Restrictive covenant –– Breach –– Damages –– Assessment of damages –– Lord Cairns Act –– Restriction prohibiting additional bedrooms to hotel –– Measure of damages –– Relevant factors in assessment of damages
The claimant had the benefit of a restrictive covenant against the construction of any building nearer to its property than a line between points A and B specified on a plan; the line was within the defendant’s property and 7m from the claimant’s boundary. In breach of the covenant, the defendant built a hotel that extended across the A-B line by 3.9m. The construction works commenced in March 1998, and the claimant started proceedings in June 1998 seeking an injunction and damages. At the trial, the parties agreed that the claim was for damages in lieu of an injunction under Lord Cairns Act (Chancery Amendment Act 1858), and that the appropriate measure should be such sum as might reasonably have been demanded by the claimant from the defendant as a quid pro quo for permitting the encroachment. The measure would be such sum as might be arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions without holding out for unreasonable amounts.
Held: Damages were assessed at £375,000. The principal issue was the amount of the benefit or gain that the defendant acquired in being allowed to breach the covenant, and the discount from that sum that would have been applied in negotiations. An incremental approach, by which the defendant’s gain was assessed by considering the benefit of the extra bedrooms and the extra profit
The following cases are referred to in this report.
Attorney-General v Blake [2000] 3 WLR 625; [2000] 4 All ER 385; [2000] 2 All ER (Comm) 487, HL; [1998] Ch 439; [1998] 2 WLR 805; [1998] 1 All ER 833, CA
Bracewell v Appleby [1975] Ch 408; [1975] 2 WLR 282; [1975] 1 All ER 993; [1976] 1 EGLR 119; (1975) 237 EG 731
Gafford v Graham (1999) 77 P&CR 73; [1999] 3 EGLR 75; [1999] 41 EG 159
Jaggard v Sawyer [1995] 1 WLR 269; [1995] 2 All ER 189; [1995] 1 EGLR 146; [1995] 13 EG 132, CA
Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798; [1974] 2 All ER 321; (1973) 27 P&CR 296
This was a hearing of an assessment of damages in a claim by the claimant, Amec Developments Ltd, against the defendant, Jury’s Hotel Management (UK) Ltd.
Jonathan Brock QC (instructed by Halliwell Landau, of Manchester) represented the applicant; John Cherryman (instructed by Hammond Suddards Edge) represented the respondent.
Giving judgment, MR ANTHONY MANN QC said:
Introduction
This is the hearing of an assessment of damages under Lord Cairns Act (Chancery Amendment Act 1858) in respect of a breach of a restrictive covenant affecting a site in Manchester. The site (Jury’s site) is in Great Bridgewater Street, Manchester. The defendant (Jury) has constructed a hotel on that site. To the east is land owned by the defendant (Amec). Jury’s site is affected by a restrictive covenant, given in favour of Amec’s adjoining site (Amec’s site), and imposed by a deed dated 10 November 1989, in the following terms:
[any building on Jury’s site] shall not be constructed on [Jury’s site] in a position nearer to [Amec’s land] than the line between points A and B shown on [a relevant plan].
That line lies several metres on Jury’s side of the boundary (the A-B line). Between about February 1998 and the spring of 1999, Jury constructed a hotel on its site. Unfortunately, in doing so, it built it across the A-B line by an amount that is now agreed to be 3.9m. Amec commenced these proceedings claiming both an injunction and damages, but, as it arrives before me, Amec no longer seeks a judgment, and the parties agree that the claim is for damages in lieu of an injunction under Lord Cairns Act.
History
It is necessary to set out the history in a little more detail. On 13 October 1997 Jury applied for planning permission for a 260-room hotel on the Jury site, at a time when Jury had not actually purchased it. At about the same time, Jury entered into a conditional contract to purchase the site, the relevant condition being the grant of planning permission for a hotel of at least 250 bedrooms. The contract was not in evidence; I was told this by Mr Steve Cunningham, Jury’s project manager. In the following months, Jury’s architects, Consarc Design Group, prepared a design brief for a 260-room hotel. Planning permission for a hotel of that size (ie 260 bedrooms) was granted on 15 January 1998, and the purchase was completed thereafter; the permission expressly stated that it related to a number of drawings, one of which was available to me. Mr Anthony Stevens, of Consarc, said that when the site purchase was being agreed, he had been given various maps and drawings of the site by the vendors, and he was aware that there was a restriction on how close to the eastern boundary of Jury’s site Jury could build, and that any new building should not be built closer than 6m to the line of the former building on the Amec site, in order to conform to what he was told was a “ramp agreement”. This must have been a reference to the deed imposing the restrictive covenant, because this deed, among other provisions, also provided for common access over what was shown on the deed plan to be an intended ramp along the eastern edge of the Jury site. It is not apparent that Jury’s researches, or those of its architects, as to the whereabouts of this line were particularly thorough.
Be that as it may, Consarc complied with their brief and designed an hotel on its present footprint, which, as is now agreed, crosses the A-B line by 3.9m. The design process started in late summer/early autumn 1997. Building started in about February 1998. A contract was entered into with McAleer & Rushe Ltd, building contractor, on a date that was never particularly clear, but the contract specified the building of “an eight storey, 265 bedroom hotel”. The increase from 260 to 265 rooms came about because, in the course of construction, Jury decided, with its architects, to alter the configuration of a few rooms so that, instead of baths, they had showers, thus enabling a few more rooms to be built.
At the beginning of March 1998 it became apparent to Amec, or so it believed, that works to erect a building were being carried out on the wrong side of the A-B line, and that some works had been carried out on the wrong side of the boundary line. Drawings relating to these issues were submitted by Amec to Jury. On 1 April, by which time the footprint of the building was quite clear and some of the foundations had been laid, there was a site meeting between representatives of Amec and Jury, which resulted in a resolution of the trespass issue. There was also discussion of what was, at least in Amec’s eyes, an infringement of the A-B line. A note of the meeting taken on Amec’s side indicates that Jury accepted a transgression of about 1.8m; Mr Stevens said that his recollection was that he appreciated that there had been an infringement, but did not admit it. Mr Cunningham denies that there was this acknowledgment of at least some infringement. The meeting note goes on to record that it was agreed that, by 6 April, Jury would get back to Amec with, inter alia, an indication as to whether there was an agreement as to the encroachment over the A-B line, and an indication of what they proposed to do about it. A subsequent letter on 7 April from Amec puts the extent of the infringement at about 3.4m, and repeats its request for Jury’s proposals for dealing with the matter.
Amec’s letter was addressed to Mr Stephen Surphlis, of McAleer & Rushe. On 9 April Mr Surphlis replied, saying that he was awaiting further advice as to the correct position of the A-B line. He said that it would not be received before the forthcoming Easter holidays and that he would be on holiday until 20 April, but would deal with the matter as quickly as possible thereafter. Unfortunately, nothing seems to have been done thereafter with any degree of promptness. Jury simply carried on building its hotel on its existing plans. It instructed Mr David Powell, a surveyor specialising in boundary disputes, to report. He visited the site on 30 June and reported on 6 July 1998; I have seen his report, but it was not relied upon in evidence before me, because it dealt with the scope of the transgression that is now an agreed matter. However, looking at that report it can be seen that he had by then seen an original, or at least a sufficiently clear, plan showing points A and B. On 23 June 1998 Amec issued the writ in this action, seeking injunctive relief and damages.
Mr Jonathan Brock QC, for Amec, submitted to me that Jury simply carried on building, knowing there was a problem and taking a calculated risk. I should therefore make a finding as to what happened. This is not wholly easy upon the evidence before me, because the evidence was not particularly full, and there has been no disclosure in this action, the parties having agreed that disclosure should be dispensed with. The lack of clarity was no doubt contributed to by the fact that Jury put in evidence as to the factual background very late –– it served witness statements out of time that were very short on the point (so far as they dealt with it at all), and which were only admitted by me on the first day of the hearing. There was some cross-examination, but not a lot, on the point, and no officer or employee of Jury was called to give evidence upon it. I think that the evidence betrays a somewhat cavalier attitude on the part of Jury. Jury knew that there was some sort of building line when it acquired the right to buy the property and prepared its plans. In my view, it failed to investigate the matter properly, and, as a result, designed its building so that it crossed the line. If, as I think it suggests, it had not seen clear enough plans to enable it to identify the A-B line, then it should have taken steps to get hold of those plans. When the problem was identified in March 1998, it was again slow off the mark in obtaining information necessary to identify the scope of the problem. It simply carried on building, hoping that the matter would come out alright. Mr Surphlis said that only poor-quality plans and title deeds were available, and it was only at a meeting on 27 November 1998 that an original of the 1989 deed was made available, but Mr Powell had enough to enable him to see points A and B, and to express a view, in July. Mr Surphlis’s complaint in his witness statement that: “We could not find anything in the written agreement which described how A-B was to be located” is not persuasive; he (or Jury) could, and should, have found out. The 1989 deed referred to the A-B line, so it was obvious that there was one, and that line, on the plan, is clear enough from proper copies. While the nature of some of the copies of the plan obscured at least one of the letters (because of shading on the plan), anyone conscientiously wanting to find out where the line lay on the plan, and then on the ground, could certainly have done so had they made the right efforts.
Course of the proceedings
Although the writ was issued in June 1998 claiming an injunction to restrain further building across the A-B line, an injunction requiring the demolition of the hotel and damages, Amec did not press its action vigorously. There was no application for an interim injunction. A defence was served on 17 July 1998 denying breach of covenant and encroachment, and particulars were served by Amec and Jury on 26 October 1998. The action then went to sleep for a while. The construction of the hotel was continuing and it opened on 1 May 1999. On 22 December 1999 Amec served notice of intention to proceed, and, at the same time, it served affidavits from the witnesses who ultimately gave evidence before me, namely Messrs Matt Crompton (the development director of Amec), Peter Uglow (a chartered accountant), Allan Wilkinson (an architectural technologist) and Malcolm Boyd (a quantity surveyor). Mr Crompton’s affidavit suggested that it was intended to be in support of an application for summary judgment, but no application was made at the time.
On 9 March 2000 Amec served an application stating that it was made under CPR Part 23 and seeking judgment for a sum of over £2.3m. On 18 May 2000 District Judge Gosnell made an order allocating the case to the multi-track, giving Jury permission to amend its defence, giving permission to Amec to use the affidavits already served as expert evidence, and giving Jury permission to serve and use evidence from Mr Powell as an expert, together with a chartered accountant and a chartered surveyor, both to be instructed. In addition, he also ordered (by consent, I am told) that no disclosure was required, a feature that has caused not a little difficulty in the resolution of one or two of the issues in this case.
There were delays on the part of Jury in taking all the steps it was entitled to take under that order, culminating in an “unless” order on 5 July, requiring service of an amended defence by 14 July and service of Jury’s experts’ reports by 1 August. Then, on 14 July 2000, Jury served an amended defence, admitting that its building was “no more than” 3.9m beyond the A-B line. That resulted in an order made by consent on 16 August that Jury should pay Amec “damages in lieu of an injunction to be assessed”, and further extending the time for the service of Jury’s expert evidence to 22 August. On the afternoon of that day, Jury served its expert evidence in the form of a report from Mr Iain Lock, a surveyor whose evidence relates to valuation, and Mr Powell (the boundary expert). They served no accountancy evidence.
Thus, the matter arrives before me as an inquiry into damages under Lord Cairns Act. Before the hearing, the encroachment was agreed to be 3.9m. However, the evidential story is not quite complete. On 27 September 2000 Jury served witness statements of Mr Stevens (an architect), Mr Surphlis (a surveyor, giving evidence of fact) and Mr Cunningham (Jury’s project manager), indicating that it wished to call them to give that evidence. There had been no prior direction for the service of witness statements. The question of whether those witnesses should be called was raised before me. Mr Brock, reluctantly but realistically, recognised that he should not really seek to have the evidence of the latter two excluded so far as it went to the circumstances of the breach, but opposed the introduction of Mr Stevens’ evidence. A lot of the relevant evidence of Mr Stevens went to the question of the size of hotel that Jury wanted, how it might have been constructed on the correct footprint and what would have happened in terms of design, construction and planning if the correct footprint had been identified at the outset. These are matters lying at the heart of the issues I have to decide. Mr Brock claimed a certain amount of prejudice, but did not want an adjournment to deal with it if the evidence was allowed in. I decided to admit the evidence. In the end, some of the difficulty in dealing with Mr Stevens’ evidence on these points comes not so much from the mere lateness with which the evidence was introduced but from the fact that the parties decided to dispense with disclosure, which was a decision taken by both parties. In the circumstances, the evidence of Jury on the issue before me was in a less than wholly satisfactory state.
Relevant measure of damages
Although there were some indications that the prohibition on building over the A-B line was intended to protect the light and amenity of a building to be erected upon the Amec site, Amec does not seek to measure its loss by reference to diminution in value of its land or any other identifiable adverse effect upon it. It and Jury are agreed that the basic approach to this case should be the same as that in a number of cases in which there have been infringements of easements and restrictive covenants but damages have been awarded in lieu of an injunction. That approach is to ascertain “such a sum of money as might reasonably have been demanded by [Amec] from [Jury] as a quid pro quo for [permitting the encroachment]”, to use (and adapt) the formulation of Brightman J in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 at p815D. This basis of assessing damages was approved in Jaggard v Sawyer [1995] 1 WLR 269*, and explained further in Attorney-General v Blake [2000] 3 WLR 625.
* Editor’s note: Also reported at [1995] 1 EGLR 146
It is also common ground that the way of ascertaining what that sum is, is to consider the sum that would have been arrived at in negotiations between the parties had each been making reasonable use of their respective bargaining positions without holding out for unreasonable amounts. This requires, in turn, that the parties have regard to the cost or detriment to the claimant and the benefits to the defendant of the latter’s being allowed to build over the building line. Since, as I have observed above, Amec’s case was not based upon any quantifiable damage to its land, the case has essentially turned upon the latter. In other words, the principal issue in the case was the amount of the benefit that Jury acquired in being allowed to build over the A-B line,
The negotiation analysis is not pursued rigorously to its logical end. I do not have to imagine a negotiation in which the parties have to guess at something that events have in fact made certain. In carrying out my exercise, I can take into account the actual events that have happened, and the actual benefits accrued, as at the date of the trial. In Wrotham Park, Brightman J held at p815H that the starting point for the calculation would have been the plaintiff asking “the developer what profit he expected to make from his operations. With the benefit of foresight [sic] the developer would, in the present case, have said about £50,000, for that is the profit which Parkside concedes it made from the development”. What Brightman J seems to have been doing there was to imagine a negotiation before the infringement, but using actual profits as evidence of what the parties would have contemplated at the time (before they actually accrued). In Attorney-General v Blake, Lord Nicholls expressed himself a little differently when he said at p637H:
In a suitable case damages for breach of contract may be measured by the benefit gained by the wrongdoer from the breach. The defendant must make a reasonable payment in respect of the benefit he has gained.
He seems to have treated Wrotham Park as an example of that; indeed, he described it as “a solitary beacon”. While he does not use the concept of a hypothetical negotiation, I think that Lord Nicholls is, in effect, saying the same thing as Brightman J. While an imaginary negotiation is not necessarily the appropriate supposition in all cases (and not in Blake itself), I think that it is helpful. I therefore propose to consider this case upon the basis of what the evidence shows about the level of gain to Jury, and what a reasonable negotiation would have produced based upon that evidence.
Evidence in relation to damages
The distance between the parties on this point was extremely large, and the debate on the point was complex. The end point of Jury was that the benefit to it was minimal or slight, and should not, in any event, exceed (as I understood Jury’s position at the end) half of a maximum sum of just over £281,000. Amec’s final case, as stated, was that the sum that should be awarded is 50% of a gain to Jury of just over £3m, putting the relevant amount of damages at £1.5m. But, in putting forward these figures, I think that Mr Brock had momentarily forgotten to deduct building costs, which reduces them to £2.319m and £1.159 respectively. Their respective calculations demonstrated a complexity in this case that does not seem to have arisen in any of the reported cases in this area. That complexity comes, first, from trying to find out what would have been possible and likely had the hotel been built within bounds, and, second, from the valuation of the extra benefit that Jury has obtained because it had the benefit of the extra 3.9m. In the account that follows, I have rounded some figures for ease of exposition.
For Amec, Mr Wilkinson, who is an architectural technologist, set about ascertaining a “possible footprint of the hotel had Jury not encroached over the… A/B line”. That footprint took the form of a drawing that showed what the hotel might have been like without an infringement. While his drawing showed a line through a row of rooms, showing the extent to which a line of rooms on the east side encroached over the A-B line, he did not simply assume that the hotel was “cut off’ at that point, leaving part of the rooms hanging in mid-air. He looked at the plan of the hotel, and ascertained which rooms in the middle of the hotel would have to be removed as a sort of slice in order to bring the hotel within its proper limits, keeping the layout of the hotel (and the sizes of the other rooms) the same so far as possible, and concluded that 25 bedrooms would have to be taken out to achieve that; or, to put it another way, Jury had the benefit of an extra 25 rooms as a result of building beyond the A-B line. Those extra rooms were two on the ground floor, four on each of the next five floors and three on the top (6th) floor. Mr Boyd, as a quantity surveyor, then valued the additional cost of building those rooms. He did so without knowing the actual costs incurred by Jury, and upon an incremental basis, that is to say he applied his expertise as a quantity surveyor to say that the cost of building the extra rooms, using then current rates, would have been £730,275 on top of what Jury would have to pay anyway for a hotel without them.
Those findings were then worked into a calculation by Mr Uglow, a chartered accountant. He carried out a discounted cash flow (DCF) calculation to arrive at a figure for the value of the benefit to Jury of those 25 extra rooms. He ascertained the annual net cash flow for 25 extra rooms and valued that as an income stream. Putting the matter shortly, he took an industry room rate and assumed an occupancy rate of 75% (based upon publicly available statistics) to arrive at an annual turnover of £320,346. He then carried out adjustments to provide for extra overheads and extra income so as to arrive at an appropriate overall net extra income figure attributable to having 25 extra rooms, made assumptions as to inflation, calculated a weighted average cost of capital of 11.5%, and arrived at a discount rate of 8.25%. That rate enabled him to value the income stream, so that, after then allowing for the building costs calculated by Mr Boyd, he arrived at a value of £2,344,143 for the 25 extra rooms. In fact, during the course of the hearing, he adjusted his discount rate to 9%, and the experts agreed an incremental profit figure for the 25 rooms that, applying the methodology and that discount rate, gave rise to a capital gain at the end of the calculation of £3,049,000 before development costs, or £2.319m after those costs. If that seems like a lot of money (which it does), then Mr Brock’s riposte would doubtless include the fact that the encroachment has increased the footprint of the hotel by about 11 %. He says that the “turnkey” value of the hotel (as shown in the accounts) is over £17.3m, and 11% of that is over £1.9m. That, he says, is a sort of cross-check.
Mr Lock’s methodology is different. He is a chartered surveyor and a valuer. He was asked to value the 265-room hotel and a 240-room hotel on the same site. His starting point was therefore the 265-room hotel. He started by determining an operating profit based upon the profits of the actual hotel as constructed and operating and applying a years’ purchase multiplier of eight. He says that this multiplier is an appropriate figure, bearing in mind the market and market transactions, but he did not produce any comparables. I was invited to accept this as being the correct multiplier upon the basis of his expertise in the market. This gave him a capital figure of £17.480m*. He then adjusted downwards by £1.092m, to take into account lesser profits in the first year, and arrived at a “turnkey value” of £16.388m. He then set about doing the same thing, but assuming a 240-room hotel, giving him a lower “turnkey value” of £ 14.843m. In order to arrive at the latter, he took an operating profit that was calculated as being pro rata to the profit of the existing hotel (ie it is 240/265ths of it). Obviously, there is a difference between the two (about £1.545m, according to calculations agreed between the experts), but that is not the gain to Jury, because one has to take off the cost of building an extra 25 rooms. He arrived at those costs by taking the development costs that he had been given by his client of £13.4m (this amount is disputed by Amec) and dividing it by 265, to give a figure per room (£50,566), which he then multiplied by 25 to give the cost of building the extra rooms, namely £1.264m. Deducting £1.264m from £1.545m gave a figure of about £281,000 for the value of the extra 25 rooms.
* Editor’s note: Figures taken from agreed statement produced by experts before the trial
In addition, Mr Stevens gave evidence as to what sort of hotel could, and would, have been built had Jury not gone over the A-B line. He created a drawing supporting his evidence that, had he been asked to do so, he could have designed a satisfactory hotel containing more than 270 rooms on the correct footprint. Mr Surphlis gave some evidence of the cost of building the hotel, breaking down what is said to be the contract value into various constituent parts. Mr Middleton (company secretary) also gave evidence about costs. Mr Cunningham, the project manager, said that if he had known that Jury’s plans involved building
What gain in practical terms did Jury get?
It is implicit in Amec’s case that if the extra 3.9m had not been utilised, Jury would have built only a 240-room hotel. While Mr Lock has carried out calculations on the footing that the 265- and 240-room hotels are the only two relevant alternatives, Jury challenges the assumption that only a 240-room hotel would have been available to it if it had kept to the right side of the A-B line. As I have said, Mr Stevens gave evidence that he could have designed a 260-room hotel, or one with even more than 270 rooms, on the reduced footprint (ie without the extra 3.9m) had he been asked to do so, and suggested that there was no real problem about that. As Mr Brock pointed out, it was not as simple as that. I am satisfied that a hotel of more than 240 rooms could have been designed as at least a drawing-board exercise, and that, as a building, such a design could have been built. However, this alternative hotel would have had different room sizes, would have had a different design, and would have had a smaller central access area (used for limited parking and for access for service vehicles). No evidence was given by any officer of Jury as to what Jury’s attitude would have been to those design changes, and the evidence that the revised service area would be acceptable was not particularly good. On the west side of the site there was a right of way that had to be preserved. That would have had to have been built over above ground-floor level. No evidence was given as to the likely attitude to that. Furthermore, some aspects of alternative designs would have required a modification of the planning permission –– in particular, one way of getting extra rooms out of the proper footprint was to alter the massing (bulk) of the top floor of the building by removing, to some extent at least, the amount by which that top floor was set back from the edge of the building as constituted by the 5th floor. Mr Stevens asserted in cross-examination that there would have been no planning problems with that, but the point was not properly tested, not least because of the late point of time at which Mr Stevens produced his witness statement (which did not, in any event, allude to planning or the attitude of Jury), and I do not consider that the point can be considered a straightforward one. Mr Stevens’ evidence did not dispel these difficulties, and (as I have said) Jury did not call other witnesses to deal with them. I was left with a very significant amount of uncertainty as to the extent to which the alternative designs of hotel would have been acceptable to Jury and the planning authority, and what number of rooms, if any, greater than 240 would have emerged from the design process.
The point is, of course, a central one because Amec’s case is that Jury got a real and valuable gain from its transgression in the form of 25 extra rooms that would not otherwise have been available to it. If I had to make a positive finding as to what extra rooms, if any, Jury thereby obtained, I would, of course, do so, although I have to say that the evidence was in an unsatisfactory case on this point. Doing the best I can, I find that Jury could, if it were required to do so, have got some rooms in excess of 240 out of the proper footprint of the hotel, but I am not so satisfied that they could have got as many as 260. However, bearing in mind the nature of the exercise in this case, which is to come up with an assessment of what the parties would have agreed in negotiation, I do not think that I need to find one way or another whether 265 rooms, or 260, or some lesser number would have been built upon the correct footprint. In a case like this, the number would form part of the negotiation, in the course of which Jury would be able to put forward a case whose compelling nature decreases as the number gets larger.
Financial gain to Jury
It is now necessary to consider the correct approach to assessing the financial gain to Jury. Having declined to find in favour of either 240 or 265 rooms, I have, of course, not made a finding that can be directly applied to the experts’ evidence, since those are the alternatives that they address directly. However, in considering the valuation methodologies, one has to consider them upon the basis of assumptions that make them intelligible. I shall therefore approach this section of the judgment on the footing that the two alternatives that have to be considered are the 240- and 265-room hotels, with the former being all that could be built without the extra 3.9m.
The difference between the views of the experts is large; indeed, it is surprisingly large. In an agreed statement signed shortly before the trial, they said they were agreed that the choice of approach (pro rata gain v incremental gain) depends upon which end you start from. If you assume a 240-room hotel, to which one has the opportunity of adding another 25 rooms, as per Mr Wilkinson’s exercise, then the incremental approach (Mr Uglow’s) is the correct one. The assumption of a 240-room hotel is an hotel as planned, not as built, contrary (I think) to the interpretation put upon this agreement by Mr John Cherryman QC, for the defendant. If one assumes a 265-room hotel as built, and seeks to ascertain the lesser value of a 240-room hotel, then the pro rata approach is said to be appropriate.
I have to say that I do not understand why this difference of approach should of itself yield such hugely different results. At the end of the day, each approach sets out to value a difference in cash flows, allowing for the costs of the extra rooms in an appropriate way. The incremental approach proceeds to value the difference directly; the pro rata approach values the difference by ascertaining two values and subtracting one from the other. There ought not to be a huge difference between them. At one stage, I thought that the difference might lie in the choice of discount rates and multipliers, but I do not think that that is right. As part of the agreed statement, the experts agreed a calculation using Mr Lock’s pro rata method, but using a discount rate of nine rather than a multiplier. While the figures thus produced were greater than Mr Lock’s own figures by a few hundred thousand pounds, they were not nearly as large as the difference between the figures in the agreed report.
The difference lies, I think, elsewhere. Mr Lock’s technique arrives at a figure for operating profit of 45% of the turnover of the hotel, that turnover being £4.8m. That profit margin, which is agreed between the experts, takes into account all of the expenses of the hotel that it is agreed should be taken into account in ascertaining the operating profit of an hotel. When considering the incremental approach, the experts are agreed that the profit generated from the extra rooms should be taken to be 70% of turnover of those rooms, and they arrive at an agreed profit figure of £320,000 for the 25 rooms, by taking the hotel’s actual turnover of £4.8m, taking 25/265ths of it (thus apportioning it directly to each of the extra rooms) and taking 70% of the resulting amount as being the appropriate extra profit from those rooms. So they take 45% as being the profit margin of the hotel, and 70% as being the profit margin of extra rooms given a pre-existing (planned) hotel. The 30% of expenditure inherent in this latter figure seems to be the costs of sales, and an element of other operating costs, but not a pro rata proportion of all the other operating expenses of the hotel, upon the assumption (that I am sure is right) that increasing the number of rooms does not result in a linear increase in all of the other expenses –– for example, it is not necessary to have a proportionate increase in all staff. It is the difference between the 45% and the 70% that makes the difference in the end result, as I think Mr Lock observed in evidence.
In the light of that, I remind myself of the exercise that has to be performed at this stage of the reasoning, which is to try to assess the gain that could be said to have accrued to Jury. It seems to me that, as a matter of principle, the incremental approach is the right one to adopt to ascertain that gain. One starts by assuming that Jury ought to have been building within the A-B line, and, if it had done that, it would have had no more than a 240-room hotel (on the present hypothesis). Jury has in fact (on the hypothesis adopted for the purposes of the valuation exercises) had the opportunity of building and operating another 25 rooms. The additional operating expense involved is not necessarily directly proportional to the increased turnover. It has the benefit of an increased profit by (figuratively speaking) bolting extra rooms onto its otherwise intended facility. It is that extra profit (allowing for the expenses of creating those rooms, operating them and capitalising appropriately) that is Jury’s gain for these purposes.
Having reached that conclusion, I have wondered how it can be reconciled with the figures arising from the pro rata approach. I was concerned that both experts had agreed that the pro rata approach was the appropriate one, if one started with the existing hotel and imagined a lesser, 240-room hotel, and that their figures threw up a completely different gain figure. I do not lightly disagree with the joint view of experts, particularly in a matter as complex as this one, but it may well be that the pro rata approach requires a little tweaking to make it reflect the fact that adding extra rooms does not require a proportionate increase in operating expenditure. There might be two ways of carrying out a necessary adjustment. Either one has to question whether it is right to apply the same multiplier to a 240-room hotel as to a 265-room hotel when using Mr Lock’s technique, or (more likely) one has to adjust the profit margins to some extent to increase the profitability of the larger hotel. I make no finding about that, but that gives me some comfort in my conclusion to know that it might not be too far from a different form of pro rata calculation.
There were two other significant differences between the experts:
(a) Construction costs. Once the incremental approach is taken as the correct starting point, then I consider that Mr Boyd’s method of calculation has to follow.
(b) Yields and discount factors. Despite the fact that the experts used different concepts, each of which reflects yield, it is apparent that they were working off different yields. I think that the views of both experts are open to question in this respect. Mr Uglow’s weighted average cost of capital is open to criticism as being too low because of the limited time-frame of his indexes. Mr Lock’s multiplier of eight is open to criticism as being unjustified by comparables and as being based merely upon professional judgment. I would not wish to belittle Mr Lock’s evidence in any way –– Mr Lock (as did Mr Uglow) clearly gave honest, careful and measured evidence before me –– but it would have been more satisfactory had that crucial element in his calculations been backed up by something else. As Mr Uglow pointed out, the number is in the middle of what Mr Lock put as an appropriate range of six to 10. One does not have to move it very far up the range to bring his figures much closer to Mr Uglow’s, particularly if Mr Uglow’s discount rate is adjusted to reflect a different weighted average cost of capital.
In forming these views, I do not leave out of account a second basis upon which Mr Lock has arrived at his figures, namely his calculation based upon land values of other hotels. He got details of two other land acquisitions by Jury, took the site purchase cost and divided it by the number of rooms built to arrive at a “site cost per room” of £9,821 for one site and £9,583 for the other. He then used that to assess the Manchester land value as being £9,600 per room. This method was not investigated in cross-examination. Even without that, I can see that there are a number of unknowns within the other transactions, and it is something of an over-simplification to say that what is in issue in the present case is the land value of the Manchester site. I did not find it helpful.
I therefore find that the incremental approach is the correct way of approaching an assessment of the likely gain in this case. This is the approach that would be adopted for the basis of the hypothetical negotiations.
Relevant test revisited and the application of the evidence to the test
I have referred on many occasions to hypothetical negotiations. In adopting that analysis it should not be thought that I am inappropriately transfixed by that concept. The parties accepted that it is a proper approach to this matter –– it is an aid at arriving at the sort of reasonable figure that one side would pay and the other side would expect from a release of the building-line covenant. It is particularly useful because it enables one to give effect to the various certainties and uncertainties, and to the various pros and cons, that are germane in any such assessment. Unlike Attorney-General v Blake (which involved an unauthorised disclosure of confidential information by a Crown servant), the present case is one in which the court is expected to divide up the spoils in the way in which the parties would have divided them had they agreed on the matter. Of course, there is no reason to suppose that, upon the facts, the parties would have agreed at all, and, to that extent, the exercise is an artificial one, but that does not mean it should not be performed. I therefore continue to consider the factors that would have weighed in the hypothetical negotiations.
One of the questions that arose in the trial was the assumed date of these negotiations. I started that particular hare running myself, wondering if they should not be treated as taking place at the date upon which Amec first became aware of the infringement and the availability of an injunction, on the footing that the damages were in lieu of that injunction. In this case, that date would be March or April 1998. If that were right, then it might be arguable that Jury would be inclined to pay more at that stage in order to avoid having to redo the construction works that had already taken place, redesign the hotel and replan the future construction works. At first, Mr Cherryman and Mr Brock both sought to head me off from that notion, suggesting that one did not deem the negotiations to be carried on at any particular date –– one just imagined a negotiation without the added element of the undoing of works. However, in his final written submissions, Mr Cherryman broke ranks and suggested that, while in a normal case a date before the commencement of building operations would be appropriate, upon the facts of this case one should take 1 May 1999 as being the date of opening of the hotel. He made that submission on the footing that both of the experts valued the hotel at that date, so that there was an implied common assumption that that was the correct date, as a result of which that date had to be treated as the date of negotiations by reason of an estoppel by convention. That, he said, meant that, in effect, no damages would be payable, because, by that date, the construction of the hotel meant that no injunction would be granted, so that Amec’s bargaining power was nil. Since it was nil, so were the damages: see Jaggard v Sawyer at p291. I reject this argument without hesitation for a number of reasons, including the following. First, the experts did not approach this case on any implied assumption that a particular valuation date was correct. They approached their joint deliberations on the footing that, in certain circumstances, certain principles would be applicable and a given set of figures would operate. That is nothing like the sort of implied assumption that Mr Cherryman refers to. Second, the notion that parties can be estopped by convention during the course of litigation by the joint deliberations, or shared hypotheses, of experts who have no power to bind them is a rather strange one. Third, the non-availability of an injunction when the trial takes place is the reason for awarding damages, not a bar on awarding them.
I think that, at least in this case, the correct date for imagining the negotiation is a date before the building works were started –– in other words, counsel were right to try to head me off in the first place. The authorities, while not dealing with this point in terms, are in my view consistent with this approach. In Wrotham Park, Brightman J calculated damages by reference to what the parties would perceive the likely gain as being, which presupposes that there had been no gain and no development at the time of the assessment, and said:
I think that in a case such as the present a landowner faced with a request from a developer which, it must be assumed, he feels reluctantly obliged to grant, would have first asked the developer what profit he expected to make from his operations.
(Judge’s emphasis.) This analysis is also implicit in the way Graham J approached the matter in Bracewell v Appleby [1975] Ch 408*. While Lord Nicholls’ speech in Attorney-General v Blake allows one to take into account what has actually happened, in terms of assessing the actual gain, I do not think that that shifts the date of the hypothetical negotiations. It merely makes sure that the hypothetical negotiations have at least one foot in the realms of reality and limits the possibility of over- or under-compensation. The position might be different in other cases –– for example, where one party conceals its acts from the other so as to steal a march and postpone the date at which that other realises that his rights are being infringed. I can see a case for
* Editor’s note: Also reported at [1996] 1 EGLR 119
I should also deal with the question of conduct. There was some debate as to the extent to which conduct is, or can be, relevant in these cases. Amec says that it is not; that I should just get on with the assessment without regard to the extent to which Jury knowingly took a risk; and there is nothing in the conduct of Amec that in any way affects the damages payable. Jury contends otherwise, saying that the conduct of Amec, in allowing a situation to arise in which we arrive at a trial with the hotel built and no possibility of an injunction, means that Amec have lost the value from its right (that value being the right to an injunction). Again, I agree with Amec. Upon the facts of this case, I consider that the conduct of the parties is irrelevant. I should also say that if it were relevant, it would be a factor telling against Jury, not Amec. I have set out above the circumstances in which the A-B line was crossed. I think that Jury was at fault in the way that I have referred to there. However, I do not think that the damages fall to be adjusted in that respect, because Jury, while negligent, if not cavalier, was still innocent. The only relevant factor one takes from that conduct is an inference that Jury was keen to have this hotel (and not another one) built.
One other aspect of conduct should be mentioned. Jury, through Miss Harrison in her speech and Mr Cherryman in interlocutory observations and in cross-examination, suggested that Amec’s entitlement to invoke equity in this case was tainted by an absence of clean hands. Mr Crompton’s affidavit dealt with title, and he described Amec’s title briefly. He was criticised by Mr Cherryman for not disclosing certain dealings with Amec’s title, and it was suggested that he had not done so in order to increase the chances of getting summary judgment. Those dealings were not, in the end, relied upon by Mr Cherryman as affecting the damages in any way, and although the clean hands point was mentioned in the final speech, it was not pressed hard. I have no hesitation in rejecting the point. Mr Crompton was not guilty of any impropriety whatsoever, and I completely reject any suggestion to the contrary.
I am now in a position to consider the effect of the hypothetical negotiation. It would, in my view, include the following features, although in setting them out I should not be taken as leaving other matters out of consideration:
(a) On the one side, Amec is a willing seller, but only at a proper price.
(b) On the other side, Jury is a willing buyer, wanting to acquire the right to cross the A-B line and prepared to pay a proper price, but not a large ransom.
(c) In such a negotiation, the parties would proceed upon common ground, put forward their best points and take into account the other side’s best points.
(d) The negotiations are deemed to take place before any transgression occurs.
(e) The basis of the negotiation would be a split of the perceived gain to Jury. That gain would not be obvious, and would be the subject of debate within the sort of variables that I have described above.
(f) The parties are to be taken to know the hotel’s actual figures for the purposes of assessing gain.
(g) In this case, the extent to which Jury would have been able to build more than 240 rooms if it had to confine its hotel to the proper footprint is not clear. I have already held that it could be able to get a small number more, but, beyond that, the picture is much more murky, and I treat the negotiation as taking place with no clearer a picture than was presented to me. The parties would have, at those negotiations, the case that I have had, which demonstrates that Jury could design a hotel of more than 260 or 265 rooms on the proper footprint, but does not clearly demonstrate that such a hotel would, or could, be built. One should not assume that it would; it has not even been proved clearly enough that Jury would have found Mr Stevens’ design (or any particular alternative design) acceptable. Jury would be able to make a case for extracting some extra rooms from the proper footprint, that case declining in strength as the number rose. This factor is one of the unresolvable points that would be canvassed in the negotiation with no final conclusion being reached upon it in terms of deciding an actual number, but it can be said that Jury would not advance a completely convincing case for 265 rooms.
(h) The numbers arising from these calculations are also debatable, because of a genuine difference of view as to 16 discount factors and yields.
(i) Amec cannot pray in aid any damage to its own property. It is simply trying to extract a benefit from its right to prevent Jury from earning some more money from a larger hotel.
(j) The additional land that Jury is seeking is not just a few inches –– it is almost 4m wide, and, in area, is 11% of the area of the hotel. That is a significant amount of extra building.
(k) While militating against any sort of de minimis figure (at least), the preceding factor also imposes a restraint on very high figures. For example, it shows why Jury would never pay (and Amec could never expect) Mr Uglow’s £2.3m figure. Mr Uglow may be able to get there as a matter of logic, but, as a matter of common sense, Jury would never pay a sum approaching £2.3m for the right to build upon a 4m strip of land when they had paid only £2.65m for the whole plot in the first place.
(l) Jury’s costs figures, while perhaps generally in the right area, have not been proved as cleanly and as clearly as one would expect.
(m) Jury would be fairly keen, although not overwhelmingly anxious, to have the right to build over the A-B line.
(n) As important as any of the above factors is this. In any negotiation, science and rationality gets one only so far. At the end of the day, the deal has to feel right. Some of the numbers that have been suggested by Amec in the course of this litigation, while perhaps intellectually justifiable, seem to me to be way over the top of what Jury would be prepared to pay, when set in the context of the rest of the cost of this hotel.
Conclusion
As was pointed out by Nourse LJ in Gafford v Graham [1999] 3 EGLR 75 at p80L, the sort of damages questions involved in cases like the present are matters of judgment that are incapable of strict rational and logical exposition from beginning to end. I have sought to set out the principal factors that have operated in my mind and which would have operated in the minds of the parties to the hypothetical negotiation. I have in mind that the principal point is how much of Jury’s gain should be paid to Amec, while at the same time saying that is unnecessary to put a definite figure on the gain in this case, although I can say that the parties would be looking at a gain that is nearer Mr Lock’s figures than Mr Uglow’s. At the end of the day, I have to assess a figure for damages, which I do, at £375,000.
