Vendor and purchaser — Contract for the sale of land — Damages — Vendors’ liability under section 2 of Misrepresentation Act 1967 having been established at an earlier hearing subject to proof of damage*, the present hearing was concerned to determine what, if any, damage was suffered by the purchasers — If damage was established, there would need to be a further hearing to determine third party liability between the vendors and their solicitors**
from section 2(1) of the 1967 Act that the correct measure of damages would be
the measure appropriate to the tort of deceit, although the representations
were in fact innocent — The misrepresentation alleged, and found by Mervyn Davies
J to be proved, was that certain deeds which disclosed the nature and extent of
rights to light and air enjoyed by the proprietors of an adjoining property
were not available for inspection — The neighbouring proprietors’ rights to
light and air were not revealed to the plaintiffs until after they had started
on the redevelopment of the site which they had purchased from the defendants —
In consequence the redevelopment scheme had to be partially redesigned and its
completion was delayed — The judgment of Morritt J describes in detail the
changes required to satisfy the neighbouring proprietors and the extent of the
delay involved
plaintiffs’ claim for damages as a result of these changes was framed on three
alternative bases, described as the Developer’s Loss Basis, the Market Value
Basis and the Hybrid Claim — Morritt J’s judgment discusses each of these
bases, and the criticism of them, in great detail and with the assistance of a
number of authorities — This part of the judgment is of considerable interest
to valuers — The judge emphasised the serious difficulty in making residual
valuations of prospective developments, because so much is based on assumption;
a small variation in one of the assumptions, eg as to the rent at which a
completed development can be let, can produce an enormous difference in the
final result
after rejecting a complaint that the plaintiffs failed in their duty to
mitigate damage, the judge awarded them damages in the sum of £151,500
*Editor’s note: Judgment of Mervyn Davies
J on November 20 1987: see p 192 ante.
**See further judgment of Morritt J on
March 21 1989 at p 205 post.
The following
cases are referred to in this report.
Andre & Cte SA v Ets Michel Blanc &
Fils [1977] 2 Lloyd’s Rep 166
Ark wright v Newbold (1881) 17 ChD 301; 50 LJ
Ch 372; 44 LT 393; 29 WR 455
Banco de Portugal v Waterlow & Sons [1932]
AC 452
Broome v Speak [1903] 1 Ch 586; [1904-7]
All ER Rep Ext 1526; 72 LJ Ch 215; 88 LT 580, CA
Cackett v Keswick [1902] 2 Ch 456
Cooper v Tamms [1988] 1 EGLR 257
County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987]
1 WLR 916; [1987] 1 All ER 289, [1986] 2 EGLR 246, CA
Darbyshire v Warran [1963] 1 WLR 1067
Davidson v Tulloch (1860) 3 Macq Rep 783,
HL
Doyley Olby (Ironmongers) Ltd [1969] 2 QB 158; [1969] 2 WLR
673; [1969] 2 All ER 119, CA
Glaster v Rolls (1889) 42 ChD 436; 58 LJ
Ch 820; 62 LT 133; 38 WR 113; 5TLR 691, CA
Hornal v Neuberger Products Ltd [1957] 1
QB 247; [1956] 3 WLR 1034; [1956] 3 All ER 970, CA
Lacovides v Constantinou The Times, October
23 1986
Livingstone v Rawyards Coal Co (1880) 5 App
Cas 25, HL
McAuley v London Transport Executive [1957]
2 Lloyds Rep 500, CA
McConnell v Wright [1903] 1 Ch 546
Peek v Derry (1887) Ch D 541
Sharneyford Supplies Ltd v Edge [1986] Ch 128;
[1985] 3 WLR 1; [1985] 1 All ER 976 (Mervyn Davies J); [1987] Ch 305; [1987] 2
WLR 363; [1987] 1 All ER 588, CA
Shepheard v Broome [1904] AC 342
Smith Kline & French Laboratories Ltd
v Long [1989]
1 WLR 1; [1988] 3 All ER 887, CA
Stevens v Hoare (1904) 20 TLR 407
Twycross v Grant (1877) 2 CPD 469; 46 LJQB
636; 36 LT 812; 25 WR 701
Waddell v Blockey (1879) 4 QBD 678; 49
LJQB 517; 41 LT 458, CA
Watts v Spence [1976] Ch 165; [1975] 2
WLR 1039; [1975] 2 All ER 528; (1975) 29 P&CR 501
In this, the
second stage of the proceedings brought by the plaintiffs, CEMP Properties (UK)
Ltd, against the defendants, Dentsply Research & Development Corporation,
Morritt J had to quantify the damages caused to the plaintiffs by the
misrepresentations which Mervyn Davies J in his judgment on November 20 1987
had held to have been proved. Although the issue as to an indemnity between the
defendants and their solicitors, Denton Hall & Burgin, was postponed to a
later third party hearing, the solicitors were represented at the present
hearing.
Michael
Lyndon-Stanford QC and Stephen Bickford Smith (instructed by Titmuss Sainer
& Webb) appeared on behalf of the plaintiffs; Alan Sebestyen (instructed by
Slaughter & May) represented the defendants; Alan Steinfeld QC (instructed
by Reynolds Porter Chamberlain) represented Denton Hall & Burgin.
Giving
judgment, MORRITT J said: In this action, the plaintiff, Cemp Properties (UK)
Ltd (‘Cemp’) claimed damages for negligence and under the Misrepresentation Act
1967 in respect of misrepresentations made by the defendant, Dentsply Research
& Development Corporation (‘R & D’), inducing Cemp to contract to
purchase a property from R & D.
The misrepresentations
alleged were that deeds which disclosed the nature and extent of rights to
light and air enjoyed by the owners of an adjoining property were not available
for inspection. The contract was dated February 15 1980, whereby Cemp agreed to
purchase a property in Soho known as Amalco House from R & D for £2.1m. The
contract was completed on May 15 1980. The neighbouring owners’ rights to light
and air were revealed to Cemp in October 1980 by which time Cemp had started on
the redevelopment of the site it had purchased from R & D. In consequence
the development scheme had to be partially redesigned and its completion was
delayed. The writ was issued on July 30 1983.
By an order
made on March 19 1986 it was ordered that the trial be split into two parts; the
first part being confined to liability, the second part to deal with all issues
as to damages. The first part was tried by Mervyn Davies J in November 1987. On
November 20 1987 he declared and ordered that:
(a) The plaintiff in entering into the contract
dated February 15 1980 and completing the same relied on the representations
pleaded at paragraph 4 (2)(b) of the Re-Re Amended Statement of claim.
(b) The said representations were false.
(c) In the event that the plaintiff establishes
that it has suffered any loss or damage as a result of the said
misrepresentation the defendant is liable for the same pursuant to section 2(1)
of The Misrepresentation Act 1967.
Originally
Cemp joined as the second defendant the solicitors acting for R & D on the
sale, namely, Denton Hall & Burgin (‘DHB’). On November 19 1984 R & D
served a contribution notice on DHB. During the course of the trial before him,
Mervyn Davies J by an order dated November 9 1987 gave the plaintiff leave to
discontinue the action against DHB but ordered that they should remain in the
action as third party and that the third party proceedings should be treated as
having been commenced by the contribution notice. By his order made on November
20 1987 Mervyn Davies J also ordered that the trial of issues between R & D
and DHB should take place after the trial as to questions of damages and
interest between Cemp and R & D.
Thus I am now
concerned with the question of what (if any) damages and interest R & D
should pay to Cemp in consequence of the liability which, subject to the
question of damage, Mervyn Davies J has declared to exist. Depending on the
answer to that question it will then be necessary to have a trial of the third
party proceedings.
The property
sold by R & D to Cemp was in one block fronting on to Broadwick Street,
Poland Street and Livonia Street in Soho, London. The buildings on the site can
be divided into three elements. To the east, known as 26-28 Broadwick Street,
was a building comprising a basement, ground and six upper floors which had
been completed in 1966. Adjoining it to the west and integrated with it by
various openings in the party wall was a building erected between 1910 and
1935. This building was known as 30-40 Broadwick Street and, because it had a
frontage on to Poland Street, 1A Poland Street. To the north of that part known
as 1A Poland Street was a single-storey garage with a sharply pitched roof.
This garage was built on to the flank wall of the property adjoining to the
north known as 1-5 Poland Street. It is the rights to light and air to that
flank wall which have given rise to the disputes in this case.
Prior to
construction of the garage there were five apertures in the flank wall. There
were windows at the second-and first-storey levels which have been referred to
as A and B respectively. At ground-floor level there were two windows referred
to as C and E and a ventilator referred to as D.
In 1928 the
owners of 1-5 Poland Street had let the ground floor and basement thereof to
Amalgamated Dental Co Ltd, who owned the site of the garage. Amalgamated Dental
Co Ltd is a predecessor in title of and now a company associated with R &
D. The lease was
into an agreement with the lessors for that purpose. The agreement made in June
1928 recited that in the flank wall:
There are windows which overlook the land
of the lessee in respect of which the right of easement of light and air over
the said land has been acquired or exists . . .
and then reference is made to windows A,
B, C and E and the ventilator D. The operative part of the agreement provided
that it should remain in force until the lease should expire and authorised the
lessee to erect the garage in accordance with plans annexed thereto ‘and for
that purpose to block up and close’ windows C, E and the ventilator D. Clause 3
provided as follows:
On the determination of the lease the
lessees will reopen the said windows C, E and the ventilator D, making good in
a substantial manner to the satisfaction of the lessors’ surveyor all damage to
the lessors’ premises occasioned thereby and they hereby agree that no right or
easement of light or air over the lessees’ said premises shall have been
surrendered destroyed or varied in any shape or form by the lessors or anyone
claiming through or under them by reason of this agreement but that on the
determination of this agreement the lessors’ rights shall remain and be of full
effect.
The garage was
duly erected and apertures C, D and E were blocked up.
In 1934
Amalgamated Dental Co Ltd was the freehold owner of the land immediately to the
south of the garage and was in the process of redeveloping that site. Taking an
angle of 45 degrees from the bottom sill of windows B, C and E, the proposed
redevelopment would have infringed the rights to light to those windows.
Accordingly, by a deed made in February 1934, agreement was reached so as to
permit the redevelopment.
That deed
recited that the proposed redevelopment threatened ‘to interfere with the
ancient lights’ of the flank wall ‘and to diminish the access of light and air
thereto’ in a manner shown on the plan annexed thereto. In the operative part
the deed provided that Amalgamated Dental Co Ltd, referred to as ‘the building
owner’, should ‘have full liberty and power to erect the new building in
accordance with the plan annexed hereto but not otherwise’. That plan showed a
three-storey building which permitted light to the bottom sill of window B at
an angle of 54.5 degrees from the horizontal. Clause 5 provided that the 1928
agreement should remain in force after the determination of the 1927 lease (in
1948) until determined by a three-month notice in writing. It then provided
that on the expiration of such notice the building owner should forthwith
reopen the windows and ventilator (ie C, E, D) and carry out the works as
provided in clause 3 of the 1928 agreement. The redevelopment was duly
completed in conformity with the provisions of the 1934 deed. At some time
between 1934 and 1979 windows A and B were boarded up on the inside so as to
exclude the passage of light. A ventilator was inserted in the top right-hand
corner of window A.
By 1969
Amalgamated Dental Co Ltd was the freehold owner of the entire site, including
the site of the garage. In that year there was a sale to and leaseback from the
Commercial Union Assurance Co Ltd of the entire site. The lease was expressed
to be subject to and with the benefit of the 1928 agreement and the 1934 deed.
Those two documents are referred to as ‘the Maxwell deeds’.
In 1974 an
associated company of R & D reacquired the freehold from Commercial Union
and the Maxwell deeds were delivered to DHB. By 1979-80 associated companies of
R & D owned the leasehold and the freehold interests in the site. Both
titles were registered, but there was no entry in either in respect of the
Maxwell deeds or either of them.
In 1979 the
combined freehold and leasehold interests were put on the market by R & D
seeking a price in excess of £2.5m. (R & D had obtained an unregistered
transfer of the freehold interest from the registered proprietor and a contract
to acquire the leasehold interest from the registered proprietor.) An offer of £2.62m, subject to contract, was
accepted in October 1979 and in consequence the property was taken off the
market. This sale did not proceed owing to an increase in minimum lending rate
to 17% and a consequential decline in the property market. In January 1980 the
property was put back on the market seeking offers ‘at £2.25m’.
In the
meantime Mr Gill, an architect, became interested in the site as possibly
suitable for introduction by him to prospective purchasers for the purpose of
refurbishment or redevelopment. He investigated the planning position and had a
meeting with a planning officer of Westminster City Council. The particular
problem was that the site had been used as what is known as a ‘Headquarters
Building’, which was not, as such, an existing use category. It was essential
to find out what area the local authority would accept as having an established
use as offices, because that use could generate the most profit whether the
property was refurbished or redeveloped. During this meeting Mr Gill discovered
what the local authority accepted as the area with the existing use for offices
and that, provided the same height, shape and colour was retained, the local
authority would look favourably on applications for permission to redevelop.
Accordingly,
in early January 1980 Mr Gill introduced the site to Cemp. Cemp is the English
subsidiary of a Canadian property development company. It had not previously
developed any sites in the United Kingdom. Mr Philip H White, its de facto director,
was investigating the UK property market in 1979. The site was introduced as a
site suitable for redevelopment with a substantial area available for office
use. Both Mr Gill and Mr White, after further investigation, concluded that the
chance of obtaining consent for redevelopment was very good.
In accordance
with his company’s normal procedure, Mr White carried out a number of
feasibility studies. One was known as the downside position. This was the least
profitable. Then there was the upside position, which was the most profitable.
The third was based on the most probable outcome. Cemp concentrated on the
downside feasibility study. If that showed a viable position, then Cemp would
proceed. Only the downside feasibility study was produced in evidence. This
showed that on the basis of refurbishment alone and with site acquisition costs
of £2m, a profit of £1.087m could be made, being 19.3% on the costs of
acquisition and refurbishment. Mr White stated that the upside and most
probable feasibility studies each used £2m as the site acquisition costs and
assumed redevelopment. Each produced higher percentage profits on total costs.
By January 24
1980 Mr White had indicated to R & D’s agents that Cemp would offer £2.1m,
subject to contract. R & D accepted Cemp’s offer on January 28 1980 and the
matter was put into the hands of the parties’ solicitors to draw up a contract.
On January 31 1980 Cemp’s solicitors asked for copies of inter alia the
Maxwell deeds and also asked:
If copies of the above are not available,
is the vendor aware of the contents of these deeds and documents or of any
complaint of any obligation on the part of the successors in title to the
original parties?
The answer
given on February 6 1980 was ‘No’. These are the misrepresentations for which,
subject to the question of damage, Mervyn Davies J found R & D to be liable
at the first trial because, as he held, the representations were untrue and had
been relied on by Cemp in entering into the contract dated February 15 1980.
Immediately
prior to the date of the contract Mr Gill had established with the planning
officers a minimum office use of 35,196 sq ft, which was capable of being
increased by offering the local authority what is known as planning gain.
Planning gain is the provision of space for uses the local authority consider
desirable but which, because of its lower rental value, would not be provided,
except as part of a larger scheme embodying more profitable uses. The planning
gain being sought prior to the contract was in the form of light industrial
workshops and ground-floor showrooms which Cemp was prepared to provide. By
March 17 1980 the local authority were also seeking planning gain in the form
of residential accommodation which, again, Cemp was prepared to provide.
It is plain
from the documents and the oral evidence of Mr White and Mr Gill that Cemp
purchased the site for refurbishment of 26-28 Broadwick Street and for
redevelopment of the rest. Both Mr White and Mr Gill considered at the time of
the contract that in all probability planning permission to do so would be
forthcoming and in the event they were proved right. Both R & D and DHB
accept that such refurbishment and redevelopment was, while not inevitable,
sufficiently likely to be foreseeable by them for the purpose of any question
as to the remoteness of damage.
The contract
was completed on May 15 1980. On June 1980 Cemp submitted an application for
planning permission, which was duly granted on September 17 1980. This scheme
provided for light industrial workshops fronting on to Livonia Street and the
refurbishment of 26-28 Broadwick Street so as to provide showrooms at
ground-floor level with offices on the upper floors. The buildings on the rest
of the site were to be demolished and replaced with a new
Street with showrooms at ground-floor level and offices on four upper floors.
Between the end wall of these offices and showrooms fronting on to Poland
Street and the flank wall of 1-5 Poland Street, there was to be a building
comprising a shop at ground-floor level with seven flats on the first to fourth
floors. Access to the flats was to be via a passage running from Poland Street
to a staircase at the rear of the building. There was not to be a lift. Also at
the rear of the residential block there was to be a glazed fire escape from the
offices.
Prior to the
contract Mr Gill had seen window A in the flank wall of 1-5 Poland Street and
the planned redevelopment did not infringe any right to light which that window
might enjoy. He did not in fact see window B until June 1980. By that time the
garage had been cleared out and he was able to catch a glimpse of window B
through a hole in the garage roof. Apertures C, D and E were bricked up and of
no concern to Mr Gill.
But in
consequence of the discovery of window B, even though, being boarded up, it
appeared to be unused, Cemp approached the occupiers of 1-5 Poland Street
seeking their agreement to the removal of windows A and B and asking to be put
in touch with the freeholders so as to obtain their consent also. Contact was
made with the freeholders in early August 1980, the upshot of which was that a
meeting took place between representatives of Cemp and of the freeholders on
October 13 1980.
In the
meantime the building contract had gone out to tender. Cemp accepted the tender
of Harry Neal Ltd (‘HNL’). HNL had agreed the terms of the contract by October
8 1980. The period of the contract was 81 weeks from October 20 1980, when
demolition was to commence, as in due course it did.
At the meeting
between representatives of Cemp and the freeholders on October 13 1980 copies
of the Maxwell deeds were available but were largely illegible. The only
legible document was the plan attached to the 1934 deed showing angles of light
from windows B, C and E. The representatives of Cemp were not aware of the
provisions of clause 3 of the 1928 agreement as amended by the 1934 deed. The
representative of the freeholders floated a figure of £75,000 as the price for
the freeholders’ consent, which Cemp’s representative thought was ‘ransom’, was
only what was described as ‘a marker’ and in any event did not purchase the
lessees’ consent. Notwithstanding several subsequent requests from Cemp, the
freeholders never sought to justify the figure of £75,000. On October 16 1980 Cemp
was advised by its solicitors that the provisions of the Maxwell deeds were
probably unenforceable but that it might well be necessary to modify the
redevelopment to accommodate any common law rights the freeholders might enjoy.
Cemp’s first reaction was to see if the planning authority would relieve Cemp
of the obligation to build the flats at all. They were not prepared to do so.
Cemp then offered the freeholders £2,500 for the extinction of such rights to
light as they had. This was rejected on October 27 1980 as derisory. Cemp also
notified DHB of the possibility of a claim against their clients for damages
for misrepresentation, which was met with a brusque denial of liability on
October 22 1980.
By the end of
October 1980 the residential section of the proposed development had been
severed from the remainder by an agreed alteration of the building programme
produced by HNL. The result was that the section of office building on to which
the residential block would have been built had to be redesigned. This redesign
took time and necessitated the construction of the office block in sections
starting from the far end and building each section vertically. The normal
method would have been to construct the entire office block in one section from
the ground floor up. Thus the construction of the office block took longer and
was an inefficient use of HNL’s resources. Moreover, the wall which was to
adjoin the residential block would have been built as an internal wall, but
owing to the deferment of the construction of the residential block and the
uncertainty as to what (if anything) would be built against it, it had to be
redesigned and built as an independent, free-standing, external wall. Such a
wall is thicker, more expensive and slower to build and has some effect over
four floors on the available space for letting.
In
mid-November Cemp’s agents made proposals to the freeholders of 1-5 Poland
Street whereby windows A and B would be replaced with windows further to the
east. This was thought by Cemp to improve the light to the rooms in 1-5 Poland
Street and to facilitate the redevelopment of that site in due course. The
freeholders did not agree and the proposal was rejected. At this point the
negotiations with the freeholders were taken out of the hands of Cemp’s agents
and taken up by Mr White himself.
By
mid-December 1980 demolition of the existing buildings had been completed. On
December 18 1980 the freeholders served notice on Cemp pursuant to clause 3 of
the 1928 agreement as amended by the 1934 deed terminating the 1928 agreement
with effect from March 25 1981 and requiring reinstatement of the flank wall in
accordance with clause 3 of the 1928 agreement.
Attempts to
reach a compromise with the freeholders continued and a meeting took place on
February 9 1981. The figure of £75,000 was again mentioned but not justified
and, as before, did not cover the rights enjoyed by the tenants. But the
freeholders’ representatives made plain that they were not concerned with
windows C and E, provided that the light to windows A and B and the air to
ventilator D were preserved. It was agreed that Cemp’s architect would consider
and cost a light well scheme which would accommodate the freeholders.
Mr Gill
produced a scheme which would provide 10 flats round a light well. This was
revised to a scheme which produced eight flats round a light well, because the
agents advised that these new flats must have an immediate entrance from Poland
Street. The eight-flat revised scheme was estimated by Cemp’s quantity surveyor
to give rise to additional costs of £102,650.
Sketches of
the eight-flat scheme and light well were produced to the freeholders and at a
meeting held on March 4 1981 agreement was reached in principle. The basis of
the agreement was that the freeholders agreed to the extinction of all rights
to windows C and E and ventilator D. In return, Cemp would provide a generous
light well for windows A and B. There were other stipulations of the
freeholders which had to be accommodated and the actual compromise was not made
until execution of a deed on October 30 1981. However, Cemp did not wait for
execution of that deed but proceeded forthwith with the plans and construction
of the residential block. Thus on the same day as the meeting, namely, March 4
1981, HNL were instructed to commence excavation for the basement of the
residential block.
There are a
number of differences between the eight-flat scheme which was built and the
10-flat scheme which was originally intended. First, there was a substantial
light well to serve windows A and B. This was designed not merely to preserve
light to those windows but to enhance light to the flank wall to the east of
those windows so as to facilitate any further redevelopment of 1-5 Poland
Street. This light well was the direct consequence of the freeholders’ rights
in respect of windows A, B, C and E and ventilator D. Second, the number, size
and position of the flats was altered. These changes were necessitated by the
inclusion of the light well and also the insistence of the freeholders that the
windows of the flats should not overlook the flank wall and that the exhaust
pipes from the proposed gas central heating system should not be sited in the
light well. The freeholders also insisted that the walls of the light well
should be light-coloured self-cleaning brickwork.
Third, in
consequence of the redesign of the flats, which was thought to make them less
attractive and therefore more difficult to sell, a lift and direct entrance
from Poland Street were included. The heating system was changed from gas to
electricity. Fourth, the inclusion of a lift required a basement to house the
machinery, because the planning authority would not allow lift machinery on the
roof. In addition the freeholders required that the damp should be excluded
from the flank wall by waterproofing and refused to permit Cemp to place any
load on the flank wall. Thus Cemp had to construct its own cantilevered wall and
corresponding bracing walls from basement level, both to exclude the damp and
to avoid placing a load on the flank wall. In the light of the need for a lift
room in a basement and the cantilevered and bracing walls, it was obviously
sensible to enlarge the basement area to cover the whole of the site of the
residential block.
Fifth, the
inclusion of the light well necessarily placed the east wall of the block
further to the east, thereby increasing the area of the shop at ground-floor
level by an amount greater than the loss of area occasioned by providing direct
access from Poland Street to the flats. The net increase was 23 square metres.
On March 31
1981 Cemp submitted a revised planning application seeking approval for the
overall scheme incorporating the eight-flat residential block.
On June 29
1981 there was a site meeting with HNL at which it was indicated that a revised
programme was being drawn up for the
time for commencement was February 1981.)
In the event the programme provided for commencement of the work on July
13 1981, which happened, and completion was on July 23 1982. On August 11 1981
approval was given to the revised planning application.
On July 9 1982
the offices and showrooms were completed. On September 20 1982 the residential
block was completed. On November 11 1982 Mr Gill, as architect, granted HNL an
extension of time to the contract period of 12 weeks pursuant to a provision in
the building contract. This extension of time was considered by him and HNL
fairly to reflect the delay in the building works caused by the problems raised
by the right to light. One week of the 12 was due to very wet weather in May
1981 which affected the residential block because of the delayed start. Had it
been started in February 1981 as originally intended the rain would not have
affected the stage of the construction of the residential block which would by
then have been reached.
It was not
until the very end of 1984 that the entire redevelopment had been let. As was
stated in evidence, a developer could have sold the building before then, but
he would have been very unwise to have done so.
From time to
time Cemp’s solicitors had notified R & D’s solicitors of the prospective
claim for damages. By a letter of April 5 1983 the damage was estimated at
£100,000-£110,000. In the statement of claim endorsed on the writ issued on
July 30 1983, the damage was quantified at £176,996. By a number of subsequent
amendments the claim has increased substantially. The claim is now put forward
on three alternative bases and quantified respectively at £514,984, £750,000 or
£854,471, plus financing charges at 12.74% compound interest up to December 25
1984.
The sum of
£514,984 is computed on what has been described as the developer’s loss basis.
This involves two cash flow calculations. The first takes the actual payments
and receipts of the development as built. Interest is debited or credited from
the actual date of payment or receipt at a rate of 12.74% compound interest
until December 25 1984. The date December 25 1984 is taken because that was the
earliest date at which the completed development was fully let and therefore in
a position to be sold to an institutional investor. The completed development
is valued as at that date and credited to the account.
The second
cashflow calculation excludes the costs incurred in the development as built,
which would not have been incurred in the development as originally intended.
These additional costs were assumed to come to £158,332. The delay of 12 weeks
owing to the dispute with the freeholders was dealt with by assuming that the
other costs actually incurred were paid earlier. The method adopted was to
advance such payments by four and five days per alternate week from February
1981 to the date of actual completion. Actual receipts were similarly advanced.
In consequence it was assumed that the completed development would have been
fully let and capable of being sold in October 1984. Interest on such payments
and receipts was debited or credited at the same rate as in the first cashflow
calculation from the date of deemed payment or receipt to December 25 1984. The
value of the development as intended was estimated and credited as at October 2
1984.
The first
cashflow produced a positive balance of £523,496. The second cashflow
calculation produced a positive figure of £1,038,480. The difference between
these two figures, namely, £514,984, is claimed as damages for the loss
suffered in consequence of the misrepresentation. Both the principle and the
details of this computation have been criticised. I will deal with such
criticism later.
The second
alternative claim in the sum of £750,000 was described as the market value
basis. Cemp alleges that the property they bought for £2.1m was in fact worth
only £1.35m at the time when they contracted to buy it, because of the rights
to light enjoyed by the freeholders of 1-5 Poland Street pursuant to the
Maxwell deeds. Cemp claims to be entitled to damages representing the
difference, namely £750,000. This claim is also criticised in principle and in
detail.
The third
alternative claim in the sum of £854,471 was described as the hybrid claim. It
is a hybrid because it comprises £750,000 calculated on the market value basis
and £104,471 of the £158,000 additional costs excluded from the second cashflow
calculation used in the developer’s loss basis. Again this computation was
criticised in principle and in detail. However, the parties did agree that the
measure of damages to which a party was entitled under section 2(1) of the
Misrepresentation Act 1967 was the measure appropriate to the tort of deceit.
In my judgment, this agreement is correct both in principle and on authority.
In principle it seems to me that the words in section 2 (1):
if the person making the
misrepresentation would be liable to damages in respect thereof had the
misrepresentation been made fraudulently, that person shall be so liable
notwithstanding that the misrepresentation was not made fraudulently
must import the measure of damages
appropriate to the tort of deceit. Had it been intended to introduce the
contractual measure of damages, one would have expected the statutory
hypothesis to be that the misrepresentation had become a term of the contract.
On authority I
would follow the decision of Ackner J in Andre & Cie SA v Ets
Michel Blanc & Fils [1977] 2 Lloyds Rep 166 and Mervyn Davies J in Sharneyford
Supplies Ltd v Edge [1986] Ch 128 in preference to the decision of
Graham J in Watts v Spence [1976] Ch 165. This was clearly the
choice Balcombe LJ would have made in Sharneyford Supplies Ltd v Edge
[1987] Ch 305, CA: see p 323.
The difference
between the two measures was pointed out by Slade LJ in Smith Kline &
French Laboratories Ltd v Long [1989] 1 WLR 1 at p 6. If the
misrepresentation amounts to a term of the contract, the plaintiff’s claim is
measured by comparing his actual position with the position he would have been
in if the misrepresentation had been true. But where the liability is in the
tort of deceit the plaintiff’s claim is measured by comparing the plaintiff’s
actual position with the position he would have been in if the
misrepresentation had not been made to him. Thus in tort the plaintiff cannot
recover for what is often described as ‘loss of bargain’. In the context of
this case the difference is between a misrepresentation that the freeholder had
no rights to light and a representation that they had such rights, as
examination of the Maxwell deeds would have disclosed. In the former case, the
contractual measure, Cemp would be entitled to the profits it would have made
if the misrepresentation had been true. In the latter case Cemp is entitled to
damages to compensate it for being misled into thinking there were no such rights.
R & D and
DHB argued that the developer’s loss basis is in principle wrong, because it is
a claim for loss of bargain and therefore not recoverable in tort. They point
to the fact that the two cash flow calculations compare profit figures. The
difference claimed is said to be a loss of the profit which would have been
made if the representation had been true.
I do not
agree. If the misrepresentation had never been made, Cemp would not have bought
the site and would not have taken all the steps it did in preparation for its
redevelopment in accordance with the scheme it originally intended. Thus if the
misrepresentation had never been made, Cemp would not have found itself in
October 1980 in the position in which it then was, having to delay and redesign
parts of its redevelopment, thereby incurring the additional costs assumed. The
purpose of the developer’s loss basis is to compute the financial consequence
of such extra costs and delay. While it is true that the cashflow calculations
produce positive figures and therefore a profit, this does not mean that the
claim is for loss of bargain. In the simple case of a trader who incurs loss
through wasted expenditure owing to the tort of another, the fact that such
wasted expenditure has the effect of reducing his profit does not mean that his
claim for that wasted expenditure is irrecoverable because it could also be
described as a loss of profit. This is not the same as the loss of a bargain,
as that phrase is used to describe the measure of damages for breach of
contract.
R & D and
DHB also argued an allied point to the effect that because, as the evidence
showed, the redevelopment actually carried out was profitable, Cemp sustained
no loss which it can recover in tort. I cannot accept this submission either.
Wasted expenditure is still wasted even if the project produces a profit at the
end of the day.
Accordingly,
in my judgment the developer’s loss basis of calculation is not wrong in
principle. I will consider the detailed criticism of the cashflow calculations
later in this judgment.
The market
value basis was criticised on similar grounds. R & D and DHB argued that
the prima facie measure of damages is the price paid less the true value
of the property acquired. They disputed Cemp’s submission that such true value
has to be ascertained at the time of acquisition so that subsequent events are
only relevant as evidence of what was the true value at that time. They
submitted that as the completed development was ultimately sold in 1988 at a
profit there was no recoverable loss.
It was common
ground that the starting point for any award of damages is as stated by Lord
Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25,
at p 39 that the measure of damages is:
. . . that which will put the party who
has been injured or who has suffered in the same position as he would have been
in if he had not sustained the wrong for which he is now getting his
compensation or reparation.
In the case of
a misrepresentation inducing a plaintiff to purchase an asset, he has lost the
purchase price but he has gained the asset. His prima facie loss is the
amount by which the former exceeds the latter and it would be surprising if the
true value were to be assessed at a later date. Indeed there is a long line of
authority which shows that it is not correct to take the true value at a later
time.
In Davidson
v Tulloch 1860 3 Macq Rep 783, the House of Lords was concerned with
an interlocutory appeal from Scotland. It is not suggested that the law of
Scotland is different on this question. It was alleged that Dr Tulloch had been
fraudulently induced to purchase shares from Davidson for £1,910. Dr Tulloch
claimed £1,910. One question which arose was whether such a claim could be
sound in law. The Lord Ordinary concluded that it was and the Second Division,
in effect, agreed. On the subsequent appeal to the House of Lords the Lord
Chancellor observed that because of subsequent events the purchase could not be
avoided for fraud so that £1,910 could not be recovered on that basis. He
concluded that the fraudulent inducement and the contract were sufficiently
alleged and continued at p 790:
But then comes the manner in which the
damages are calculated. That cannot be supported, because the damages are
calculated as if Davidson was obliged to take the shares off the hands of
Tulloch and to place him in the same situation as he would have been in if he
had never been a shareholder; for that loss is calculated upon what took place
after Dr Tulloch was shareholder and during the many years that elapsed before
the company was wound up. That cannot be the proper mode of calculating the
damages.
The proper mode of measuring the damages
is to ascertain the difference between the purchase money and what would have
been a fair price to be paid for the shares in the circumstances of the Company
at the time of the purchase; and that may be made the measure of damages if a
trial shall take place.
In Twycross
v Grant (1877) 2 CPD 469 the plaintiff claimed damages for being
induced to purchase shares on the basis of a prospectus deemed to be fraudulent
pursuant to section 38 of the Companies Act 1867. At the trial the jury had
been directed that if the real damage sustained by the plaintiff was the price
he had paid for the shares, he was entitled to recover that amount. The Court
of Appeal decided that the direction was correct because the shares were then
worthless. Cockburn CJ with whom Brett LJ agreed, said at p 544:
If a man is induced by misrepresentation
to buy an article, and while it is still in his possession, it becomes
destroyed or damaged, he can only recover the difference between the value as
represented and the real value at the time he bought. He cannot add to it any
further deterioration which has arisen from some other supervening cause. If a
man buys a horse, as a racehorse, on the false representation that it has won
some great race, while in reality it is a horse of very inferior speed, and he
pays ten or twenty times as much as the horse is worth, and after the buyer has
got the animal home it dies of some latent disease inherent in its system at
the time he bought it, he may claim the entire price he gave; the horse was by
reason of the latent mischief worthless when he bought; but if it catches some
disease and dies, the buyer cannot claim the entire value of the horse, which
he is no longer in a condition to restore, but only the difference between the
price he gave and the real value at the time he bought.
In Waddell v
Blockey (1879) QBD 678, one Lutcher had been fraudulently induced to buy
rupee paper from the defendant. After the purchase the rupee paper declined in
value and later still Lutcher sold the rupee paper for a sum which gave rise to
a loss of £43,000. The plaintiff was his trustee in bankruptcy who sued to recover
£43,000. At first instance he obtained judgment for that amount, but on appeal
that award was set aside and the action was referred for a reassessment of the
damages. The Court of Appeal concluded, as summarised in the headnote, that the
proper measure of damage was the difference between the price he had paid and
the price which he would have received if he had resold on the market forthwith
after his purchase.
Similar
statements or inferences can be drawn from Arkwright v Newbold (1881)
17 Ch D 301; Peek v Derry (1887) 37 Ch D 541; Glasier v Rolls
(1889) 42 Ch D 436; Cackett v Keswick [1902] 2 Ch 456; McConnel
v Wright [1903] 1 Ch 546; Broome v Speak [1903] 1 Ch
586; Shepheard v Broome [1904] AC 342 and Stevens v Hoare
[1904] 20 TLR 407.
R & D and
DHB contend, however, that Doyle v Olby (Ironmongers) Ltd [1969]
2 QB 158 decides otherwise. In that case the plaintiff had been fraudulently
induced to buy a business from the defendant. At the trial his counsel had
sought and obtained an award of damages based on the contractual measure. In
the Court of Appeal the plaintiff appeared in person and claimed that the award
of damages was too low. The Court of Appeal agreed that the wrong measure had
been adopted and that the measure of damages for deceit referred to by Lord
Collins MR in McConnel v Wright [1908] 1 Ch 546 at p 554 was too
restricted because he did not refer to consequential damage. Lord Denning MR at
p 167 stated:
The defendant is bound to make reparation
for all the actual damages directly flowing from the fraudulent inducement. The
person who has been defrauded is entitled to say:
‘I would not have entered into this
bargain at all but for your representation. Owing to your fraud, I have not
only lost all the money I paid you, but, what is more, I have been put to a
large amount of extra expense as well and suffered this or that extra damages.’
All such damages can be recovered: and it
does not lie in the mouth of the fraudulent person to say that they could not
reasonably have been foreseen. For instance, in this very case Mr Doyle has not
only lost the money which he paid for the business, which he would never have
done if there had been no fraud: he put all that money in and lost it; but also
he has been put to expense and loss in trying to run a business which has
turned out to be a disaster for him. He is entitled to damages for all his
loss, subject, of course, to giving credit for any benefit that he has
received. There is nothing to be taken off in mitigation: for there is nothing
more that he could have done to reduce his loss. He did all that he could
reasonably be expected to do.
The conclusion
of Sachs LJ was to the like effect. He, too, at p 171 referred to the value of
benefits received being taken into account. Both Lord Denning and Sachs LJ
agreed with the computation of loss made by Winn LJ on pp 169 and 170. In that
computation, sums received by the plaintiff when he sold the business three
years after its acquisition were taken into account.
R & D and
DHB say that to apply the reasoning in Doyle v Olby to the facts
of this case necessitates a finding that Cemp suffered no loss because the
completed development was ultimately sold at a profit: in other words, the
ultimate sale price was a benefit received which must be brought into account.
I do not
accept that analysis. In Doyle v Olby the Court of Appeal was
understandably concerned to award the plaintiff compensation for all his loss
sustained not only in acquiring the business but subsequently running it. Thus
on p 170 Winn LJ refers to a number of liabilities incurred for rates and goods
supplied in the course of running the business. To arrive at his true loss, any
benefits derived from that subsequent expenditure as well as the initial
expenditure must be taken into account. But I do not understand that decision
to have sought to change the prima facie measure of damages based on the
price paid less the true value at the time of purchase exemplified in the cases
to which I referred. But if claims are made for consequential losses incurred
by further expenditure after the acquisition of the property in question, then
if that expenditure produces a benefit, the value of such benefit should be
taken into account.
Accordingly,
in my judgment Cemp’s claim based on the difference between the price it paid
and the true value at the time is not wrong in principle merely because the
completed development was ultimately sold at a profit.
I turn
therefore to the criticism of the hybrid claim. In so far as one constituent
item is the same as the market value basis, namely, £750,000, I have already
expressed my conclusion. So far as the balance is concerned, it was suggested
that the items going to make up the sum of £104,471 were recoverable only on
the contractual measure. Those items are items of extra costs incurred after
the problem with regard to the rights to light arose. They are not compensation
for loss of bargain. Accordingly I see nothing wrong in principle with the
hybrid claim.
Before
considering what (if any) loss Cemp actually suffered it is necessary to
determine what rights to light and air were actually enjoyed by the freeholders
of 1-5 Poland Street. The 1928 deed recognised the existence of rights to light
and air to the five apertures. That recognition would be binding by estoppel on
the parties to the agreement and their successors in title. The agreement was
also a licence to infringe the rights enjoyed to the windows C and E and the
ventilator D by the erection of the garage. Clause 3 provided that on the determination
of the agreement those rights should be restored which, as R & D accepted,
would involve the removal of the garage. The 1934 deed extended the term of the
1928 agreement and gave a
the adjoining land.
Cemp has
argued that the determination of the 1928 agreement would have enabled the
owners of 1-5 Poland Street to require the owner of the new higher building to
demolish, in addition to the garage, such part of the new building as might be
necessary to enable light to reach the lowest aperture at an angle of 45
degrees. In my judgment, it is quite plain that that is not the case. The 1934
agreement licensed the erection of a taller and permanent building. There was
no provision that that agreement should be in any way temporary. Clause 5
merely extended the period of the 1928 agreement. It did not purport to
introduce any additional consequences if it was determined. Accordingly, had
the contents of the Maxwell deeds been known in February 1980 I am satisfied
that no prospective developer properly advised could or would have thought that
he might be required to demolish any part of the existing building in addition
to the garage.
The other
point at issue is whether the 1934 deed would permit the erection of a new
building so as to infringe the rights to light of the five apertures to the
same, but to no greater extent than the 1934 deed allowed. The third recital
states that the building owner:
. . . is desirous of erecting . . . new
buildings of greater height which threaten to interfere with the ancient lights
. . . and to diminish the access of light and air . . . and the plan annexed
hereto indicates the manner in which such ancient lights will be affected.
The plan
referred to merely shows the flank wall of the proposed new building consisting
of a ground and three upper floors topped by a parapet. Various light angles
are shown, the material one being a line which shows that the top of the
parapet permits the access of light to window B at an angle of 54.5 degrees.
There is no other indication of the nature or design of the new building.
Clause I
provided that:
. . . the building owner and the persons
rightfully claiming under it shall have full liberty and power to erect the
said new buildings in accordance with the said plan annexed hereto but not
otherwise.
Clause 2
enabled the owners of 1-5 Poland Street at any time thereafter to raise the
height or alter the elevation of 1-5 Poland Street or to pull down and erect
any new buildings according to such plans and elevations and in such manner as
they should consider proper.
Cemp argues
that the contrast between clauses 1 and 2 shows that the permission granted was
for the erection of one new building but no more. DHB contends that such a
construction is absurd and would, for example, preclude rebuilding in the case
of destruction by fire.
In my
judgment, the 1934 deed authorised any building provided that it did not
infringe the rights to light to the five apertures to any greater extent than
the plan indicated. The permission granted was not expressed to be temporary.
The purpose of the deed and the plan showed that the parties were concerned
only with position and height of the flank wall of the proposed new building.
The parties were not concerned at all with which particular bricks formed the
wall and the parapet. In my judgment, therefore, on a proper construction of
the 1934 deed, the owners of the site were entitled to put up a new building
with a flank wall facing 1-5 Poland Street in the same position and to the same
height as shown on the plan.
However, while
this is my conclusion, anyone advising a prospective purchaser in February 1980
would be likely to add that the point was not free from doubt. Thus a prudent
purchaser would be likely to seek the agreement of the owners of 1-5 Poland
Street before committing himself to any scheme of redevelopment. The bargaining
position of such a purchaser would have been stronger if the point had been
raised in February 1980 compared with the position of Cemp in October 1980 and
subsequent months. It is also relevant that by 1979 Soho had been declared to
be a conservation area, so that any demolition, including the removal of the
garage, required planning permission.
As I have already
stated, the discovery of the Maxwell deeds in October 1980 necessitated delay
in the construction of the residential block, a change in the method of
construction of the office block and the redesign of the residential block.
Cemp employed Northcroft Neighbour & Nicholson as quantity surveyors in
connection with the redevelopment. The partner responsible was Mr J H Chaffe.
The evidence at the hearing included a written report and oral evidence of Mr
Chaffe.
This evidence
showed that by October 1980 a bill of quantities for the redevelopment as
intended had been drawn up. The cost of the building works of the redevelopment
actually carried out was shown in the detailed measured final account as agreed
with HNL. Because of the extent of the redesign of the residential block that
section was completely remeasured. By comparing the bill of quantities with the
final account and the remeasurement, Mr Chaffe was able to show with
considerable accuracy the extra costs involved in construction.
The extra
costs so proved amount to £151,758, to which must be added additional quantity
surveyor and constructional engineer’s fees exclusive of VAT of £6,130, making
in all £157,888. I should mention some of the items specifically.
First, there
is the sum of £13,000 for the flank wall of the office block. Because of the
postponement of the construction of the residential block and the uncertainty
which arose in consequence of the discovery of the Maxwell deeds, this wall was
built as an external wall. It was suggested that some deduction should be made
from the sum of £13,000 for the cost of an internal wall. But Mr Chaffe was
calculating additional costs. He must therefore have already taken account of
the cost of an internal wall and the point was never put to him in
cross-examination. I am satisfied that no deduction should be made on this
account.
It was also
suggested in argument that the additional fees for the quantity surveyor and
engineer were not consequential on the rights to light problem but could be in
connection with what was described as ‘optional extras’. Those fees are
consequential on the additional costs being a percentage of that amount.
Accordingly, in my judgment they cannot be regarded as fees for extras unconnected
with the rights to light dispute.
In his
calculations Mr Chaffe included the sum of £7,527 for what were described as
acceleration measures. The acceleration measures were sums paid out to HNL for
overtime and weekend working in respect of laying reinforced concrete. The
total sum paid was £55,000. Mr Chaffe apportioned £7,527 of that sum to the
residential block on the basis of proportionate values. In their hybrid claim
Cemp claims the whole £55,000 because the rights to light problem caused some
delay and extra cost in the building of the office block. This may be so, but
the acceleration measures were related to a particular aspect of the
construction work. Mr Chaffe saw no reason to include all the costs of
acceleration measures and nor do I.
Accordingly I
approach Cemp’s various alternative claims on the basis that the additional
costs incurred were, in round terms, £158,000 and that the deduction of that
amount in the cash-flow calculations of the redevelopment as intended was
correct.
Each of the
parties called an expert valuer to assist in the quantification of damage with
various valuations. Cemp’s expert was Professor W M Hattersley. He qualified as
a chartered surveyor over 37 years ago. He was a partner in Gerald Eve & Co
from 1958 to 1986. He is now Professor and Head of Centre for Studies in
Property Valuation and Management in the City University, London. His principal
expertise was in the field of commercial lettings, but I have no doubt that he
has extensive experience in all aspects of land valuation.
R & D’s
expert was Mr C L Manton. Since January 1981 he has been a partner in the firm
of Best Gapp & Cassells. He qualified as a chartered surveyor in 1976. In
1977 he was employed by Debenham Tewson & Chinnocks and in 1978 went into
practice on his own account. Subsequently he entered into partnership with
another chartered surveyor and in 1981 merged that firm with the firm of Best
Gapp. As presently constituted, the merged firms have two partners, four
associates and two consultants. In his written report Mr Manton stated that
prior to 1981 he had been employed by a number of leading firms of chartered
surveyors in central London. While not in any way casting doubt on the status
of the firms which had employed Mr Manton, I think this statement suggested
that his previous experience had been somewhat greater than it was.
DHB’s expert
was Mr N J Rose. He is a qualified chartered surveyor with 24 years’
experience, primarily, though not exclusively, in valuing developments on
behalf of banks. He is now senior partner in the professional services division
of De Groot Collis, a firm he joined in 1971. Previously he had been with
Gerald Eve & Co.
As is to be
expected, all the experts sought to assist me to the best of their ability and
experience and, as is also normal and their function, counsel for each party
criticised the approach of the other parties’ experts. Where material I shall
refer to those criticisms when considering the different aspects of the expert
evidence.
But one point
was plain from the evidence of each of the experts; namely the considerable
difficulty they face in making residual valuations of prospective developments,
because so much is based on assumption. An apparently small variation in one of
the assumptions — for example, the rent per square foot at which a completed
development can ultimately be let — can produce an enormous difference in the
final result. The number of variables is large and in consequence the number of
possible conclusions is enormous, bearing in mind that there is a permissible
range within which opinions may legitimately differ for each variable. This is
not to decry the processes used by valuers. When seeking to value a property in
the present by reference to a future development it is inevitable that a large
number of variables will have to be assumed.
The use of
such methods to value a property at a date eight years in the past is even more
difficult, because the valuer is expected to put himself in the position he
would have been in at that date and state what assumptions he would then have
made as to the future. If he relies on the assumptions apparently then made by
Cemp he is accused of failing to use his own experience and expertise. If he
seeks to adopt different assumptions to those adopted by Cemp at the time he is
accused of being arbitrary and unreal. Accordingly, I approach all the
valuations with caution, not because the experts were anything other than
expert in their field, but because my function is different from theirs. I have
to determine what loss Cemp in fact sustained in consequence of the
misrepresentation that R & D made to Cemp.
Counsel for
Cemp put the market value basis in the forefront of his argument, not only in
its own right, but also as a constituent element of the hybrid claim. The sum
of £750,000 was claimed on the basis of the difference between the price paid
by Cemp and Professor Hattersley’s residual valuation of the property in
February 1980 on the assumption that the contents of the Maxwell deeds were
then known.
Initially, DHB
contended that the appropriate date for the comparison was the date of
completion, namely, May 15 1980. But ultimately it was accepted that overall
there was no material distinction between the two dates. Accordingly, the point
was not pursued in argument and I shall take the date of the contract as the
material date.
In his oral
evidence, but not in any of his written reports, Mr Rose expressed the view
that when R & D put the site back on the market in January 1980, it was not
properly remarketed. The relevance of the point was to support his opinion that
the market value of the site in February 1980, on the assumption that the
contents of the Maxwell deeds were known, was not less than the sum of £2.1m
paid by Cemp.
I do not
accept that the property was not properly remarketed. Mr Rose’s opinion was
based on the documents in evidence in the action, which included documents from
the file of Debenham Tewson & Chinnocks, the selling agents then acting for
R & D. As Mr Rose accepted, even if all the agents’ documents were in
evidence, they would not show the complete picture, because so much is done on
the telephone. It is noticeable that the agents’ documents do not disclose the
interest that both Mr Gill and Mr Manton had separately shown in the site at
the time. The suggestion of inadequate remarketing was never put to them or to
Mr White in cross-examination and neither R & D nor DHB called a witness
from the agents to support the allegations. Mr Rose himself accepted that the
agents were highly competent, that they obtained a marvellous deal for R &
D, who wanted a quick sale, and that he, Mr Rose, would not have advised R
& D not to accept Cemp’s offer.
Professor
Hattersley’s initial valuation at February 15 1980 on the assumption that the
contents of the Maxwell deeds were revealed to the market proceeded on the
further assumption that the site would be fully redeveloped. He also assumed
that the rights to light would involve the loss of office space and part of the
ground-floor shop, because the developer would have to permit the access of
light at 45 degrees to all the apertures and that the planning authority would
require a mock facade to Poland Street.
For the
reasons already given in my judgment, these further assumptions were wrong, but
in any event Professor Hattersley had considered the value of this site only
from the point of view of complete redevelopment; he had not considered its
value for refurbishment only, which would have been unaffected by the rights to
light.
Accordingly,
Professor Hattersley was recalled and produced in evidence a reworking of
Cemp’s own refurbishment feasibility study. In these recalculations Professor
Hattersley made different assumptions to those made at the time by Cemp. He
reduced the lettable area of office space from 37,500 to 35,700 sq ft. He
provided for an additional building works costing £150,000 as the building cost
of a stepped-back facade. He took a yield rate of 7% on the offices and a
profit percentage of 25. On these different assumptions and various
combinations of them his valuations ranged from £1.4m to £1.6m.
However, the
assumption of extra building costs for the stepped-back facade was also wrong,
because there was no reason, on a refurbishment, to think that the planning
authority could or would have insisted on it.
In his final
speech, counsel for Cemp produced further reworkings of Cemp’s original
feasibility study on the same assumptions but assuming £20,000 for extra
building costs instead of the sum of £150,000. The £20,000 was for a mock
facade which it was said that the planning authority would require. But this
seems to me to be speculation. But on these assumptions, the values suggested
range from £1.5m to £1.6m.
On different
assumptions, Mr Manton and Mr Rose valued the site at February 15 1980, with
the contents of the Maxwell deeds known, at about £2.1m. It is plain that the
value you end up with depends on the assumptions you start with. Professor
Hattersley’s figures, ranging as they did from £1.35m to £1.6m, all depended on
changing some of the assumptions Cemp made at the time. There is obviously
considerable danger in a hypothetical valuation after the event that the
benefit of hindsight may creep in. The fact that the extra cost involved in
coping with the problem of the rights to light when it emerged was only
£158,000 and the fact that in February 1980 a purchaser would have been in a
better position to negotiate with the owners of 1-5 Poland Street than Cemp was
in October 1980 to March 1981 makes me sceptical of a valuation as at February
1980 which produces a minimum of £500,000 as the difference between the price
paid and the true market value — a loss of some 24%.
While not
abandoning his claim based on the developer’s loss basis, in his reply counsel
for Cemp primarily relied on it as a check on the validity of Professor
Hattersley’s market valuations.
The
developer’s loss basis is an ingenious attempt to work out the monetary value
of the delay and extra costs involved as a result of the contents of the
Maxwell deeds becoming known in October 1980. But again I find the result
surprising. The difference between the two cash-flow calculations produces a
figure of £514,984. The extra costs built into it came to £158,000 as proved by
Mr Chaffe. Thus some £357,000 would appear to represent the cost of the delay.
Even if one assumed that all the additional costs had been incurred and paid by
June 1981 and added interest for the period from June 1981 to December 1984 at
the same rate as Professor Hattersley did in his computation, the resulting
figure is less than half the sum thrown up by Professor Hattersley’s
calculations.
In my
judgment, the developer’s loss basis is not a suitable method of calculating
the cost of the additional work and the delay. The basic fallacy is that in the
cash-flow computation of the redevelopment as intended, after excluding the
additional costs of £158,000, all the other costs which would have been
incurred in any event are treated as being paid on a date earlier than the date
on which they were actually paid. Compound interest from the deemed date of
payment to December 25 1984 is then added. In the cash-flow computation of the
redevelopment as carried out, compound interest at the same rate is also added,
but from the date of the actual payment to December 25 1984. The result is,
therefore, that part of the sum of £514,984 is represented by compound interest
on costs which would have been incurred in any event for work which was not
shown to have been delayed for the period between the deemed date of payment
and the actual date of payment. That period may be as little as three days for
sums actually paid in February 1981 or as much as 12 weeks for sums paid at the
end of the period.
This
additional interest element is not compensated for by the crediting of interest
on receipts, because the receipts come only at the end of the periods covered
by the computations. Moreover, all sections of the building were practically
complete by September 1982 but the building was not fully let until December
1984. But in his cash-flow computation of the redevelopment as intended,
Professor Hattersley has treated the building as fully let and in a condition
suitable for sale by October 1984. He has then credited interest for the period
from October to December 1984. Such interest therefore reduces the interest
debited in respect of the costs. But I see no grounds to warrant the assumption
made that if the building works
have been fully let three months earlier. It took one and a quarter years after
completion of the building to let it fully. Whatever extraneous reasons caused
that delay, and there was no evidence on the point, they are just as likely to
have operated until December 1984 if the building had been finished in June
1982 instead of September 1982. Thus if this assumption were excluded, the
developer’s cash-flow computation would have shown up an even greater loss.
Accordingly,
having considered the principles used in computing the developer’s loss claim,
I find that it is based on the fallacious assumption that all costs which would
have been incurred in any event would have been paid earlier when substantial
parts of the redevelopment scheme were in fact unaffected by delay. Thus I
reject the developer’s loss computations as a measure of the damages suffered
by Cemp through additional costs and delay. It follows that far from confirming
the various alternative computations of the true value of the site as at
February 15 1980 made by Professor Hattersley, it casts yet further doubt on
those valuations.
The measure of
damages constituted by the formula of the price paid less the true value at the
time is only a prima facie rule which should not be mechanistically
employed. In County Personnel (Employment Agency) Ltd v Alan R Pulver
& Co [1987] 1 WLR 916* in a case dealing with the breach of a
contractual duty of care, the Court of Appeal stated a number of principles to
be observed in assessing damages. At p 925 Bingham LJ, after referring to the
diminution in value rule usually applied in cases involving the acquisition of
property in consequence of negligent advice, continued:
(3) That is not, however, an invariable approach,
at least in claims against solicitors, and should not be mechanistically
applied in circumstances where it may appear inappropriate. In Simple Simon
Catering Ltd v Binstock Miller & Co (1973) 228 EG 527 the Court
of Appeal favoured a more general assessment, taking account of ‘the general
expectation of loss’. In other cases the cost of repair or reinstatement may
provide the appropriate measure: the Dodd Properties case [1980] 1 WLR
433, 456, per Donaldson LJ. In other cases the measure of damage may properly
include the cost of making good the error of a negligent adviser: examples are
found in Braid v W L Highway & Sons (1964) 191 EG 433, and G
& K Ladenbau (UK) Ltd v Crawley de Reya [1978] 1 WLR 266.
*Editor’s note: Reported also at [1986] 2
EGLR 246.
He then
referred to the fact that in the case before the Court of Appeal the
application of the diminution in value rule ‘would involve a somewhat
speculative and unreal valuation exercise’. He pointed to the fact that by
contrast there was firm evidence of what it cost the plaintiffs to ‘extricate
themselves from the consequences of the negligent advice they had received’. It
was the cost of such extrication which the Court of Appeal concluded was the
proper measure of damage in that case.
The diminution
in value rule referred to in that case does not apply in this. But I see no
reason why the principles expressed to which I have drawn attention should not
be equally applicable in this case.
In Hornal v
Neuberger Products Ltd [1957] 1 QB 247 the plaintiff had been
fraudulently induced to buy a machine by a representation that the machine had
been reconditioned by a reputable firm of toolmakers, when it had not. The
county court judge dismissed the plaintiff’s claim on the basis that as the
machine in its unreconditioned state was worth what the plaintiff paid for it,
he had suffered no loss. In the Court of Appeal the plaintiff’s appeal was
allowed because even though the machine was worth the price paid, it was not,
as represented, fit for immediate use. Damages were awarded for the weeks
during which it was not fit for use. Thus, even though the prima facie rule
produced no loss, this did not preclude the recognition of loss on a different
basis caused by the misrepresentation.
In Jacovides
v Constantinou (reported in The Times for October 23 1986)
the defendant vendor had fraudulently represented that the public health
authority had not required any work to be done to the property being sold to
the plaintiff. Jupp J concluded that the cost of doing the work could, in the
absence of other evidence, be presumed to be the difference between the price
paid and the actual value of the property at the time. In the alternative he
held that as the plaintiffs had been compelled to spend money in order to
continue to use the premises for the purpose for which they bought them, that
money constituted a concealed addition to the purchase price.
These three
cases dispose of an argument advanced on behalf of R & D that because the
extra costs of redesigning and building the residential block were incurred
after the inaccuracy of the misrepresentation had been discovered, they were
not caused by the misrepresentation but were self-inflicted and irrecoverable.
I have no hesitation in rejecting that argument. If the misrepresentation had
never been made, so that an accurate answer had been given to Cemp’s inquiry,
the contents of the Maxwell deeds would have been known in February 1980 and
these extra costs would never have been incurred.
It seems clear
that I am entitled to and should consider the extra costs incurred either as a
check on the true market value of the site in February 1980 or as more
appropriate than the usual measure to adopt in the circumstances of this case
or as consequential damage actually sustained, even if the normal measure of
damage reveals no loss.
The items of
additional expense included in the hybrid claim total £104,471. Acceleration
measures are claimed in the full sum of £55,000. In accordance with my earlier
findings, that claim should be reduced to £7,527. All the other items are
proved. Thus, under that part of their claim Cemp has proved damage amounting
to £57,000.
Those items
are in respect of matters for which no additional benefit was obtained and are
over £100,000 less than the extra costs proved by Mr Chaffe. Accordingly, I
should consider the extra costs proved by Mr Chaffe and consider also whether
anything, and if so how much, should be deducted for benefits derived from that
expenditure: cf Doyle v Olby (supra); Cooper v Tamms [1988]
1 EGLR 257 at p 264. Earlier in this judgment I have summarised the differences
between the residential block as ultimately constructed and as originally
intended.
R & D and
DHB claim that in the result Cemp ended up with better and more valuable flats
than they would have had if the intended redevelopment had been carried out. It
was put to Mr White in cross-examination that when the problem arose he took
the opportunity in conjunction with Mr Gill ‘to kill two birds with one stone’
by redesigning the flats to satisfy the freeholders of 1-5 Poland Street and to
produce much better flats than those originally intended. Mr White denied the
suggestion and maintained throughout, as I accept, that the redesign was forced
upon them by the freeholders and went no further than what was required by them
or what naturally flowed from those requirements. Thus Cemp did not set out to
build better and more valuable flats, but that may have been the result.
Only Mr Manton
and Professor Hattersley considered whether the flats as built were more
valuable than those originally intended. Mr Manton’s valuation suggested an
additional profit of £100,000. But his calculation is unacceptable. First Mr
White stated that the residential part of the redevelopment produced a loss and
Professor Hattersley and Mr Rose both agreed that both schemes for the
residential part would produce a loss; that is why it is described as planning
gain. But in any event Mr Manton valued the flats as built on the basis of an intermediate
plan for 10 flats, which was never carried out. Accordingly I reject Mr
Manton’s valuation.
Professor
Hattersley valued the flats as built at £337,000 and as intended at £315,500, a
difference of £21,500. Having heard extensive evidence concerning the rival
attractions and drawbacks of the flats as built compared with those originally
intended, I have no hesitation in accepting Professor Hattersley’s valuations
in this respect.
Thus, from the
additional cost of £158,000 it is necessary to deduct a benefit of £21,500,
leaving prima facie a figure of £136,500. However, I do not think this
figure is sufficient on any of the bases I am considering.
If the figure
of £136,500 is taken as a check on the amount by which the price paid exceeded
the true value of the site in February 1980, it takes no account of the effect
of the uncertainty which knowledge of the contents of the Maxwell deeds would
have caused to prospective purchasers in relation to the permitted height of
the flank wall of any new building.
Equally, if it
is taken as the amount of the concealed increase in the purchase price or of
the consequential loss, it takes no account of the costs of delay to the office
block section and the greater expense involved in the method of constructing
that block, that is to say, in blocks instead of in one section from the ground
floor up. While the extra cost of the external wall has been included, no
account is taken of the reduced amount of office space available for letting
due to its extra thickness. Over four floors, the lost area cannot be dismissed
as de minimis. None of these matters can be precisely quantified, but in
the context of a development of this size justice would not be done unless some
reasonably substantial sum is included.
Doing the best
I can, I propose to add a further £15,000. Thus subject to the claim of R &
D and DHB that Cemp should have mitigated its damage, I will give judgment in
the sum of £151,500.
It was agreed
by counsel for Cemp that the claim for financing costs raised in para
13(E)(3)(vi) of the statement of claim should be treated as a claim for
interest. All counsel agreed that all questions of interest should be deferred
for argument until after I have given judgment on the amount of damages.
R & D and
DHB both contended that if I found, as I have, that the damages to which Cemp
is prima facie entitled exceed the sum of £75,000, then Cemp failed in
its duty to mitigate its damage and the award of damages should be reduced to
the sum of £75,000. This contention was pleaded by DHB in its defence at the
time it was the second defendant, but has not been pleaded by R & D.
However, no objection was taken at the trial to R & D cross-examining
Cemp’s witnesses on and arguing the point.
R & D and
DHB argue that when on October 11 1980 the freeholders of 1-5 Poland Street
indicated a figure of £75,000 as the price at which they were prepared to
release their rights, Cemp should forthwith have negotiated such a release at
that figure or such lower figure as they could achieve. They claim that, having
failed to do so, Cemp cannot now recover damages in excess of £75,000. It is,
of course, well established that a plaintiff is under no actionable duty to
mitigate his loss, but he is not entitled to charge a defendant by way of
damages with any greater sum than that which he reasonably needs to spend for
the purpose of making good the loss: Cf Darbyshire v Warran [1963]
1 WLR 1067 at p 1075 per Pearson LJ. The question is one of fact and the
onus of proving a failure to mitigate lies on the defendant.
But the
standard of reasonableness which is to be applied is not a stringent one, as R
& D submitted. Where a plaintiff finds himself in a dilemma in consequence
of the defendant’s wrong, the reasonableness of what the plaintiff did should not
be ‘weighed in nice scales’ with the benefit of hindsight at the instance of
the wrongdoer: cf Banco de Portugal v Waterlow & Sons Ltd [1932]
AC 452 at p 506. R & D relied on McAuley v LTE [1957] 2
Lloyd’s Rep 500 as indicating a test of greater stringency, but that decision
was on the basis of a concession in the light of the particular facts of that
case and does not, in my judgment, affect the principle apparent from Banco
de Portugal v Waterlow.
Accordingly, I
exclude the benefit of hindsight and consider the dilemma which faced Cemp in
October 1980. By the date of the meeting on October 13 1980 planning permission
had been obtained, a contractor had been engaged and building programmes had
been prepared. Demolition was due to commence a week later. There could have
been no question at that stage of postponing the entire development. The choice
therefore lay between negotiating a release of the rights for a sum of money or
proceeding with the development and if necessary redesigning the residential
block so as to accommodate such rights as the freeholders actually had.
Cemp’s agents,
Debenham Tewson & Chinnocks, considered the sum of £75,000 to be
ludicrously high, a view shared by Mr Gill and Mr White, who was throughout
conscious of the need to mitigate Cemp’s loss. Cemp’s solicitors thought that
the Maxwell deeds were unenforceable against Cemp. It was plain from the letter
from the freeholders’ agents dated October 16 1980 and elaborating on the suggestion
made at the meeting that, in addition to £75,000 paid to the freeholders, there
was to be liability for the fees of the freeholders’ agents, and, more
importantly, the freeholders’ tenants whose windows were to be blocked up would
have to be consulted.
It is true, as
DHB pointed out, that in the event the tenants’ windows were blocked up
without, as far as the evidence goes, any compensation being paid to them. But
Cemp was not to know that in October 1980.
On October 21
1980 Cemp’s solicitors wrote to DHB as R & D’s solicitors indicating that
the freeholders were claiming £75,000 as the price for releasing their rights.
The letter concluded by stating that Cemp was looking at possible ways of
either resisting the claim or altering the proposed development so as to avoid
infringing the alleged rights, but that if these alternatives did not work and
Cemp had to continue the proposed scheme at an additional cost of £75,000, they
would look to R & D to make good the loss.
In my
judgment, it is plain that at the time Cemp thought and reasonably thought that
the freeholders’ claim could be dealt with at a cost considerably lower than
£75,000. Cemp counter-offered £2,500, which was rejected as derisory.
Thereafter every attempt to get the freeholders to justify their figure of
£75,000 was unsuccessful.
Accordingly
the demolition proceeded and was completed in mid-December but, as I have
already stated, negotiations continued in the meantime.
Then at the
meeting of February 9 1981 mention was made of the freeholders’ demand for
£75,000. Mr White asked how much they were claiming, but the freeholders
declined to quote a figure without knowing how much the tenants would claim.
But it was plain to Mr White that the freeholders were really only interested
in the rights to windows A and B and the possibility of redeveloping 1-5 Poland
Street.
When on
February 18 1981 Cemp’s quantity surveyor costed the new scheme for the new
residential block at £102,650 it was apparent for the first time that
redesigning the residential block to accommodate the freeholders might be more
expensive than paying the sum of £75,000. But by this stage it was also clear
that £75,000 would not purchase such rights as the tenants had. Moreover the
freeholders were by then more concerned with their future ability to redevelop
1-5 Poland Street than with money.
Accordingly,
even if by mid-February 1981 Cemp had changed its mind and sought to negotiate
a release of all the adverse rights for £75,000, in my judgment Cemp would not
have been able to reach such an agreement.
In my
judgment, at the time the Maxwell deeds came to light in October 1980 Cemp
reasonably thought that resisting the freeholders’ claim and redesigning the
residential block would be much cheaper than paying anything approaching what
the freeholders demanded and such extra sums as the tenants might seek. When in
February 1981 they realised that might not be so, it was too late. In my
judgment, the plaintiffs did not fail in their duty to mitigate their damage.
Accordingly I
award to Cemp damages in the sum of £151,500. For the reasons I have given, I
conclude that this sum is the sum of money required to put Cemp in the position
it would have been in if the misrepresentation had never been made to Cemp by R
& D.
