Professional negligence – Surveyor – Appellant surveyor retained to advise respondents on proposed investment in factory outlet centre through enterprise zone property unit trust – Investment proving unsuccessful – Appellants held liable for negligently overstating value and commercial prospects of centre – Whether judge having sufficient evidence on which to find appellant’s valuation negligent – Whether damages to be discounted to take into account tax relief obtained by investors on project – Appeal allowed in part
The respondents 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 centre (FOC). The purpose of the trust was to enable 480 individual investors to participate in the investment; as well as participating in any profit, the investors benefited from substantial tax allowances aimed at encouraging investment in enterprise zones. The respondents retained the appellant, a firm of chartered surveyors and property consultants, to advise on the acquisition. The appellant valued the property at £62.85m, including more than £21.547m in enterprise zone tax allowances. The first respondent proceeded to enter into a purchase and development agreement under which it acquired a 155-year lease of the site and paid a total consideration of £62.85m.
The investment ultimately proved unsuccessful. The respondents claimed damages from the appellant for negligently overstating the value of the property. Their 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 the FOC’s likely ability to attract consumer spend was crucial to its valuation and the appellant should therefore have obtained a “CACI–style” retail analysis report. They submitted their own CACI-style report and their expert gave evidence by reference to it.
Allowing the claim in the court below, the judge found that the appellant’s valuation exercise had been defective in various respects and that it had been negligent in undertaking the valuation without obtaining a CACI report. He found that the report advanced by the respondents was flawed but that the evidence of their expert was none the less of assistance in reaching a proper valuation, which he found to be £44.8m with the benefit of tax allowances. He awarded damages of £18.05m for diminution in value, representing the difference between the appellant’s valuation and the actual value. He declined to reduce the damages to take account of the tax relief that the investors had received: see [2011] EWHC 2336 (Comm); [2011] PLSCS 225.
The appellant appealed. It contended that: (i) the judge should have awarded only nominal damages, since, once he had found the respondents’ CACI report to be defective, there was no basis on which he could conclude that the appellant’s valuation was wrong or that any particular figure for loss could be established; and (ii) the respondents should have been required to give credit for the tax benefits that their investors had received.
Held: The appeal was allowed in part.
(1) (Lloyd LJ dissenting): The appeal court should be slow to interfere with the judge’s findings on issues of fact in relation to a valuation exercise, where the judge had heard the evidence and seen the witnesses. The judge had been entitled to find that the respondents’ expert was an impressive witness whose ability to form a view was based on experience and expertise in the market in question, rather than on unthinking reliance on the respondents’ discredited CACI report. The “collapse” of that report did not mean that there was no proper basis on which the judge could reach a conclusion on the quantum of loss. On the issue of quantum, the judge was not bound by expert evidence and was not confined to the figures advanced by the experts, provided he had a reasoned and rational basis for his decision. That was especially the case in matters of valuation where the figure arrived at by the judge might well lie somewhere between those advanced by the rival experts. A judge would sometimes have to do the best he could on the basis of the evidence that he had heard, even though that evidence was likely to be imperfect: Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch) applied. The judge had been entitled to conclude that the appellant had been negligent in undertaking the valuation and giving advice without obtaining a CACI report or equivalent. It did not follow, as a matter of principle or logic, that the discrediting of the respondents’ CACI report prevented the judge from reaching a conclusion on the quantum of damages for which the appellant was liable, so long as there remained a rational and evidential basis on which the judge, doing his best, could determine a figure for damages. It would be a cause for regret if, despite obvious serial breaches of duty on the part of the appellant, the court were driven to conclude that no loss had been established. The judge had been correct to reject a mechanistic, arithmetical approach in favour of “standing back” and seeing what looked reasonable.
(2) (Lloyd LJ concurring): The judge had erred in refusing to take tax relief into account when assessing damages. The award of damages should place the injured parties, so far as possible, in the same position as if the wrong had not occurred; the court should therefore ask what damage the claimants had really suffered from the breach: Duke of Westminster v Swinton [1948] 1 KB 524; (1948) 151 EG 65 applied. In determining what damage investors had really suffered, it was necessary to look at the market value of the whole that was bought. Adopting that approach, it would be unreal to ignore the fact that, on making the investment, the investors immediately became entitled to tax credits, which, in practical terms, reduced the purchase price; put another way, the “whole” that was bought included the tax relief. The incidence of taxation could be relevant in calculating damages: British Transport Commission v Gourley [1956] AC 185 applied. Although the investment was not entirely tax-driven, and the investors were concerned that the venture should be commercially profitable, tax breaks were none the less integral to the investment. Such tax breaks were designed to encourage investment and underlay the concept of enterprise zones. It would therefore be unreal to leave tax considerations out of account in determining the losses really suffered by the investors. Tax should be brought into both sides of the equation by deducting tax relief from both the appellant’s valuation of £62.85 and the judge’s valuation of £44.8m. The proper award of damages on that basis was £11.861m.
It made no difference to that conclusion that the tax benefits accrued to the individual investors not to the respondents. The trust existed only in order to purchase the property on behalf of the investors and the statutory scheme governing EZPUTS enabled the beneficiaries of the trust to take advantage of the special tax provisions rather than confining those benefits to the trust itself. There was therefore “transparency” between the investors and the trust, so that, for the purposes of the tax credits, the interests of the trust and the investors were synonymous. Just as investors obtained the benefit of the tax credits on the purchase of the property by the trust, so that tax relief should be taken into account in assessing the damages recoverable by the trust.
Roger Stewart QC and Sian Mirchandani (instructed by Berrymans Lace Mawer LLP) appeared for the appellant; Sue Carr QC and Graham Chapman (instructed by Enyo Law LLP) appeared for the respondents.
Sally Dobson, barrister
