Mr Rowand comments that management had informed Mr Bell that the growth and turnover at Forfar was unrelated to the closure of the Montrose depot in July 2017. Mr Rowand comments that no further explanation or analysis was provided in support of this. The growth at Forfar in years 2015 and 2016 was said to be unconnected to the closure, but that may not have been the case for years 2017 and 2018. Management had also explained to Mr Bell that the growth at Arbroath was unrelated to the CPO and was due to management efforts to win customers and specifically picking up more council work there. However, there was no further analysis or evidence provided to show this was the case in financial years 2017 and 2018.
[104] Based upon the information in Mr Bell’s report, Mr Rowand’s analysis indicates that the Montrose depot appeared to be significantly more profitable than the other depots. For example, the average EBITDA for Montrose in 2014 was £107,128, whereas for the other depots it was £3,636. For 2016 the average EBITDA for Montrose was £109,769 whereas for the others it was £12,808. Given that Mr Bell’s valuation was based upon the EBITDA of the Montrose depot he would have anticipated Mr Bell’s having undertaken work to ensure the accuracy of the figures.
[105] As the turnover of Montrose, Brechin and Arbroath were broadly similar for financial years 2014 to 2016, the apparent higher profitability of Montrose could not be as a result of its operations being larger than the other depots. Mr Rowand demonstrated that in 2016 the gross profit percentage of Montrose was higher and other overheads lower compared to the other depots, and there was a significant discrepancy in the payroll costs for Montrose which were relatively low. Mr Rowand gave a list of further information he wished to see in order to assess the robustness of the profit and loss information presented for Montrose.
[106] Turning to the loss of profit claim in respect of an MOT station, Mr Rowand sought a large amount of further information. He points out that the depot profit for Montrose appeared significantly higher than the other depots, without explanation. The addition of the lost profit to the actual trading results of Montrose exacerbated this issue, and the adjusted EBITDA for Montrose (assuming it operated an MOT station) looked very different from the actual EBITDA achieved by the other three depots which did have MOT stations.
[107] Turning to the valuation of the business, Mr Rowand considered that the goodwill of a trading business should be determined by comparing the market value of the business to the net tangible assets of the business. He agreed that the market value of the Montrose depot business should be calculated as a multiple of EBITDA because it had been a profitable business.
[108] Mr Rowand made detailed comments upon Mr Bell’s valuation methodology. He comments upon adjustments to establish a maintainable EBITDA, namely directors’ payroll costs, gain/loss on disposal of fixed assets, additional accountancy costs and profit on MOTs and associated repairs/servicing. The addition of the estimated profit from MOTs and associated work would nearly double the maintainable EBITDA on Mr Bell’s figures, from £104,417 to £200,944.
[109] Mr Rowand then set out reasons why Mr Bell’s EBITDA multiple may be overstated. Insufficient discounting had been made, for example, to take account of the smaller nature of the applicant as opposed to the companies subject to the relevant published data.
[110] In calculating goodwill he raised an issue as to a hypothetical retained profit deriving from the operation of the MOT station from 2012. An adjustment would be required to decrease the level of net liabilities attributable to the Montrose depot on account of the disposal of the Ferry Street premises. However he had insufficient information to establish the net tangible assets/liabilities of the Montrose depot at 31 July 2017.
[111] Turning to claimed costs incurred due to the CPO, Mr Rowand indicates that Mr Bell had attached no supporting documentation. He points out that accountancy fees in the profit and loss account of Montrose at 2015 were £4,203 which was inconsistent with a statement of £10,000 incurred for 2015 and that a large number of other accounting and legal costs were unbilled.
[112] Turning to a valuation of the Montrose depot by Mr Rowand himself, he was of the view that he had insufficient information to provide an opinion on value as at 31 July 2017. This was principally because he did not have copies of profit and loss accounts for each of the depots for each of the financial years 2014 to 2017, as well as an explanation (along with supporting documentation) of why the Montrose depot was so much more profitable than the other three depots. He would also require considerable additional information to support Mr Bell’s valuation of profit from the hypothetical operation of an MOT station at Montrose.
[113] Subject to these matters Mr Rowand estimated an EBITDA multiplier of 3.25 for the applicant’s Montrose business. This was based upon information for “Europe” for the “auto parts”, “auto & truck” and “retail automotive” sectors for 2016-2018. The data is provided by a Professor Damodaran at the Stern School of Business at New York University. The average multiple for the three comparative sectors between 2016 and 2018 was 7.23. Mr Rowand made a substantive discount to 3.25 to take account of the fact the published information related to businesses significantly larger than the applicant.
[114] Making various adjustments for maintainable EBITDA, the illustrative exercise might indicate a maintainable EBITDA of £152,000. If the estimated profit from the MOT operations were excluded, a total weighted EBITDA might be of the order of £55,300. Applying a multiple of 3.25 would result in an illustrative business valuation of £180,000. His illustration (para.3.11) of EV to goodwill is unaffected by the existence of net tangible liabilities; ie there were no net assets to deduct in order to reach a figure for goodwill.
[115] Mr Rowand also considered in detail the possible transfer of business to BGL. An invoice dated 9 August 2017 from the applicant to BGL indicated the sale of various plant and machinery to the latter for £2,350 plus VAT. The 2017 financial statements of the applicant showed motor vehicle disposals with a nil net book value, with no gain on sale, suggesting motor vehicles were transferred at nil value.
[116] Payroll records of BGL to 20 November 2018 showed the existence of two employees who had been employed at the applicant’s Montrose depot, namely Scott Yeats and Ben Martin. The other employees of the Montrose depot transferred to the applicant’s Arbroath depot. Mr Yeats was appointed director of Balmain Garage on 25 March 2019 and the previous director, Mr Pert, resigned on the same day. The latter also transferred his 100% shareholding to Mr Yeats on that date. It was therefore possible that some of the applicant’s Montrose customers had “followed” Mr Yeats and Mr Martin so that in effect these customers were transferred from the applicant to BGL.
[117] Mr Rowand noted that the first sales invoice for BGL was dated 8 August 2017 which thus commenced trading shortly after the applicant’s Montrose depot closed. He could see no evidence in August 2017 of any payment to suppliers for plant and machinery, tools, equipment, stock etc., which presumably the business and its employees would have needed in order to provide the services. He noted there were substantial payments to the applicant from December 2017 onwards and sought clarification.
[118] He noted that BGL had agreed to pay a monthly occupancy licence fee of £500 from 1 February 2017, monthly in advance. There was a payment of rent of £6,000 on 23 January 2018 and Mr Rowand had queried why the directors of Abby Express Ltd had been prepared to allow the premises to be used rent-free for 11 months.
[119] Mr Rowand set out various further information required to assess if, and the extent of which, trade at the applicant’s Montrose depot had been transferred to BGL. This included analysis by customer of the sales of the Montrose depot for the years 2014 to 2017. Mr Rowand also made the point that the average number of employees of Balmain Garage was four in 2018, five in 2019 and three in both 2020 and 2021. The applicant’s Montrose depot appears to have had five employees and so Balmain Garage had a similar number initially, before reducing its employee numbers in 2020. Mr Rowand points out that if the location of the applicant’s depot in Montrose was important to customers of that business, as was suggested by Mr Bell, it would seem likely that the nearby Balmain Garage would be well placed to pick up these customers when the applicant’s Montrose depot closed.
[120] Turning to the matter of the cessation of the applicant’s Ferry Street business, Mr Rowand pointed out that if a business ceased to trade then typically there would be cessation costs. These included redundancy payments, loss on disposal of assets and other closure costs, but no details had been provided.
[121] Mr Rowand also pointed out that he did not have information to ascertain the volume of the mobile business carried out from Montrose and the other depots.
[122] Mr Rowand’s supplementary report sets out further information provided to him but also attaches a list of missing information and unanswered queries in an appendix. The new information provided included full financial statements for the applicants (but not the individual depots) for years 2018 to 2021, the top ten monthly account customers for years 2015-2018 and listing of sales by customer for the Montrose depot for financial year 2017. There were also financial statements for BGL for years 2018-2021 and an analysis of the latter’s top ten customers for 2018 and 2019.
[123] In considering the applicant’s turnover between 2016 and 2021 there was a pattern of a downward trend, albeit not a substantial decline, before a marked increase in 2021. The company was profitable in terms of EBITDA in each year, albeit the level of profitability fluctuated, ranging from £107,600 in 2017 to £173,593 in 2021. Trading in 2020 and 2021 was likely to have been detrimentally impacted by Covid restrictions, but profitability increased due to government support grants. What was not evident was a reduction in annual turnover and profit of the magnitude which the applicant asserted was achieved in the Montrose depot. It was stated that in 2016 the Montrose depot achieved turnover of £582,618 and EBITDA of £109,769, but a loss of that magnitude was not obvious from the trading track record. Amongst the possible explanations were two likely explanations, namely, trade from the Montrose depot was transferred to other depots of the applicant, or there was growth from the other depots that offset to some extent, the loss of all the turnover and profit of Montrose.
[124] The figures provided by the applicant showed that the combined turnover for the other three depots in 2016 was £1,364,758 with an EBITDA of £38,425. The recent 2018 figures showed a turnover for the three depots of £1,757,997 and EBITDA of £128,454. There was an apparent increase between 2016 and 2018 in combined turnover by the three depots of 29% and increase in profit by 334%. In Mr Rowand’s opinion such growth in profit did not look credible and reinforced his concerns about the robustness of the management accounts prepared for Montrose. In his opinion the trends in the company’s turnover and the split by depot was not inconsistent with an assumption that most of the trade of the Montrose depot was transferred to the three other depots, which could be the reason for the marked increase in turnover in Arbroath in 2018 and no further growth in overall turnover thereafter.
[125] Mr Rowand had also considered VAT returns. The level of sales in Q3 and Q4 for 2017 was lower than in financial year 2016 by around 8-9% or about £42,000 per quarter. There was no major collapse in the level of sales. The reduction of 8-9% would be consistent with the transfer of the majority of the trade of Montrose to other depots of Angus Tyres.
[126] Turning to his sales analysis, Mr Rowand considered the top ten monthly account customers (Appendix III) of the applicant for each of the four financial years 2015 – 2018. The figures totalled the sales to the top ten monthly account customers and also provided figures for cash sales/non-monthly account customers. Nevertheless there was a substantial unexplained difference of the order of one-third of turnover.
[127] Mr Rowand’s comment was there was no obvious loss of a significant customer from the top ten analysis following the closure of the Montrose depot in July 2017. If a customer appeared in the top ten list but not in the list in the subsequent year it did not necessarily mean there were no sales to the customer. There could be sales to the same customer but of a lower scale than the tenth ranked customer in the list.
[128] There were four customers who appeared in the top ten list in 2017 but were not in the 2018 list when then were no sales from the Montrose depot. One of these customers was Greenpark Garage. All the sales were listed for Montrose, but Mr Rowand could not exclude the possibility that Greenpark Garage was still a customer but outwith the top ten list. Brunton Farms were no longer in the top ten list for 2018, but had only done £1,028 sales in Montrose in 2017, so most of the business had been transacted by other depots. A similar point could be made for Hydrus Engineering which had provided no Montrose sales in 2017, so if lost as a customer it was not through the closure of Montrose. A similar point could be made for Hamish MacKay; there were only £71 Montrose sales in 2017 out of £9,614 so sales were mainly at other depots, and if the customer had been lost, it was not through closure at Montrose.
[129] The largest customer in the top ten for all four years was Tayside Contracts. The total company sales to this customer were £126,600 in 2017, and £62,173 of these were included in the Montrose sales listing. Following closure of the Montrose depot there was not a substantial fall in sales to this customer in 2018, but rather an increase to £154,578. In Mr Rowand’s opinion the further information was not inconsistent with the respondent’s view that much of the trade of the Montrose depot was transferred to other depots of the applicant.
[130] Mr Rowand’s supplementary report gives further comment upon the MOT business. He noted a 2015 invoice for the purchase of MOT equipment for the Forfar depot: there were costs of at least £18,200 for the MOT testing station. He continued to express doubts on the appropriateness of using only one month’s information to extrapolate the number of MOTs per year (1,750) based upon performance in March 2019. He produced data showing that there is an element of seasonality in overall MOT sales and that March was the most popular month.
[131] Turning to professional fees, Mr Rowand had been provided with fee notes totalling £62,251. This included a fee note for £10,000 to Murray Taylor dated 26 February 2015 for “various in connection with Lands Tribunal claim”. All the other fee notes post-date the raising of the Tribunal proceedings in December 2017.
[132] Mr Rowand turned his attention to BGL. He summarised the profit and loss accounts for each of the four years from 2018 – 2021. He points out that the level of turnover has been relatively steady (£156,924 in 2018; £156,217 in 2021). This is surprising on the face of it for a business which commenced trading in August 2017 because typically there would be a build- up of trade for the new business and the 2018 advertising costs of £1,167 were relatively modest. The garage was loss making in the first two years and profitable in 2020 and 2021. There were three principle reasons for the improvement, firstly a reduction in payroll costs, secondly Covid-19 grant support received in 2020 and 2021 and, thirdly, a refund of rent in 2021 meaning that the total rent cost for the four year period was £9,000. The director’s payroll cost for Scott Yeats in 2021 was £34,383. It was unclear if Mr Pert, the initial director/shareholder, had received any personal financial reward prior to his replacement on 25 March 2019. Annual sales of Balmain Garage have ranged between £156,217 to £161,161; whereas the total sales of the applicant’s Montrose depot in financial years 2014 to 2017 were around £580,000 per annum.
[133] Mr Rowand also carried out a study of the top customers of BGL. There were 12 such customers on the list for 2018 and 2019 (Appendix IV) and all 12 had been included on the listing for sales on the applicant’s Montrose depot in the year ended 30 November 2017. The main customers of BGL had therefore previously been customers of the applicant’s Montrose depot.
[134] BGL was also a customer of the applicant featuring in the top ten customers of the applicant in years 2017 and 2018. BGL had in fact been the second highest valued customer in 2018 with sales of £61,904. The applicant appears to have been a key supplier of BGL in terms of sales of raw materials.
[135] Mr Rowand estimates that Balmain Garage achieved annual sales of around £160,000 using three items of second-hand equipment and small tools provided by the applicant along with some other fixed assets acquired for £1,416, which seemed a relatively low asset base. In Mr Rowand’s opinion the further information is not inconsistent with the applicant’s having transferred some of its Montrose business to BGL.
[136] Mr Rowand draws attention to conflicting information as to whether the applicant had a mobile business, namely correspondence by Murray Taylor and Whelan & Co respectively. At the time of his supplementary report, the most significant outstanding piece of information were profit and loss accounts for each of the four depots for each of the financial years 2014 to 2017 as well as an explanation as to why the Montrose depot was so much more profitable than the others.
[137] Mr Rowand’s comments dated 13 November 2022, deal with profit and loss accounts now produced for each depot for financial years 2014, 2015 and 2016. No supporting documentation had been provided for the figures so Mr Rowand was unclear as to the robustness and reliability of the figures. The figures showed Montrose had a steady level of profitability but with a remarkably higher level of profit than the other two established depots (ie excluding Forfar). In 2014 and 2015, the Montrose profit appeared some four times higher than the others. Despite no sales growth in the three year period, Arbroath moved from a loss of £29,079 in 2014 to a profit of £77,602 in 2016, an improvement of £106,681. Mr Rowand in his comparison analysis removed a notional rent figure of £10,000 for the Montrose depot, where there was no similar entry for the other depots.
[138] Mr Rowand’s study had not taken account of the applicant’s explanation, given in oral evidence, that the Arbroath profitability had been reduced for 2014 and 2015 on account of an unnecessarily high staff head count, which was substantial, but had been substantially reduced by 2016. His figures had also not taken account of the misallocation of a salary of £19,000 to Arbroath, which should have been allocated to Montrose, which again was explained in evidence. It could be seen, therefore, sales per £1 of payroll at Montrose for 2016 were £3.67 and for Arbroath were £3.88 and thus the comparison was more even. Nevertheless, for 2016 the turnover between Montrose and Arbroath was broadly consistent (£583,618 as opposed to £551,019) but the EBITDA at Montrose was still significantly higher, ie £119,769 as opposed to £77,602 at Arbroath. Mr Rowand still felt this unexplained difference was significant. Mr Rowand also pointed out that he had not seen supporting documentation for the salary re-allocation.
[139] He comments that Montrose was the only established depot of the applicant without the apparently highly profitable MOT trade, according to Mr Bell’s analysis, but despite this its profitability was apparently significantly higher than the other two established depots.
[140] Mr Rowand continued to hold the view that he had insufficient information to provide an opinion on the value of the Montrose depot at 31 March 2017. He remained of this view in the light of the unusual and unexplained features and trends as well as the lack of vouching provided for the figures of the individual depots. He noted that the EBITDA of the established business, ie excluding the Forfar depot, as a percentage of turnover for the years 2016-2018, was of the order of 10%. He points out that individual depot profit and loss accounts of the applicant for years to 2017and 2018 had not been provided. These would show any variations in the trading performance of the individual depots in the period when Montrose ceased to trade (July 2017) and 2018. The information was such that the turnover of the applicant in 2018 was 5% lower than in 2017, but profitability (EBITDA) increased by 19% from £107,600 to £128,454 despite the applicant’s having lost the benefit of its most profitable depot in 2018.
[141] Mr Rowand provided further comments dated 13 November 2022 upon further MOT sales information. He produced a summary of MOT sales information provided to him. Using Mr Bell’s methodology his amended loss of MOT profit calculation showed a profit after deducting cost of sales and payroll costs equivalent to 36.2% profit as a percentage of turnover. However, the actual profit as a percentage of turnover for the other depots for 2014, 2015 and 2016 were 11.1%, 14.1% and 15.6% respectively. The claim figure was more than double the equivalent highest percentage achieved by the three depots with MOT operations. Mr Rowand acknowledged that the depot figures included sales from other operations as well as MOTs, but his analysis reinforced his opinion that the assumed level of profitability for the MOT operations at Montrose depot looked high in the context of the applicant’s actual trading results.
[142] He also remained of the view that data for a longer period, at least three years, would be more appropriate for establishing the appropriate assumptions for MOT sales. Actual payroll costs incurred for the operation of an MOT station would be relevant, but the information had not been provided.
[143] In his comments within the joint statement Mr Rowand concluded that the trends in the applicant’s turnover and split of turnover by depot was not inconsistent with an assumption that most of the trade of the Montrose depot was transferred to the other three depots and that some of the business was transferred to Balmain Garage. It would not be unreasonable to assume that the vast majority of the Balmain Garage turnover at around £158,000 would have been achieved by the applicant’s Montrose depot had it remained open.
[144] In calculating goodwill Mr Rowand expressed concerns at methodology which did not deduct the value of the Montrose property of £170,000. Excluding the property value would increase the goodwill by the same amount. Mr Bell used a notional rent of £10,000 and applied a multiplier of 5.35, which reduces the enterprise value of the business by £53,500. The effect of doing so was to increase the goodwill by £116,500. Mr Rowand did not think this position was satisfactory, ie for a business with a rented property to have a goodwill value of £116,500 higher than the same business with an owned property. There were some types of transaction where it was appropriate to add in a notional rent, eg in which land and buildings were being retained by the seller, but this was not such a case. The notional rent distorted the comparison between depots. If property was assumed to be rented rather than owned there was a case for excluding the property from the net tangible assets, but this should not have a significant impact on the underlying goodwill value of the trading business. He did not think it appropriate to have a rent receivable as well as the notional rent cost for the same property in the estimate of maintainable EBITDA.
[145] Mr Rowand did not have details of individual depot profit and loss accounts for 2017 and 2018 which would be of assistance. The information had been requested but not provided. Critically, Mr Rowand would require more information in order to establish the amount of trade lost as opposed to the amount of trade retained. The Montrose depot had achieved sales of the order of £580,000 per annum. It might be assumed that £160,000 sales per annum had been transferred to BGL. Of the remaining £420,000, Mr Bell and the directors accepted that of the order of £100,000 trade with Tayside Contracts had been retained. But of the remaining £320,000 trade, Mr Rowand did not know how much of that had been lost or transferred to the other depots. The applicant would have more customer information in order to determine what had happened. Mr Rowand did not see any evidence of a substantial decline in turnover of that magnitude, for example, by the VAT returns. This suggested that a substantial percentage of the business had been retained, but Mr Rowand could not point to the actual customers who had been retained. He would need to examine the customer listings before and after the Montrose closure in order to carry out a comparison exercise to demonstrate which customers no longer used the applicant. An amount of trade within a range of up to £320,000 had either been lost or retained by the business, but he did not have the information to estimate where within the range the answer lay.
Submissions
Applicant’s submission – disturbance claim for lost MOT profits
[146] Counsel submitted that the applicant was entitled to full compensation for its losses arising from the compulsory purchase of the subjects. It was accepted that the applicable principles were (1) the losses required to be caused by the compulsory purchase; (2) the losses should not be too remote; and (3) that the applicant required to have acted reasonably in dealing with the situation posed by the compulsory purchase, neither incurring losses a reasonable person would not incur, nor failing to avoid losses that a reasonable person would have avoided.
[147] With reference to Director of Buildings and Land v Shun Fung Ironworks Limited, losses caused in anticipation of the threat of compulsory purchase were caused by the compulsory purchase just as much as losses arising afterwards.
[148] The issue was whether the applicant would have installed an MOT testing station in 2011 but for the CPO, and if so, what profit it would have derived between then and 2017. There was no reason why the applicant would not have followed the model of the other depots and installed an MOT station. The applicant provided services for cars and larger vehicles. The decision to install a testing site for vehicles up to class 7 – larger vans – made sense against this background. Both Messrs Annandale spoke to a conversation with Mr Wilson about whether the cost of such a facility would be recoverable if the CPO went ahead, and they were told that it would not. Mr Wilson could not remember this conversation, but the applicant submitted that this was something the directors would be more likely to recall. Mr Wilson himself had not expected the project to take as long as six years. In these circumstances the decision not to install the MOT station in the light of the pending CPO was a reasonable one. The loss was readily foreseeable as the applicant had recently moved to the subjects and could be expected to be seeking to invest in them to make the most use from them.
[149] It was submitted that Mr Bell was able to support each step of his analysis in respect of the loss of profit claim. Mr Bell was able to support a figure that the applicant had lost
£48,870 in profit from conducting MOTs and a further £214,689 from associated repairs. The loss profit total of £263,559 would require deduction of £6,667 to reflect depreciation in the testing station to give a final figure of £256,892. This would have been an incremental profit and was not a figure to be used to suggest that other depots must also earn as much from MOTs.
[150] With reference to the issue of remoteness discussed in Welford v EDF Energy Networks, it was submitted that unlike Welford, the applicant had an established business on more than one site and was proposing an additional use on one site which was also being carried on elsewhere. The supply of MOTs was already part of the applicant’s existing business. Investment had been carried out in the form of raising roof beams, which was enough to establish the level of investment required to make a claim for the lost business.
Respondent’s submission – disturbance claim for lost MOT profits
[151] Counsel pointed out that there was no pleading record for the claim. The Murray Taylor report of 9 June 2016 referred to in the Tribunal application made no reference to lost MOT business, nor was it stated in the compensation schedule submitted to the respondent.
[152] Reference was made to Emslie & Simpson Ltd v City of Aberdeen DC. The passages of the Lord President at 363J-364B supported the view that loss before vesting was only recoverable where it is incurred after dispossession became “inevitable.” Dispossession was not inevitable prior to the GVD being served in July 2017, so there was no right to compensation for losses allegedly incurred in the years 2012-2016 as a result of a decision allegedly taken in 2011. It could not be the law that an acquiring authority should in principle be liable for the financial consequences of all business decisions taken by the potentially affected parties from the earliest date when word reached their ears that compulsory purchase was being considered.
[153] With reference to Welford, the MOT disturbance claim was too remote. Profits from a business which had not commenced anywhere would generally be regarded as too remote to provide fair compensation for land which was to be compulsorily acquired. The investment in the land for the business to be carried out had not been made. The raising of the roof beams was only one step in the investment required, but there had been no correspondence disclosed in respect of this. Nor was there any regulatory approval for the MOT business at the subjects.
[154] In any event, the MOT claim rested on five unevidenced assertions, namely:- (1) some form of informal approval for an MOT station from a civil servant of unstated authority at an unidentified office on an unidentified date; (2) installation costs would have matched those of at least one of the other three depots, records of which had not been produced; (3) sales in gross income from tests and associated repairs would have matched those at the other three depots, records of which had not been produced; (4) the margin on MOT test income had been taken by Mr Bell from certain sheets produced but without his knowing what costs had been deducted to calculate it; and (5) the costs of sales and payroll would have matched those at the other three depots, records of which had not been produced.
[155] There was a bizarre assertion that Montrose’s greater profitability was its very lack of an MOT station; Mr Bell had indicated that an MOT station at Montrose would have increased the depot’s EBITDA, but he had also said that the explanation why Montrose had performed better than the other depots was because of the lack of an MOT station with its attendant better paid mechanics. The head of claim was speculative.
Tribunal discussion
Disturbance claim for loss of MOT profit
[156] We recognise that a loss sustained in the shadow period, ie post-scheme but pre- vesting, will not fail for lack of causal connection by reason only that the loss arose prior to vesting, provided it arose in anticipation of the vesting and because of the threat which vesting presented: Director of Buildings v Shun Fung Limited at p138A-B.
[157] The question we have here is whether a claim for loss of profits for a business expansion, whose plans are cancelled in the shadow period, is too remote. We referred parties to Welford v EDF Energy Networks where the Court of Appeal considered a claim for loss of profits for a new business. In that case:
“2 … The … claimants had done more than simply purchase the land with the intention of using it as a waste transfer station. They had also devoted substantial time and money in clearing the site and laying concrete in order to fit it for use for this purpose. They had had plans drawn up and had applied for (and had received) planning permission for this use. They were using the land for skip storage, which was a component part of the proposed waste transfer use (albeit it could, and did at the time, constitute a use in itself). Even though the use of the site as a waste transfer station had not begun, the business was clearly in existence.”
Thomas LJ, with whom the others agreed, said:
“28 It is clear that profits from a business which has not been commenced anywhere will generally be regarded as too remote for the purpose of providing fair compensation for land which is to be compulsorily acquired. That is because compensation for the value of that land will ordinarily reflect the cost of that part of the investment in the commencement of the business which is represented by the cost of the land. Therefore, where a person has land on which he is contemplating starting a new business, but the business is not in existence at the time the land is compulsorily acquired, then ordinarily the market value of the land will reflect the business opportunity that is contemplated; it is but part of the overall investment that will have to be made to realise the profits from the contemplated business. The profitability of that business will be subject to all the risks inherent in the start-up of a business which is not in existence. Compensation measured by the market value of the land will be treated as fair compensation, as it will enable him to buy other land as part of the investment he will need to make to start the business he is contemplating. A claim for loss of profits will therefore be treated as too remote.
29 However in the present case, the Tribunal found as a fact that the business of waste transfer (in contra distinction to skip hire and waste disposal) was not merely contemplated, but clearly in existence at the relevant date … If this court had jurisdiction to consider findings of fact, it is possible that a powerful argument could have been advanced to questioning that finding. However that was the finding made and it is on that basis that the issue of remoteness must be decided.”
30 Although the Tribunal found that the business of waste transfer was in existence and money had been spent on its development, the use of the site as a waste transfer station had not commenced by the relevant date. Did that make the loss too remote so that it was irrecoverable? …
31 … The issue is one to be determined by the principles applicable to the award of compensation for the compulsory acquisition of land as, for example, set out in Horn to which I have referred … The question is whether the land has a definite and ascertainable special value to the owner of the land over and above that which is reflected in the ordinary market value of the land. In my view once the owner of the land has a business in existence, has made the investment in the land on which that business is to be carried out and commenced work in connection with the business on it, then the business has a sufficient relationship to the land for the land to have a special value to the owner arising out of that business so that compensation for the loss occasioned by its disturbance can be recoverable, even though the land is not yet being used for the business. It is the coming into existence of the business and the investment in relation to the land that is sufficient, even though the land is not yet being used for the business. If the business is profitable, then loss by disturbance to the business which is to be conducted on the land will not be reflected in the value of the land. In such a case, the land has more than development value reflected in the market value; it has a special value to the owner of the land, given the existence of the business and the investment in the land on which that business is to be conducted. As the Tribunal determined on the facts that the business was in existence and work had commenced on the land in connection with the business, then in my view they were right to conclude that a claim for loss of profits from the waste transfer business could be made by the claimants even although site A was not yet being used for that waste transfer business.”
[158] In the present case there was an existing tyre business at the subjects, but the expansion into MOT work had not yet occurred there in the shadow period. The MOT station was not in existence at any time during the shadow period. We find the above passages of the Court of Appeal in Welford to be persuasive in this context. The issue of remoteness is tested by whether the applicant has made the investment in the land for the new contemplated business, even though the land is not yet being used for the new business. The special value of the land to the owner emerges once the investment in the land has been carried out. At that point compensation would be payable on the basis of disturbance to the business, since compensation based upon development value alone would not represent fair compensation.
[159] In this case the investment for the MOT business would have required the installation of an MOT station at the cost of some £25,000-£30,000. That was the evidence of Mr William Annandale. There would also have been required a formal regulatory approval by the Department of Transport. There would have been required the addition of suitably qualified staff. We are prepared to accept the applicant’s evidence that the reason they did not proceed with such investment was because of the shadow of the CPO. However, as we have said, we require to look at the matter in the context of remoteness rather than causation alone.
[160] The only evidence of actual investment for an expanded business relates to the raising of roof beams in the premises in order to fit the necessary equipment. This fact was not highlighted to us with reference to any of the survey reports. We were told the work was carried out by the applicant’s own staff. We do not know how major an operation this was or how much it might have cost had it been carried out by contractors. Nor do we know how major an operation it was in relation to the cost of an installation of an MOT station itself. In these circumstances we are unable to conclude that substantial investment had been carried out for the proposed additional business. So we are unpersuaded that the proposed business had a sufficient relationship to the land for the land to have a special value to the owner in the sense used in Welford. We are driven to the conclusion, therefore, that the MOT disturbance claim is too remote. In these circumstances it is not necessary for us to consider the other arguments under this chapter.
[161] We also have concern that this claim was not included in the compensation schedule provided to the respondent, nor indeed was mentioned in the Tribunal application. We do not think that even on the most charitable interpretation it could be described as a variation or development of an existing case. However, had the applicant moved for the application to be amended so as to include the MOT station claim, we would not have been unsympathetic on the basis that the claim had been brought out in Mr Bell’s reports and been responded to in detail in the respondent’s evidence. In the event we would prefer not to reject the claim on pleading grounds, but do so on the question of remoteness.
Submissions
Applicant’s submission - disturbance claim for extinguishment of business
[162] Dealing firstly with the question of mitigation of loss, it was submitted that it was a matter of fact whether the applicant had acted reasonably. With reference to Millar v Strathclyde Regional Council at 13 I-J, there was no onus on an applicant to demonstrate that it had considered the suitability of every property on the market at the time. The situation was analogous to a defence in a breach of contract case, whereby the onus of proving that the best available means to minimise loss was not taken, rested on the party who had broken the contract: McBryde on Contract, para 22-45.
[163] It was submitted that a reasonable business would not have relocated the Ferry Street depot to 1B Broomfield Industrial Estate, Montrose. The applicant had already experienced trading at the Broomfield site while they were looking for a better location. There were shortcomings at Broomfield, namely, the difficulty of dealing with larger vehicles there, the location in an industrial estate where customers required transport if they left their cars there, and the fact that a more visible location would increase trade. The applicant’s directors had not been swayed by comparisons with Just Tyres or the Halfords depot nearby. There was no evidence that Messrs Annandale had been aware that the respondent would have been prepared to sell them the site if necessary.
[164] Turning to the possible relocation of the depot to the LBS site, it was accepted that although, strictly speaking, at the time of the vesting of the CPO the site did not belong to the applicant, the only fair approach was to treat the relevant companies, namely the applicant and Abbey Express Limited, together. Nevertheless, a reasonable business person would not necessarily have eliminated other sources of profit on the site in order to accommodate a tyre depot with which they were less than happy.
[165] In summary, Mr McLeish’s evidence was that the council had too many issues with the principle of a tyre depot on the LBS site. There were planning issues, environmental issues and an issue in the form of additional traffic. The wording of the correspondence was consistent with this. Reorientating the design communicated in 2016 would have led to parking and access issues. Mr Taylor himself had indicated that the brief was challenging and was not surprised that the architect felt it was too challenging. There was no evidence of a possible layout for a new depot which would meet the applicant’s needs and be likely to be granted planning permission.
[166] Turning to any other potential location, the correspondence from Mr McDonald MRICS on behalf of the applicant, indicated that he had been unable to satisfy the applicant’s requirements. The Montrose market had been difficult. It was for the respondent to show which compromises the applicant ought reasonably to have made, with reference to specific properties available at the time in the context of a reasonable business person; it was not enough for the respondent merely to indicate that the applicant was being too fussy.
[167] It was further submitted that there was no evidence that the applicant had continued to carry on the Ferry Street depot business under the name of Balmain Garage Limited. The respondent had made up its mind not to compensate on an extinguishment basis once it had found out that the applicant had bought the LBS site. The adminicles put together by Mr Wilson that BGL was a front for the Annandale companies was unconvincing and lacked insight.
[168] Turning to the value of the Montrose trade, only Mr Bell had produced a valuation for the purpose of establishing the amount of the lost goodwill. Mr Rowand had only provided comments.
[169] On the matter of sufficiency of material to value goodwill, the principal difficulty was said to be Mr Rowand’s comment as to a lack of explanation for unusual and unexplained features and trends in the 2014-2016 profit and loss accounts. It was submitted that the evidence showed that the relative profitability of the Montrose depot related to payroll differences. This was spoken to by Mr Bell and Mr Steven Taylor. Mr Rowand accepted that the explanation made the features and trends more consistent, although he had not seen the underlying payroll figures. Mr Graeme Annandale denied having “shifted people over” for the purposes of illustrating the profit and loss of the different depots, explaining that it was possible to have people work in different depots on different days. Mr Bell had identified one person who had been incorrectly attributed to the Arbroath depot for years 2014 and 2015 and had adjusted his figure accordingly.
[170] There were other issues of principle between the experts. It was submitted that Mr Bell was correct to adjust the EBITDA by only the cost of a “quarter director”. Potential buyers might be existing larger tyre fitting companies whose directors could spread themselves over several sites.
[171] Mr Bell’s use of a notional rent for the value of the premises was acceptable in the method of valuing EBITDA. It had been proposed originally by the respondent’s accountants. There was some evidence that the notional rent was however too low. The experts were agreed that they were unable to attribute the company’s assets and liabilities between depots; ie to allocate the appropriate net tangible assets of the Ferry Street business. It was submitted that the correct way to deal with the issue was to adjust the notional rent somewhat.
[172] It was also submitted that the maintainable EBITDA would require to take account of the MOT claim. Retained profits would not require to be taken into account since it is likely these would have been distributed by dividend. It was accepted, and the experts agreed, that rent receivable had already been compensated for since the property valuation had been on a vacant possession basis.
[173] It was submitted that Mr Bell’s approach should be adopted for adjusting for the amount of trade the applicant now had with BGL. Mr Bell was setting off a readily ascertainable gain to the applicant in the wholesale of tyres to Balmain Garage following the CPO. This was different to the trade remaining with the applicant, which had been in existence in 2017, and was something which a willing buyer and seller of the business might have hypothetically negotiated.
[174] In this connection, the applicant submitted that it was important to consider the depots as individual stores and not to analyse loss by looking to the company’s overall trade. According to Mr Bell the test was not how the company’s performance now compared with its performance before the Montrose depot closed, but how the applicant’s performance now compares with how it would have performed had the Montrose depot stayed open. The figures showed that the Montrose depot performed well and it could be expected that such performance would have continued. It must be the case that business was lost or drifted away, and the increased business at other depots was due to a combination of individual growth, focussed management attention and advertising and movement of Montrose custom to other depots.
[175] It was accepted that many customers of BGL will have previously used the applicant’s Montrose depot, but this did not imply that BGL was the only place to which the customers turned, as there were several possibilities within Montrose. Mr Graeme Annandale had spoken about the inability of the company to maintain the bulk of its business with farms in the northern part of Angus. Arbroath had benefited from council business and this was borne out by the top ten customer list. The public sector trade, namely with Tayside Contracts and Angus Council, might be expected to have a higher level of inertia in moving provider. Counsel submitted that Mr Bell’s figures should be adopted: namely, that roughly half of the trade at Montrose moved to places unknown outwith the applicant’s depots; from a turnover of £582,618 there was traceable movement to BGL of around £150,000, to other depots used by Tayside Contracts of £100,000 and an allowance of around £20,000 for untraceable movement to other depots. It was submitted that these assumptions were realistic in the light of the director’s evidence and the layout of the county.
[176] Finally, turning to the multiplier, Mr Bell saw the value in using recognised UK sources for obtaining the information. Mr Rowand’s use of European figures were of less provenance. There was no information on how to assess how Prof Damodaran produced his annual data. It was not appropriate for Mr Rowand to apply his own discount to another’s judgement. Mr Bell’s figure of 5.35 should be preferred.
Respondent’s submission – disturbance claim for extinguishment of business
[177] Counsel accepted that an aspect of a disturbance claim under the Land Compensation (Scotland) Act 1963 could involve a claim for business extinguishment. Reference was made to the leading case of Prestwick Hotels v Glasgow Corp. Counsel emphasised the passage of the Lord President at p109:
“If, contrary to the position in fact in this case, all or any part of the goodwill of the claimants had survived the acquisition … the costs of re-establishing the old business elsewhere would then have been a direct material and probable consequence of being deprived of the premises in which that old business had been carried on, and would have been properly regarded as necessary compensation for disturbance.”
[178] It was submitted that relocation costs were the ordinary measure whereas extinguishment was the exception: Director of Buildings & Land, Lord Nicholls p125G-H. The same passage indicated that if no reasonable businessman, forced to quit, would incur the cost of moving the business and setting it up in the new property, a claimant would not be entitled to compensation calculated on a relocation basis. He would not be entitled to reimbursement of expenses unreasonably incurred.
[179] It was submitted that an extinguishment claim required not only proof that the goodwill of the business had in fact been extinguished, but that the purported extinguishment was caused by the CPO. Proof of causal connection between dispossession and loss was fundamental, and the onus was upon the applicant. An applicant pleading extinguishment who proved only that after his premises were acquired, he closed his business, fails to prove the necessary causal connection between the two events if he leads no adequate evidence about unsuccessful enquiries for alternative premises.
[180] It was not realistic for the respondent to have to prove the availability of materially identical premises to the premises subject to the CPO. This would set the bar too high. It was recognised that compensation was available for relocation costs, making a new site suitable for the business and for reduced earnings at a sub-optimal new site: eg Prielipp v Secretary of State for the Environment, para. 228; Rowan-Robinson para.10.08; 10.14.
[181] Moreover the respondent is unqualified to act, as it were, as the applicant’s combined board, estate agent and architect, so cannot be obliged to prove that a given alternative must have met the applicant’s needs. Reference was made to Walkers on Evidence at para. 2.2.5:-
“When a fact is peculiarly within the knowledge of one of the parties, very slight evidence may suffice to satisfy the burden of proof upon the other party on that issue, and to lay upon the party with the knowledge the burden of proving his own averment, whether affirmative or negative, about the fact in question.”
It was enough to shift the burden where the authority had proved that a reasonable range of alternative sites were available at the material time. In general terms the applicant had to establish by evidence all of the items of its claim: Rowan-Robinson para 10.07.
[182] It was submitted that it had not been proved the Montrose depot business had been extinguished. The evidence was consistent with the retention of all or most and certainly many of the account customers. Mr Graeme Annandale admitted that some of the increased turnover at Arbroath in 2017-2018 was connected with the closure of Montrose, and there was no dispute that Tayside Contracts, the depot’s highest value customer, had been retained, as had the Geddes Group. The applicant’s agent’s email of 4 September 2014 confirmed that the applicant would continue with its mobile business within Montrose. Messrs Annandale had admitted to Mr Wilson that the Montrose depot income was largely generated from the mobile business, thus implying that the mobile business could operate from other depots. It was reasonable to think that the passing trade from smaller vehicles would have been retained by the nearby BGL.
[183] There had been a transfer of business from the Ferry Street Depot to BGL. There were many factors which showed that the latter was carrying on the same business in respect of the passing trade. This could be confirmed by the seamless timing by which BGL commenced business as soon as Ferry Street closed, the fact that BGL’s premises were owned by a company controlled by the same parties who controlled the applicant, the proximity of the BGL premises to the Ferry Street premises, the similarity of the location, the identity of the service, the fact it was clear the same customers used BGL who had used Ferry Street, the fact that the former manager at Ferry Street became the manager of BGL and there may have been other staff whose employment was transferred to BGL. It was also the case that BGL’s opening stock had been provided by the applicant and that the applicant acted as a wholesaler to BGL. The only documentary record of the applicant’s tools and equipment at Ferry Street indicated those items being transferred to BGL. BGL never had any security of tenure beyond a bare licence to occupy. The licence has not been produced but it was reasonable to conclude that BGL could only operate for as long as the applicant’s principals permit; thus those principals exercised control over BGL. Mr Graeme Annandale had accepted that the applicant had helped BGL to become established on the basis that some good would come from it. The applicant’s staff and vehicles continued to visit Lower Balmain Street. So, in conclusion, the coming into existence of one concern was a direct function of the closure of the other. Nothing had been produced, for example, that might indicate whether the applicant had sent a circular to its Montrose customers that henceforth they might go to BGL. Many other documents which might provide clues as to whether the business had in fact been extinguished had not been produced, eg P45 notices. Mr Graeme Annandale had admitted that the applicant had tried to keep hold of the customers in Montrose.
[184] It could be implied that BGL’s principals were cyphers for the applicant’s directors. But in any event, a business is not extinguished by acquiescing in its passing into another’s hands. In all events, Mr Yeats was running what is to all extent and purposes, a continuation of the applicant’s Montrose business. It had not been proved that no element of the old goodwill or connection had survived the disturbance.
[185] Moreover, the applicant had not taken reasonable steps to avoid the business extinguishment, if this had occurred. On the contrary, the applicant had provided BGL with the market opportunity represented by the applicant’s leaving Montrose. Mr Yeats had not had to pay for the new business. It was clear that BGL had been able to trade from Lower Balmain Street since 2017, so the applicant itself could have done so. In effect, the applicant’s principals had provided BGL the opportunity to continue the local Montrose business. The Lower Balmain Street business could have been continued by the applicant.
[186] In any event there were at least 11 possible alternative premises based upon the respondent’s evidence. The respondent had repeatedly intimated to the applicant that a cogent justification was required for rejecting alternative sites. The applicant presented no methodical, reasoned explanation for rejecting every single alternative. There was very little evidence that there had been a comprehensive search and no documentary evidence, eg a set of property particulars, was produced. This was not credible. It was submitted that Mr MacDonald had only looked once on the internet for alternative sites, which was not sufficient to constitute reasonable steps to find alternative premises.
[187] It was further submitted that reasonableness in this context included the possibility that the applicant could have claimed for reasonable relocation costs, including losses if the new location was less profitable than Ferry Street. For example, Mr Graeme Annandale had rejected Broomfield as “not an ideal scenario”. The applicant had not considered other possible locations.
[188] The applicant had failed to provide good reasoning for rejecting the option of relocating to better premises at the LBS site in 2016. The applicant’s witnesses were assiduous in their pessimism at the planning position. Costings were said to have been prepared, but had not been produced and re-orientated plans had not been submitted for comment. The fact there were good prospects for a lawful use at the LBS site was unassailably evidenced by the fact that BGL has carried on at that address since 2017. The only rational explanation for the applicant’s actings was that it did not need to carry out a diligent search for an alternative site, because it already had the LBS site, and further search for an alternative site would have been inconsistent with the assertion of extinguishment upon which it had decided to peril its claim.
[189] Counsel then submitted that if the Ferry Street business had been extinguished, the applicant had failed to produce sufficient evidence to value it. The best evidence rule was not satisfied and, in any event, there was a lack of trustworthy information. The profit and loss figures in Mr Bell’s appendices were not management tools but had been prepared for the purpose of negotiation with the respondent. Some costs had simply been allocated between depots rateably according to sales. Other cost allocations were based on the unverified word of one director.
[190] Counsel pointed out that the Ferry Street turnover in the year to November 2016 was £583,000, but the applicant’s total turnover for 2018 was only £106,000 less than it had been in 2016. Operating profit for Ferry Street had remained steady between 2014 and 2016 in a range between £85,000 to £87,500, which meant that the applicant’s ability to remain in the black at all depended upon the profit generated by the Montrose depot. From 2016 to 2017 operating profit fell by only £45,771, and between 2016 and 2018 by only £10,988. The non-Montrose depots surged in EBITDA between 2016 and 2018 by 334%, ie for the first full year after Montrose closed. So on the figures the applicant had chosen to present as its evidence, the extinguishment of the Montrose business was promptly followed by a three-fold increase in company earnings.
[191] The foregoing could not be reconciled with profit after payroll figures. Profit after payroll as a percentage of turnover at Montrose between 2014 and 2016 was of the order of 26% to 28%. The same percentages for the combined performance at Arbroath, Brechin and Forfar for those years averaged 13.7%. So ignoring overheads, for each pound a man was paid, Montrose ostensibly returned more than twice as much turnover. But its closure coincided with a massive increase in operating profit. The anomaly could not be explained without the production of depot profit and loss figures after 2016, but this had not been provided. There was no evidence as to the increased advertising which Mr Bell had indicated was the reason why Arbroath’s 2017 turnover increased. The other explanation for Montrose’s low payroll was that Montrose did not have an MOT station. But with reference to the MOT claim, the applicant was trying to assert that the MOT station would have made the Ferry Street depot both richer and poorer. Paradoxically the first person to identify that on the applicant’s figures, the Ferry Street depot was the most profitable one, was Mr Rowand.
[192] Accordingly the options were either that the profitability of one or more of the other three depots improved remarkably from 2016 to 2018, or the figures were wrong, or to a significant extent the Montrose business was not extinguished. The first possibility could not be relied upon without evidence. There was no depot by depot analysis profitability for 2017 and 2018, vouched by primary records. There was no evidence as to new sources of income or savings, particularly relating to the Arbroath depot.
[193] It was also the case that the applicant had not addressed the question how one could know how much of the Arbroath’s increased turnover post-CPO had been business transferred from Montrose. Mr Bell had not addressed this matter.
[194] Turning to the valuation for goodwill, it was submitted that the potential for MOT trading should be excluded. If any valuation for goodwill was appropriate, Mr Rowand’s valuation was £180,000. On other valuation matters, the applicant’s claim made nothing of any excess of value to owners over the market value of goodwill. Mr Bell had also retrospectively adjusted his original figures for the retention of Tayside Contracts and another £20,000 turnover from other retained customers. This was with the benefit of hindsight; open market value had to be calculated from the perspective of hypothetical parties to a transaction knowing that the applicant would be able to continue to trade since there was no restrictive covenant. This matter had been ignored.
[195] The rent receivable should not be double-counted in a disturbance claim, since the agreed compensation for the heritage for assumed vacant possession. The notional rent £10,000 was too low because it was less than the rent actually received by the applicant for a small part of the Ferry Street depot. There was no reliable evidence as to what the figure should be. The full £170,000 was an agreed figure, and should be deducted from the enterprise value. The MOT component of the claim had not been discounted for any risks and was thus over-optimistic. Mr Bell’s multiplier had sought to justify a “premium for control” which was based on collateral opinion, not real world evidence. It was accepted that compensation would be taxable in the applicant’s hands so was to be calculated using pre-tax earnings.
Tribunal discussion
Disturbance claim for extinguishment of business
Mitigation
[196] We deal firstly with the issue of mitigation of loss. The applicant chose not to relocate its business to another site in Montrose, and thus seeks compensation for the extinction of the Montrose business. Instead, management made efforts to assist a smaller new business commence in Montrose, namely BGL. It also made efforts to retain business formerly carried out at Montrose, via the Arbroath depot, and to win new business.
[197] Although a large number of potential alternative premises were mentioned in evidence, two in particular appeared more significant than the others. It was contended that the applicant could have moved into either, thus minimising the extinguishment claim. These are the Broomfield Industrial Estate premises and the LBS premises. We visited both these sites.
[198] The applicant had, of course, occupied the Broomfield premises until 2010. It would have been possible for the applicant to return there on or before 2017 since there was no dispute that the owner, the respondent, would have been prepared to let the subjects and had indicated it would be prepared to do so. We agree with Messrs Annandale’s comment that the Broomfield subjects would have been inferior to the Ferry Street subjects for the purposes of the business; in effect returning there would have represented a step backwards for the applicant. The Broomfield subjects themselves lacked a yard and had limited off-site parking, both of which were useful and available at Ferry Street. Moreover the Broomfield site is not an edge of town centre site. Customers could not easily combine a trip with a visit to the town centre, and it was the case that on arrival at Broomfield the customer might ask for a taxi to the town centre, thus taking up staff time. But nevertheless the applicant had still been able to establish a substantial volume of trade there. The applicant’s agent’s letter of 24 April 2017 indicates that in 2009, trade was at £377,625. This is of the order of almost two-thirds of the final full year’s trade at Montrose in 2016, of £582,618.
[199] So on the face of it, a decision to close the Montrose operations altogether would be questionable. One can infer that a substantial turnover could have been retained at the old Broomfield depot. That depot, lying in an industrial estate at the north of the town, was in a good location to serve lucrative areas to the north, including via a mobile business. We think it likely that a reason for not relocating the business in Montrose was because the applicant’s directors foresaw the strong possibility that customers located outwith Montrose itself could continue to be serviced from the other depots. Messrs Annandale did not expressly admit to this. Indeed Mr William Annandale said there was little mobile business, but their agent’s letter of 4 September 2014 indicates an intention to continue with the mobile business within Montrose while trading from the remaining premises. This position is also supported by Mr Rowand’s analysis (supplementary report para. 3.2.10) that the trends in the applicant’s turnover and split by depot was not inconsistent with an assumption that most of the trade at the Montrose depot was transferred to the other three depots. This could well be the reason for the marked increase in turnover in Arbroath in 2018 and why there appeared to be no further growth in overall turnover thereafter. On this analysis, the rejection of the Broomfield site as an alternative premises was not a failure to mitigate loss; we consider that the applicant’s likely implied calculation was that it could retain a substantial amount of trade formerly undertaken by the Montrose depot from their other depots.
[200] The applicant’s directors professed not to be interested in operating the LBS site as a tyre depot as an alternative location to the Ferry Street subjects. They said fundamentally the site was too small. Nevertheless, the applicant acquired the LBS site in the shadow period. The new operator, BGL, commenced operating there almost immediately after the closure of the Ferry Street subjects in July 2017. The evidence is abundantly clear that the applicant gave every assistance to the new operator to commence the business from the disused garage there. The documents show that BGL consistently achieved a turnover of approximately £158,000 per annum and, by the fourth year of trading, made a profit after deduction of director’s and other payroll (para 4.2 Mr Rowand’s supplementary report), representing a payroll reduction from previous years. There is no suggestion that the profits are not inherently maintainable, despite a refund of rent in 2021. We think we can infer that had the applicant taken over the premises for itself, a short distance from the acquired subjects, and with all its know-how and business connection, it would have been a profitable venture.
[201] Mr Rowand indicates (para 3.10 of joint statement) that it would not be unreasonable to assume that the vast majority of the BGL turnover represented what the applicant’s Montrose depot would have achieved if it had remained open, ie the BGL turnover would have continued to have been included in the earnings of the Montrose subjects. We think this is a reasonable assumption on the part of Mr Rowand. We think it likely, in the circumstances, that goodwill pertaining to the applicant was, if not directly transferred, permitted to be exploited by BGL. The LBS site was nearby and, like the Ferry Street subjects, is close to the town centre. The familiar face of Mr Yeats would be there as the new manager. The timing was seamless. The LBS depot is, we think, more suitable to deal with smaller vehicles and local business. Like the Ferry Street subjects, there would be good synergy for linked trips between the LBS depot and the town centre for private individuals. This type of local business would, we accept, be less likely to be retained by the applicant’s other depots furth of Montrose.
[202] The evidence indicates there was a close relationship between the applicant and BGL. However, BGL is a separate legal entity, and the evidence does not go so far as to show that the entity is actually controlled by the applicant. There is no suggestion, for example, that the profits of BGL (as opposed to licence fee/ rent) are being paid to the applicant. So on the face of it, there is a question why the applicant did so much to assist BGL in commencing its operations. It is true that the applicant benefited by trading with BGL, particularly in its first year. But on the question of mitigation of loss, we find it difficult to understand why the applicant could not have operated the disused garage on the LBS site for itself and thus retain part of the Ferry Street business and, of course, the profits generated thereby.
[203] This brings into focus the fact that the applicant, as it were, pulled up short in the planning dialogue for a new garage at the LBS site. We disagree with Mr McLeish’s and Messrs Annandales’ analysis that the proposal would have been, in the words of Mr McLeish, flogging a dead horse with the council. On the contrary, taken as a whole, the officers’ position was to suggest an alternative layout which might have been worth taking forward. We do not doubt that the site was challenging, as one of the council witnesses conceded, and was only about one-half the size of the Ferry Street subjects. But the applicant having been prepared to put forward a proposal for a new building, it seems to us that if the applicant and its adviser attempted any imagination or ingenuity for a solution as to how the planning issues might be addressed, such was not produced. No sketch or costing for a re-orientated layout was produced to us which might have demonstrated the strength of the applicant’s position with the planners and the project’s viability. Moreover, at the time when Mr Wilson had suggested to Mr William Annandale in 2015 that a sketch for pre-planning discussions could be submitted, the opportunity had not been rendered more complex by the implementation of the 2015 planning permission for the six units and associated parking, which parking was said to be problematic for a new garage. We are therefore left with an impression of missed opportunity for the LBS site.
[204] That said, the proposed sketch showed two work bays at the LBS garage site. This is the same number of work bays existing in the now re-used garage of BGL. We cannot speculate as to whether any improved performance of a new garage would have been worth the expense of its development, as opposed to simply re-using the old garage. This is not a matter we can judge too finely.
[205] At the end of the day we require to decide how a reasonable businessman, in the shoes of the applicant, using its own money, would have acted in the circumstances: Director of Buildings p127E. Rather than extinguishing part of its business, we think the reasonable businessman would have sought to minimise loss by recommencing the old LBS garage, as has demonstratively occurred via the entity of BGL. It is true that to do so would only have retained part of the trade – we infer mainly local trade in small vehicles - which had existed at the Ferry Street subjects. It is also true that such an operation would have been smaller than the applicant’s existing business model. However, we think it would have been more reasonable to seek to avoid loss of some trade by partial relocation rather than to maximise loss by extinguishing the business without any relocation at all. And in principle it is possible for a disturbance claim to seek to recover a partial loss of goodwill: eg London County Council v Tobin. So in these circumstances we are driven to conclude that the applicant did fail to mitigate its loss by not continuing some of its business at the LBS site.
[206] Looking at the matter another way, it is likely that the applicant, through an associated company Abbey Express Limited, continues to exercise considerable control over the LBS garage subjects. The garage is occupied by BGL under a licence. We were told that the term of the licence expired on 1 February 2022 (Mr Rowand, para 3.8). Mr Graeme Annandale indicated that he did not know the current term of the licence, but from his evidence we infer that it is likely to give Abbey Express Limited a degree of flexibility as licensor; ie for the licence to be fairly short term. Flexibility was the reason why Abbey Express Limited’s properties were licensed rather than let. Thus, we have no reason to doubt there is every possibility that the applicant could yet mitigate its loss by terminating the licence, occupying the garage and trading there in its own right. It could thus yet retain the benefit of goodwill transferred, or at least the goodwill which BGL was facilitated to exploit, at the LBS site.
[207] We do not reach the same conclusion for the Broomfield site. Our assumption is that a substantial amount of trade was retained by the business via the other sites, and so it was not necessary to revert to these premises. Again, this is not a matter which can be judged too finely.
Extinction of business
[208] We now turn to the question whether the applicant’s business formerly carried on at the Montrose depot has been extinguished. It is difficult to draw a clear conclusion on this matter, because the pattern of the applicant’s trade shown in various financial statements does not demonstrate a matching loss of trade of the order of the Montrose turnover as existing in the year prior to the CPO. There is no dip in the accounts following the closure (31 July 2017) equivalent to the level of Montrose turnover of £583,000 in the year to 30 November 2016.
[209] Equally, it is difficult, if not impossible, to conclude that there has not been a loss of some of the goodwill formerly existing at the Montrose site, in the form of loss of business from existing customers. The VAT returns for the whole business (para. 3.2.12 and App II Mr Rowand’s supplementary report) show a level of sales in Q3 and Q4 in 2017 to be 8% to 9% lower than in 2016. Mr Rowand indicated this to be consistent with a transfer of the “majority” of the Montrose trade to other depots, thus begging the question of the whereabouts of the “minority” of the Montrose trade post CPO. This is also against a background of increasing turnover at the newly established, but relatively distant Forfar depot, thus potentially masking the extent of lost business in the overall accounts. In these circumstances it is apparent we are dealing with a partial business extinction claim.
[210] The applicant has made only limited concessions as to the amount of Montrose trade retained by the remaining business. The applicant has thus chosen to put before us an analysis based upon optimistic assumptions, which as we shall discuss, we find difficult to accept. The respondent has made arguments that the applicant has not proved a loss, but has at least implicitly accepted there could be some loss of trade, albeit not readily quantifiable. As is so often the case, it thus falls to us to analyse the evidence for ourselves to determine whether some loss has been established on more realistic assumptions.
[211] The applicant’s position is that the Montrose depot should be looked at in isolation. However, this approach is still problematic because, as we say, the overall accounts do not show a drop in turnover of the order of the pre-existing Montrose turnover. It is now accepted that a measure of the Montrose trade was in fact retained via the remaining business. Logic might suggest that the Montrose site can nevertheless be looked at in isolation to the Brechin depot (nine miles from Montrose), since turnover there remained relatively steady before and after the CPO (Mr Bell para 2.11). Logic might also support a similar or stronger view for isolating the Forfar depot, which is the applicant’s furthest depot from Montrose (19 miles) and whose turnover was consistently growing since it opened in 2015 (Mr Bell para 2.8 et seq). We will discuss the Arbroath depot below.
[212] We think the case is strongest to exclude the turnover of the Forfar depot in our analysis. Mr Bell’s report (para 2.7) would be revised thus:
| Year end 30 Nov | 2018 | 2017 | 2016 | 2015 | 2014 |
|---|---|---|---|---|---|
| (£’000) | (£’000) | (£’000) | (£’000) | (£’000) | |
| t/o whole | 1,758 | 1,864 | 1,947 | 1,892 | 1,846 |
| t/o Forfar | 293 | 224 | 181 | 61 | - |
| t/o excl Forfar | 1,465 | 1,640 | 1,766 | 1,831 | 1,846 |
[213] When the Forfar trade is excluded, with regard to the turnover split by depot, one sees a reduction in turnover between 2016 and 2018 (£1,766,000 minus £1,465,000) of £301,000. That is a reduction for the combined totals for Brechin, Arbroath and Montrose after the relevant date, and would thus include any Montrose trade retained by Arbroath and Brechin. The assumption we make is that the Forfar depot would be less likely to retain significant amounts of Montrose trade for geographical reasons. A loss of trade of £301,000 is consistent with a substantial amount of the Montrose trade (£583,000 in 2016) being retained.
[214] Mr Rowand noted that there was a trend in declining turnover. In the two years between 2014 and 2016 we note that there was a decline, excluding Forfar on the above figures, of the order of 4%. Applying this trend to a loss in 2018 would reduce the £301,000 to £288,960.
[215] Another way to look at the problem would be to start with the Montrose trade (£583,000 in 2016) as a presumptive loss and consider the evidence as to how much of this may have been retained. This means focussing upon the Arbroath depot, which is 13 miles from the Montrose site, and where turnover increased by £311,000 between years ending 2016 and 2018; ie following the closure at Montrose. Mr Bell states at para 2.13 of his main report:-
“The growth in the sales at Arbroath is also understood to be unrelated to the CPO, rather due to management efforts to win customers and specifically picking up more council work in Arbroath. Management is of the view that the sales movements in Arbroath and Forfar would have happened whether the Montrose site closed or not and are not due to customers moving sites following the CPO.”
[216] Mr Rowand’s main report (4.1.8) is sceptical. His analysis in his supplementary report at 3.2.10 indicates that trends in the company’s statements is not inconsistent with an assumption that most of the trade of the Montrose depot was transferred to the other three depots, which could be the reason for the marked increase in turnover in Arbroath in 2018 and no further growth in overall turnover thereafter. His analysis of the top 10 monthly account customers of the applicant indicates there is no obvious loss of a significant customer from the top 10, and that the information is not inconsistent with the view that much of the trade of the Montrose depot was transferred to other depots of the applicant: supplementary report paras. 3.3.1 – 3.3.6. Mr Bell concedes that sales to the largest customer, namely Tayside Contracts, amounted to £100,000 and were included in the Montrose depot’s profit and loss statement for the last full year prior to Montrose closing. He accepts these sales were not lost by the applicant following the closure of the Montrose site: supplementary report para. 3.8. It is therefore accepted that a certain amount of the Montrose trade was not lost to the applicant following closure of the depot there.
[217] The difficulty we face here is, therefore, as Mr Rowand points out, we do not have direct evidence of the nature of the increase in the Arbroath trade, following upon the CPO. On one hand the increase may be on account of the directors winning new trade for Arbroath. On the other hand, the increase could be due to loyal trade previously carried out at Montrose simply moving to, or being serviced by, Arbroath. Or of course it could be a mix of both. The trading pattern, so far as produced to us, is ambiguous. It is also the case that only once the claim became seriously scrutinised – eg by Mr Rowand’s seeking information as to the applicant’s top ten customers (main report para 6.3.3; supplementary report para 3.1.1) did the applicant concede the retention of a major customer, namely Tayside Contracts. The fact that trade had indeed been retained must have been within management’s knowledge, but it does appear that Mr Bell was initially informed otherwise (para. 2.13 of main report quoted above). In these circumstances, with no criticism intended to Mr Bell himself, we have to be careful before giving much weight to what he says at para 3.9 of his supplementary report, namely:-
“I enquired with Angus Tyres if there were any other customers that would also have remained with Angus Tyres following Montrose closing. Angus Tyres management was not aware of any contracts or customers that should be included.”
[218] Certain parts of the evidence discussed above indicate an intention by the applicant to continue the mobile business previously carried on from Montrose by other depots. In these circumstances we do not think we can accept Mr Graeme Annandale’s ipse dixit that mobile trade greatly diminished following the CPO, or indeed Mr William Annandale’s evidence that there had been little mobile trade in any event. The forensic accounting evidence did not seek to apportion the “before” and “after” mobile trade of the applicant, which might have assisted on this matter.
[219] Nor do we feel we can, as it were, give the applicant the benefit of the doubt in making a generous assumption that a particular amount of the Arbroath increase was unrelated to the Montrose closure. Looking at it the other way around, it is difficult on the evidence to conclude just how much of the Arbroath increase did not result from the Montrose closure. Although the matter was not gone into in detail, and only alluded to by Mr Rowand, we think that the applicant would have had customer records that could have allowed a greater analysis, perhaps on a sample basis, to have been carried out on the issue of retained vs lost trade. There was no suggestion that such an exercise could not be carried out.
[220] There are exceptions to this analysis. Intuitively, we would have thought it more difficult for the Arbroath depot to service trade located to the north of Montrose, for the simple reason that Arbroath lies 13 miles to the south of Montrose. The northern area was a valuable area of business in the opinion of Mr Graeme Annandale, and we were inclined to accept his evidence on this point. That leaves the Brechin depot, potentially better able to fill the gap geographically, but whose turnover did not improve following the closure of the Montrose depot.
[221] The applicant produced documents showing the amount of MOT business carried out at the various depots in 2016, 2017 and 2018. The number of MOTs carried out at Arbroath increased between 2016 and 2018, by a total of 204. As the Montrose depot did not carry out MOTs, the amount of the Arbroath trade increase relating to MOTs could not have come from the closure of the Montrose depot. It is possible to estimate the increased turnover of the business from the MOT sales and associated work.
[222] Although there was a serious dispute as to the potential profitability of MOT work had it been carried out at Montrose, there was fortunately little disagreement on how to calculate the turnover generated by MOT work. Mr Bell allowed an average charge of about £47 for an MOT, whereas Mr Rowand felt this looked high in relation to a four year average of £44.53 each. There was no dispute in an assumption that 35% of customers would require additional work, and that the average charge for additional work was £191. We think a rough and ready calculation can be made: 204 × (say) £45 = £9,180; 204 × 35% × £191 = £13,637; £9,180 + 13,637 = £22,817. So an amount of the Arbroath increase in trade between 2016 and 2018 which could not have been related to the Montrose closure can be estimated by about this sum.
[223] Furthermore, Mr Rowand points out (para. 3.3.5 supplementary report) that the amount of work carried out for Tayside Contracts increased between 2017 and 2018 by nearly £28,000 (or £24,000 on Mr Bell’s figures App I). The great majority of the work had been carried out at Montrose, and was largely continued by Arbroath (App I to Mr Bell’s supplementary report). The fact that there was an increase in trade with this customer in the year following the Montrose closure seems more consistent with efforts by management to pick up more council work in Arbroath (Mr Bell para. 2.13) rather than simply inheriting existing trade from Montrose.
[224] We cannot exclude the possibility that some of the “new” MOT work could also have been “new” Tayside Contracts work, but then again nearly one half of the MOTs were to private customers (Mr Bell para. 3.8), and the new MOT figure is small in relation to the overall Arbroath turnover for 2018 (£23,000 as against £862,000). In these circumstances we think that of the increase in trade at Arbroath between 2016 and 2018, being of the order of £311,000, it is possible to draw a broad conclusion that at least about £50,000 was unlikely to be related to the transfer of goodwill from the Montrose depot.
[225] It is also the case that the overall drop in turnover was mitigated by the fact that substantial trade was established with BGL. A large amount of the Arbroath trade increase in 2018 would have been on account of supplies to BGL in Montrose. The sales in 2018 amounted to £51,724 for the Arbroath depot, £10,179 for Brechin and an almost de minimis £1,041 for Forfar; a total of £62,944 for all three remaining depots (App I Mr Bell’s supplementary report). Mr Bell points out that after 2018, the sales to BGL flatten out to £20,000 – £24,000 per annum, which is more of a sustainable level.
Our Calculation
[226] We think the starting point has to be the dip in trade between 2016 and 2018 for the business as a whole, excluding the Forfar depot. As we have indicated this amounted to £301,000, adjusted to £288,960. Provisionally we think this can be put down to the CPO, and represents a loss of business after the retention of trade by other depots.
[227] We would test this figure by an alternative calculation seeking to look at the amount of the Montrose trade more likely to have been retained. The amount of the Montrose depot turnover in the year to 2016 amounted to approx. £583,000. The figure is more steady from the previous two years, (unlike the conjoined Brechin and Arbroath figures). In fact there was an increase from 2015, and is consistent with the part year to 2017 (para 2.7 Mr Bell).
[228] We then have to take a view, if we can, on how much of the increased turnover at Arbroath was unrelated to the CPO. Here, for reasons already given on the state of the evidence, we have to take a conservative approach. Our starting position is to infer that the majority of the Arbroath increase was probably related to the CPO, but that a minority of it was probably not related. We shall therefore infer that £311,000 - £50,000 = £261,000 was probably related to the CPO, or perhaps more accurately, we can infer that at least about £50,000 of the Arbroath increase was unrelated to the CPO. There was also a small component in the turnovers for Brechin and Forfar for sales to BGL of £11,000. This alternative methodology would suggest a loss of trade of £583,000 - £261,000 - £11,000 = £311,000.
[229] As we have concluded above, the applicant could and should reasonably have continued some of its Montrose business by setting up at the LBS site for itself. The turnover from BGL has consistently been of the order of £158,000 per annum: Mr Rowand, 3.10, joint statement. In the light of his comments, we think it is reasonable to deduct this amount as representing turnover which could have been retained in reasonable mitigation of loss. However, this deduction should not double count the fact that the loss of turnover has already been mitigated by some trade carried out with BGL. So where in both our approaches we have a lost turnover figure for 2018, that figure will have included approximately £63,000 trade with BGL for that year, in the sense of tending to reduce the loss. A figure representing trade with BGL cannot be deducted twice. So we think the actual 2018 sales figure for the whole business needs to be added back into the calculation.
[230] It is then necessary to apply an EBITDA percentage to lost turnover. In summary Mr Bell produced EBITDA percentages for Montrose alone between 17.7% and 19.1% for years 2014-2016, which he then adjusted and applied a weighted average tending in favour of 2016 (Apps E and F). Mr Rowand produced an EBITDA percentage for the three depots excluding Forfar, averaged for the three years, at 10% of turnover, before adjustment: para. 17 of comments 13 Nov 2022; and Attachment A(i).
[231] This difference in the figures is material and is marked by a significant dispute as to the reliability of the underlying accounting information. As Mr Rowand has pointed out in some detail, the financial statements imply that the Montrose depot was substantially more profitable than the other depots. On analysis the statements for years 2014 and 2015 showed that despite the established depots having a relatively steady and similar level of turnover, Montrose had a remarkably higher level of profit than the others, being more than four times higher in those two years: para. 8 of his November 2022 comments. We have some concern that part of the explanation – an excessive headcount at Arbroath and a mis-allocation of a Montrose based member of staff in those two years – only came out during oral evidence, without transparent vouching. The other part of the explanation – that Montrose had lower staff costs because tyre fitters were paid less that mechanics and MOT testers, did not satisfy Mr Rowand. He produced analysis in respect of the MOT claim which indicated that MOT work, had it been carried out at Montrose, would have been substantially more profitable than it was at the other depots: para. 17 of his MOT comments 13 November 2022. This anomaly gives us concern as to how reliably the financial statements treat Montrose in relation to the other depots.
[232] In these circumstances we prefer Mr Rowand’s approach to seek to find an EBITDA to turnover percentage based on an average of the three established depots. On the other hand, the 2014 and 2015 EBITDA figures for Arbroath and Brechin are so much lower than the corresponding 2016 figures (Mr Rowand Attachment A(i)), apparently because of a reduction in staff costs in 2016, that it would seem anomalous to take the earlier years into account. Accordingly, with some hesitation, we shall select an EBITDA percentage based upon an average of the three established depots, for 2016 only.
[233] It is necessary to adjust the EBITDA figure. Both experts deducted a notional rent for the Montrose subjects of £10,000 (Mr Bell para. 5.8 and Mr Rowand para. 5.3.4), although, we think, Mr Rowand did so for illustrative purposes rather than being persuaded such an approach was necessarily correct. The foregoing approach gives us some concern. The sum is “notional” because the subjects were owned, not rented. The inherent worth of the business is, therefore, as an owner occupied business. The value of the subjects are being settled as a separate part of the claim, and we see no need for them to be additionally assumed to be rented as part of an enterprise value. To enter a notional rent will also introduce disparity with the EBITDA value for the other depots, which we understood were also owned, but for which no notional rent was proposed. We have therefore calculated EBITDA without deduction of a notional rent.
[234] The applicant also received rent from letting a small part of the subjects. Mr Bell included rent receivable in his figures, as did Mr Rowand. However Mr Rowand’s position changed in that it would not make sense to include both a rental income and a notional rent in the EBITDA. We agree. In the first place, the applicant is already receiving compensation for the loss of the building on the basis of vacant possession, ie assuming no tenant going forward. Secondly, the rent receivable is not operating income relevant for the purpose of establishing goodwill. And thirdly, we were not convinced that the income stream was secure enough to be part of a market maker’s valuation of a business going forward. The rent receivable was £14,493 in 2016.
[235] The experts were agreed that adjustments to “normalise” profits were required. The main disagreement related to the amount for a market rate director’s salary. A market rate would be higher than the amount stated in the accounts of £5,834 for Montrose in 2016. The market rate for a director was agreed to be £40,000, and that, according to Mr Bell, could be spread around four sites at £10,000 each. Mr Rowand argued that this was unrealistic as the £40,000 would be a minimum cost. We do not agree, and prefer Mr Bell’s position on the matter. We think the hypothetical purchaser could include a business owner with multiple existing depots, serviced by a limited number of directors, or equally could operate a business with a part time director. If we are to take an average over three of the depots, it is necessary to spread the “true” cost of a director over three of the four sites, so that 75% of the £40,000 cost is accounted for. There were also minor adjustments for increased NIC which we have calculated pro rata. The financial statements indicate a small gain on sale of assets, but this is not included in the EBITDA figure (Mr Rowand, Attachment A(iv)) so we have not adjusted for this.
[236] On this basis we reach an EBITDA to turnover percentage for 2016, for the business excluding the Forfar depot, of 11.89% (Appendix 1).
[237] Turning to the multiplier to reach an enterprise value, we felt that both parties’ analyses, while helpful in identifying a range (3.25 to 5.35), were the product of a somewhat artificial exercise. Both versions relied upon rather subjective discounting from higher multipliers based on published transactions. Those transactions were not comparable, or at least not demonstrably comparable, to a sale of the applicant’s relatively small family business at Montrose. Neither Mr Bell nor Mr Rowand – and this is not a criticism – are directly in the business of advising market makers in the valuation of SMEs. We had no evidence of a good comparable transaction. At this stage we would prefer to resort to a somewhat intuitive approach. We would also point to the risk for the hypothetical purchaser in that the business would be vulnerable to competition in the form of any new or expanded business operating in the locality (excluding the seller who would be expected to sign a restrictive covenant). In these circumstances we think such a purchaser looking to acquire a business of the applicant’s size at Montrose would be likely to seek a return of the order of a multiplier of 4 on EBITDA to reflect such risk.
[238] In order to arrive at a goodwill figure, it is necessary to deduct the net tangible assets from the enterprise value of the business. The goodwill represents “what is left” of the value of the business once the net tangible assets are deducted. The difficulty here is that the applicants had net tangible liabilities (£120,412 at November 2016 and £108,796 at November 2017) which are not allocated on a depot by depot basis. Mr Rowand’s position was that if an MOT station had been up and running since 2012, and generating profits, those retained profits in principle ought to be set off against the net liabilities: paras. 4.3.21-22, 5.3.10, potentially resulting in net assets. On the other hand, without the MOT profits, his illustration (para. 5.3.11) of EV to goodwill is unaffected by the net tangible liabilities; ie there are no net assets to deduct to reach goodwill.
[239] Mr Rowand raised the anomaly that the use of a “rent” in the EBITDA calculation, could result in a smaller loss of goodwill figure than in the case of owned property, where the whole value of the property might potentially be deducted from the enterprise value. The “rent” would be a capitalised figure, highly dependent upon the “correct” market value and multiplier. Thus, in his opinion the valuation methodology could be flawed. Our calculation seeks to avoid this dilemma by the simple expedient that we have proceeded without the deduction of a notional rent for the reasons given.
[240] As we have said, the problem is we do not have a “correct” allocation for the net tangible assets or liabilities to be apportioned to the relevant depot or depots. But it seems to us that the problem would only be material (on parties’ analyses) if net liabilities were to be apportioned between the depots such that the Montrose depot were to be left with net assets; ie that a sum more than the £120,000 - £108,000 net liability were to be apportioned to the other depots and not Montrose. We do not think we can make such a specific assumption on the evidence. We think that any type of apportionment exercise, if feasible, is likely to be fairly subjective. The basic statutory accounts are not broken down by depot. Indeed many of the issues discussed in this case arise from the fact that apportionments between depots in the financial statements contain anomalies as discussed by Mr Rowand. So in these circumstances we do not think we are justified in taking anything other than a broad approach, consistent with our approach of looking at the performance of three out of the four depots, and to apply the net liabilities across the business, including the Montrose depot. On that basis there can be no deduction for net tangible assets.
[241] We think this conclusion is also supported by our own analysis for a partial extinguishment claim. In Appendix 2 we set out a “before” and “after” goodwill calculation, assuming for illustrative purposes there are net tangible assets equal to the tangible assets in the 2016 accounts (£452,355 per Appendix D to Mr Bell’s report). Again we assume a loss of turnover in the absence of the Forfar depot, and again for illustrative purposes assume that none of the tangible assets relate to Forfar. We assume in the “after” figure that part of the heritable assets have been converted to cash in the form of compensation for the CPO. It can be seen that the difference between the goodwill valuation “before” and “after” the CPO based on turnover is unaffected by the deduction of tangible assets. This is because we are essentially making a like for like comparison between scenarios by deducting the same asset values to measure the loss of goodwill.
[242] The following is a summary of our calculations discussed above:
| Annual turnover for three depots, excl. Forfar, | 2016: | £1,766,000 |
| 2018: | £1,465,000 | |
| Apparent loss due to 2017 CPO: | £301,000 | |
| Adjust by 4% for downward t/o trend 2014-2016: | (£12,040) | |
| £288,960 | ||
| Deduct for failure to mitigate loss at LBS: | (£158,000) | |
| But Add Back for actual sales to Balmain Garage in 2018, as already included in £1.465m | £63,000 | |
| Net failure to mitigate: | (£95,000) | |
| Annual loss of trade | £193,960 | |
| Apply EBITDA (See Appendix 1) at 11.89% | £23,061 | |
| Multiplier 4.0 | ||
| Loss of enterprise value | £92,247 | |
| Loss of goodwill (no MOT station) say, | £92,250 | |
| Annual Montrose turnover 2016, potentially “lost” | £583,000 | |||
| Increased turnover at Arbroath 2016 - 2018: | £311,000 | |||
| Deduct for Montrose business probably not retained by Arbroath: | ||||
|---|---|---|---|---|
| (i) Adjust for MOT growth | ||||
| 204 tests at £45.00 - £9,180 | ||||
| 204 at £191 (35%) - £13,637 say | (£22,817) | |||
| (ii) New, increased turnover with Tayside Contracts in 2018 after CPO: say | (£28,000) | |||
| Total: (£50,817), say | (£50,000) | |||
| Adjusted, ie assumed Arbroath increase due to CPO | £261,000 | |||
| Increased turnover at Brechin and Forfar due to CPO, ie trade with BGL in 2018: | £11,000 | |||
| Adjusted growth in three branches | £272,000 | |||
| Loss of trade: | £311,000 | |||
| Deduct for failure to mitigate loss at LBS: | (£158,000) | |||
| But Add Back for actual sales Balmain Garage in 2018, as already included in increased t/o figs for Arbroath (£311k) and other depots (£11k) above: | £63,000 | |||
| Net failure to mitigate | (£95,000) | |||
| Annual loss of trade | £216,000 | |||
| Apply EBITDA (See Appendix 1) at 11.89% | £25,682 | |||
| Multiplier 4.0 | ||||
| Loss of enterprise value: | £102,728 | |||
| Loss of goodwill (no MOT station), say | £103,000 | |||
[243] We must then choose which calculation is the more reliable. As discussed above, our first calculation suggests a loss of £92,250 as a function of the dip in trade immediately after the CPO for the whole business excluding Forfar. Our alternative calculation of £103,000 assumes all the Montrose turnover has been lost, except for the amount of the increase in trade at Arbroath demonstratively unrelated to the closure. Both scenarios make a substantial discount for failure to mitigate loss by the applicant’s not taking the opportunity to trade at the LBS site. On balance we prefer the former figure. It is simpler, with fewer moving parts. It is also more conservative, which given the state of the evidence is an approach we feel we need to take here. The alternative figure can be seen as something of a broad check.
[244] We also stand back and look to see whether the foregoing result is reasonable. We find that our figure is significantly less than the heritable value of the subjects themselves at £170,000. It is also significantly less than the loss of turnover figure at £193,960. Had it been otherwise Mr Rowand would have had another concern – as he put it, a buyer of a business, once it had paid for the tangible assets such as bricks and mortar, was “paying for thin air” in name of intangible goodwill. He would have concern if a sense check showed that the goodwill value was as high as annual turnover, rather than as a fraction of turnover. So our approach has been proportionate. We shall therefore allow £92,250 under this head.
Submissions
Applicant’s submission on professional fees
[245] It was clear that the applicant had required legal and accountancy advice throughout the negotiation process and after the process had broken down. Mr Taylor had spoken to his role in valuing the company and engaging in negotiations on an agreed extinguishment basis, which agreed assumption came to an end when the LBS property was purchased. The relevant fee notes had been summarised in Mr Rowand’s supplementary report; it was accepted that certain of these were more in the nature of the expenses of the process.
Respondent’s submission on professional fees
[246] The applicant had not proved that it had incurred professional fees or the extent of such fees. No schedule of costs had been produced, contrary to a statement in the application.
[247] It was pointed out that professional fees incurred in the preparation of an extra-judicial compensation claim, prior to commencement of preparation of a Tribunal application, fell to be claimed as compensation, not as litigation expenses: London CC v Tobin p.371.
[248] This part of the claim had in effect been ignored by the applicant. No written or oral evidence had been adduced about what work if any had been undertaken for the applicant by its professional advisers, or at what rate so as to calculate a proper sum due. No award could be made under this head.
Tribunal Discussion
Professional fees
[249] There was no dispute that reasonable professional fees incurred in the preparation and negotiation of a compensation claim are allowable. There was no dispute that such professional fees incurred prior to the Tribunal application were recoverable as part of the claim for compensation for disturbance; but that fees incurred after the Tribunal application would fall to be dealt with as expenses of the proceedings: cf s.3(5) Lands Tribunal Act 1949. We make no comment here whether any pre-application professional fees might still be allowable under any award of expenses for the application itself.
[250] The Tribunal application is dated 12 December 2017. On the face of it, it would appear that fees incurred on or after this date ought to be dealt with under any award of expenses in connection with the application process.
[251] The question here is therefore the extent of reasonable professional fees incurred prior to 12 December 2017. Mr Rowand has been provided with six fee notes totalling £62,251 (para. 3.5 supplementary report). Mr Bell’s report refers to professional costs of £68,700 (para. 6.9 main report) which refers to other unbilled legal work in progress which is not mentioned by Mr Rowand. Of the invoices produced to Mr Rowand, all but one post-date 12 December 2017. Prior to that date we are told there is a fee note by Murray Taylor (Scotland) Ltd dated 26 February 2015 for £10,000 for “various in connection with Lands Tribunal claim”.
[252] Inexplicably, this fee note has not been lodged and there is no detail provided anywhere as to the actual work carried out, or the hours and rates charged. Equally there is no detail given regarding any subsequent fee notes, including those by Murray Taylor, to indicate, for example, when particular work was carried out. Other than that accountancy services were provided in relation to the claim, in general terms, no written or oral evidence was led specifically as to the detail of the work or the level of charges.
[253] The inability to produce any supporting vouching at all for professional fees incurred would normally be fatal to a claim of this nature. However, it does appear to be the case that “there were additional accountancy costs of approximately £3,000 in the Montrose P&L in 2015 in relation to the CPO” (Mr Bell’s main report, para. 5.7). We infer therefore that Murray Taylor were paid about £3,000 by the applicant during 2015 for accounting services in respect of the CPO claim. It is also the case that Murray Taylor prepared a series of valuation reports, updated at various times, and these have been produced, albeit by the respondent. One of these is dated 19 August 2013, and another dated 9 June 2016 is referred to in the application, of just over three and five pages length respectively. There is no suggestion that the cost of either of these has been reimbursed by the respondent. In our view it was reasonable for the applicant to commission these reports.
[254] This Tribunal does not have expertise in the valuation of accounting services. We cannot reliably value the work carried out in respect of the two pre-application reports which have been lodged. Equally, we are conscious we should attempt to recognise the principle of equivalence, requiring true compensation for the loss, if this is possible in the circumstances. In these circumstances we shall allow a nominal sum of £1,000 in respect of the preparation of the above two reports.
Conclusion
[255] We shall allow compensation to the applicant as follows. For the first claim we find the applicant entitled to the value of the subjects in the agreed sum of £170,000, of which £17,000 remains to be paid. We shall refuse the second claim for disturbance for loss of MOT profits, but shall allow the second claim for disturbance for partial extinction of business and loss of goodwill in the sum of £92,250. We shall allow the third claim for professional fees incurred prior to the Tribunal application (12 December 2017) in the sum of £1,000 for accountancy fees.