Landlord loses Inner House Appeal against decision that supposedly religious lets were rates avoidance measure

About this case:

• Citation:
  [2026] CSIH 22
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Clark

Heptagon Portfolio Arbroath Ltd had brought a petition for review of Angus Council’s decision to refuse its appeal against a decision that it would be liable to pay non-domestic rates for its Abbeygate Centre premises from 22 December 2023. The amount of non-domestic rates payable on the argument of the council was in the region of £38,000 per annum.

The appeal was heard by Lord Matthews, Lord Armstrong, and Lord Clark. D Thomson KC and Tosh, advocate, appeared for the petitioner and reclaimer and Upton, advocate, appeared for the respondent.

Lacked commercial substance

After several of the units in the Abbeygate Centre became empty, Heptagon let the units out to Room for Faith Ltd, which in turn sublet the premises to Local Faith Ltd, at £1 per annum. Heptagon contended that, in consequence, the tenant and sub-tenant benefited from the exemption from liability for non-domestic rates under section 22 of the Valuation and Rating (Scotland) Act 1956. Angus Council, which had become aware that Room for Faith was possibly involved in rates avoidance in other council areas, sent officers to visit the premises, who found no information on how to access them for worship and that many of them contained little furniture or were impossible to see into.

On 22 November 2023, the council advised Heptagon that they intended to treat the company as liable to pay non-domestic rates from 22 December 2023 onwards, on the basis that there was no commercial substance to the agreement with Room for Faith. An appeal was made against that decision, which the relevant sub-committee of the council refused on 4 July 2024. Before the lord ordinary, Heptagon argued that the council had material before it vouching for the significant difficulties Heptagon encountered in finding a tenant and the arrangement was made because there was no real interest in the premises.

The lord ordinary held that the undisputed factual circumstances gave the sub-committee the basis for interring that the arrangement lacked commercial or economic substance. There was no merit in the submission that the council ought to have ascertained for itself the rent Heptagon could have achieved; all they required to do was consider whether the rent actually charged was significantly below what Heptagon might have achieved, which they had done.

On appeal, Heptagon submitted that the lord ordinary should have found that the council erred in its approach to the statutory criteria. The council failed to deal with the issue of the rent which Heptagon could reasonably have obtained on the open market properly, in that it did not find for itself what such a level of rent would be and, in particular, failed to take into account the fact that specialist letting agents had been unable to market the premises for two years. In the event that it did take these factors into account, it had failed to explain why any significantly higher level of rent could reasonably have been obtained at the time that the arrangements were entered into in light of that evidence.

Other appropriate evidence

Delivering the opinion of the court, Lord Clark noted that the council’s sub-committee had all the statutory provisions before it, saying: “The sub-committee expressly stated in its decision that it was satisfied that ‘in terms of Regulation 4(6) [of the Non-Domestic Rates (Miscellaneous Anti-Avoidance Measures) (Scotland) Regulations 2023], section (d) applied”. It determined that the comparison between the £1 per annum rent for each unit and the High Street rents showed the ‘gulf’, which was significant.”

He added: “We agree with the lord ordinary that the decision letter should be seen and read in its context, which includes that the sub-committee had the report from the Director of Finance, the full written and oral submissions and all relevant documents. Taking that approach, it would be unreasonable to conclude from the wording of the decision letter that, in reaching its conclusion, the sub-committee did not properly apply the test set out in Regulation 4(6)(d).”

Considering whether the council ought to have found the level of rent that could be reasonably obtained for the premises, Lord Clark said: “It cannot have been necessary for the sub-committee to attempt to identify precisely what rent was able to be obtained for each of Heptagon’s six units, which had certain differences in size and positions in the shopping centre. It is not the case that the only relevant evidence is the rent actually achieved for the premises in question. The wording in Regulation 4(6)(d) – ‘the level of the rent which could reasonably have been obtained’ - must allow other appropriate evidence to be considered, such as a comparison with properties that are located reasonably close to the premises in question and are of a broadly similar size.”

He concluded: “The reasons why the council determined that a significantly higher level of rent could reasonably have been obtained are obvious, based on the comparison it made. The informed reader was left in no real and substantial doubt as to why the council found that the condition in Regulation 4(6)(d) was met. We agree with the lord ordinary that adequate reasons were given.”

The reclaiming motion was therefore refused.