Professional negligence – Surveyor – Defendant surveyor retained to advise claimants on proposed investment in factory outlet centre (FOC) – Investment proving unsuccessful – Whether defendant liable in damages for negligently overstating value and commercial prospects of FOC – Extent of defendant’s retainer – Calculation of damages – Claim allowed
The claimants were the trustee and the trust manager under an enterprise zone property unit trust (EZPUT) established in April 2001 for the purpose of a property investment in an enterprise zone, namely the development of a Grade II listed structure at Chatham Historic Dockyard in Medway, Kent, as a factory outlet shopping centre. The purpose of the trust was to enable 480 investors to participate in the investment. Prior to the purchase of the property, the defendant firm of chartered surveyors and property consultants was asked to advise on the acquisition. In its report, the defendant valued the property at £62.85m with the benefit of Enterprise Zone tax allowance or £48.15m without. The claimants paid more than £500,000 in fees for the defendant’s services, of which more than £400,000 was invoiced as “investment and valuation advice”.
The first claimant entered into a purchase and development agreement with the developer of the site, under which it paid a consideration of £62.85m and acquired a 155-year leasehold interest in the site. When the centre opened in July 2003, only 60% was let. Over the next few years, it proved difficult to let units at the centre or for tenants to trade successfully.
The claimants brought a claim against the defendant for professional negligence. They contended that: (i) they had retained the defendant to advise them on whether to proceed with the transaction and to conduct due diligence and negotiate the purchase price; (ii) they had relied on the defendant’s valuation of the property and its advice as to the development’s commercial prospects; and (iii) that advice had been inadequate and contained fundamental errors in its approach to the valuation of a factory outlet centre (FOC). The claimants’ primary case was that since the ability of an FOC to secure and retain tenants and the level of turnover rent chargeable depended on the number of consumers spending money at the centre, an assessment of its likely ability to attract consumer spend was crucial to its valuation. They submitted that the defendants’ failure to undertake such an assessment by reference to a “CACI-style” retail analysis report had resulted in a substantial overstatement of the rent, value and prospects of the development.
Held: The claim was allowed.
(1) The extent of the defendant’s retainer was evidenced by the documents and by what the defendant had done. It had been retained to act for both claimants and the first claimant had been entitled to rely on its advice. Its retainer included carrying out due diligence and negotiations with regard to the transaction and providing valuations and investment advice, including as to the commercial viability, attractiveness and prospects of the development as a newly-developed FOC. In providing commercial investment advice with regard to the centre, the defendant’s role had extended beyond that of an ordinary valuation based on comparables. Given the particular features of the development, which was still in the course of development and had no lettings, its valuation depended on an evaluation of likely future income stream and a determination of one or more appropriate yield figures. The assessment of likely rental income and yield figures involved commercial investment advice as to the commercial prospects of the development as a trading FOC; accordingly, the defendant had been required to make recommendations on the likely prospects of the centre to attract customer spend and tenants. In addition to its contractual obligations under its retainer, it owed a concurrent duty of care in tort to exercise the reasonable standard of skill and care to be expected of an ordinarily competent valuer and commercial property investment adviser. By agreeing to act as it did, the defendant had held itself as being competent to perform the appraisal, assessment and valuation of an undeveloped FOC for EZPUT purposes.
(2) Applying established principles on negligent valuation, the defendant had breached its duty. Those who carried out commercial appraisals of FOCs in 2000-01 were, as a matter of standard practice, commissioning and relying upon full retail analysis reports. The defendant’s failure to do so was an important breach of duty on its part. It was incompetent for the defendant not to obtain a full retail performance analysis where it was aware of the use of such an analysis and it would have been easy and inexpensive to obtain one. Moreover, the defendant’s report had focused too much on positives and had not properly reflected negative aspects. As a result, the claimants had not received a full or balanced picture of the true position or of the risks associated with the investment and the defendant’s valuation had not been soundly based. A proper valuation would have been £34.375m without the benefit of enterprise zone allowances and £44.8m with them. The defendant’s valuation fell outside the permissible margin of error and gave rise to liability: Goldstein v Levy Gee [2003] EWHC 1574 (Ch); [2003] PNLR 35, Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch) and K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC); [2010] PNLR 31 applied.
(3) In the case of liability in negligence for providing inaccurate information, the defendant’s liability would normally be limited to the consequences of the information being inaccurate. The purpose of the commercial advice provided by the defendant was to provide a valuation figure that was critical with regard to the purchase price of the development. Whether viewed in tort or in contract, the scope of the defendant’s duty was to take reasonable care to ensure that the valuation was accurate. The liability that the defendant could reasonably have thought that it was undertaking was limited to any relevant inaccuracy in the valuation that it provided in April 2001: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 1 EGLR 129; [1005] 12 EG 144. The defendant’s negligent advice had induced the claimants to invest in the development. The consequences of its incorrect advice was that the first claimant had paid £62.85m rather than the £44.8m that it would have paid had it been given accurate information. The first claimant was entitled to damages of £18.05m as the difference between those figures. The existence of the tax allowances did not affect that outcome. Although the incidence of taxation could be relevant in the calculation of a claimant’s damages, the tax credits attracted by the original investment were held on trust for the benefit of the individual investors and did not affect the damages properly recoverable by the first claimant: British Transport Commision v Gourley [1956] AC 185 distinguished.
Sue Carr QC, Graham Chapman and Lucy Colter (instructed by Bond Pearce LLP) appeared for the claimants; Roger Stewart QC and Sian Mirchandani (instructed by Berrymans Lace Mawer LLP) appeared for the defendant.
Sally Dobson, barrister
