Negligence–Claim against solicitors–Advice in regard to underlease–Unusual rent review clause–Rent of underlease of two rooms on ground floor of a building was to be £3,500 per annum inclusive of rates etc for the first five years and thereafter to be, for the periods set out in the headlease, an amount equivalent to the initial rent increased by the same percentages as the mesne landlord’s rent for the whole building would be increased under the terms of the headlease–This arrangement might have been reasonable if both initial rents had been set at the market level–In fact the initial headlease rent was below the market level and the initial underlease rent far above it–In addition, when the underlease was entered into the solicitor advising the underlessees, plaintiffs in the action, had no information as to the amount of the headlease rent–After five years the initial headlease rent, which was £2,250 only for the whole building, was increased to £5,800 and the initial underlease rent of £3,500 rose to £9,022 (at the open market value this rent would have been £2,600 inclusive)–Plaintiffs could not continue and had to pay £16,000 to be allowed to surrender their underlease, plus a sum of £2,761, representing the increased rent payable since the review date–Plaintiffs claimed these amounts as damages and in addition a sum of £17,000 lost on a prospective sale of the underlease and goodwill–Held, reversing the decision of the deputy judge, that there were features which should have impinged on the mind of a reasonably careful and competent solicitor, the main ones being the head lessee’s unwillingness to divulge the rent being paid for his lease of the whole building and the very unusual nature of the review clause–The clients should have been warned of the risks involved and, indeed, advised not to enter into the underlease on these terms–It was negligent not to give such advice–As regards damages, the ‘diminution of value rule’ was not here appropriate–The true measure was the actual cost of extricating the plaintiffs from the consequences of the negligent advice–There was evidence that this cost was £18,761–The additional claim for £17,000 was speculative and should be viewed with caution–The case would be remitted to a Chancery master for the assessment of damages–Appeal as to liability allowed
The following
cases are referred to in this report.
Bowdage v Harold Michelmore & Co (1962) 106 SJ 512; [1962] EGD
000; (1962) 183 EG 233
Braid v W L Highway & Sons [1964] EGD 451; (1964) 191 EG 433
Dodd
Properties (Kent) Ltd v Canterbury City Council
[1980] 1 WLR 433; [1980] 1 All ER 928; [1980] EGD 229; (1979) 253 EG 1335,
[1980] 1 EGLR 15, CA
Ford v White & Co [1964] 1 WLR 885; [1964] 2 All ER 755;
[1964] EGD 283; 190 EG 595
Hadley v Baxendale (1854) 9 Exch 341
Ladenbau
(G & K) (UK) Ltd v Crawley & de Reya
[1978] 1 WLR 266; [1978] 1 All ER 682
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, HL
Midland
Bank Trust Co Ltd v Hett, Stubbs & Kemp
[1979] Ch 384; [1978] 3 WLR 167; [1978] 3 All ER 571
Miliangos v George Frank (Textiles) Ltd [1976] AC 443; [1975] 3 WLR
758; [1975] 3 All ER 801; [1976] 1 Lloyd’s Rep 201, HL
Perry v Sidney Phillips & Son [1982] 1 WLR 1297; [1982] 3 All
ER 705; [1982] EGD 412; (1982) 263 EG 888, [1982] 2 EGLR 135, CA
Philips v Ward [1956] 1 WLR 471; [1956] 1 All ER 874, CA
Pilkington v Wood [1953] Ch 770; [1953] 3 WLR 522; [1953] 2 All ER 810
Simple
Simon Catering Ltd v J E Binstock Miller &
Co [1973] EGD 901; (1973) 228 EG 527, CA
Sykes v Midland Bank Executor & Trustee Co Ltd [1971] 1 QB
113; [1970] 3 WLR 273; [1970] 2 All ER 471, CA
This was an
appeal by the plaintiffs, County Personnel (Employment Agency) Ltd, from a
decision of Mr Robert Wright QC, sitting as a deputy judge of the Chancery
Division, dismissing the plaintiffs’ claim against their former solicitor, Alan
R Pulver & Co, the present respondents, for damages for negligence.
Jonathan Gaunt
(instructed by Fairchild, Greig & Wells) appeared on behalf of the
plaintiffs; I Krolick (instructed by Reynolds Porter Chamberlain) represented
the respondents.
Giving the
first judgment at the invitation of Sir Nicolas Browne-Wilkinson V-C, BINGHAM
LJ said: This is an appeal against a decision of Mr Robert Wright QC, sitting
as a deputy judge of the Chancery Division. On July 15 1985 he dismissed the
claim made by the plaintiff (whom I shall call ‘the company’) against its
former solicitors (‘Pulver’s) for damages for negligence. The company
challenges that decision, although the live issues have been considerably
narrowed on appeal.
The facts can
for present purposes be summarised relatively briefly. Mrs Valerie Feldman and
Mrs Kathleen Balfe had worked together in an employment agency in Windsor. They
decided to go into business on their own account through the medium of a
company to be incorporated. For this purpose they required business premises.
Having answered a newspaper advertisement, they were
ground floor of 109 Queen Street, Maidenhead. For these rooms Mr Cook asked for
an annual rent of £3,500 inclusive. Mrs Feldman and Mrs Balfe expected that
their business would cover such a rent, and informally agreed to take a lease
of the rooms at that rent for a 15-year term with 5-yearly rent reviews. It
does not appear that Mr Cook had, initially, any interest in the premises at
109 Queen Street. But he set about negotiating the terms of a headlease of the
whole building to himself with a view to subletting the ground-floor rooms to
Mrs Feldman and Mrs Balfe or their company when formed.
On December 21
1978 Mrs Feldman instructed Mr Rose of Pulver’s to act in the matter. He was a
managing clerk employed by Pulver’s, and a trusted friend and adviser of Mrs
Feldman. She told him of her plans and asked him to act in connection with the
grant of a proposed underlease of the ground-floor rooms. He accepted those
instructions.
Either on that
day or December 22 Mrs Feldman collected from Mr Cook’s solicitors and
delivered to Mr Rose for his consideration a draft of the underlease proposed
by Mr Cook. Unfortunately no copy of that document in its original form is
still extant, and Mr Rose died in February 1979. It is common ground that the
draft underlease was for a term of 15 years with provision for rent reviews
(upwards only) in the fifth and tenth years, but the evidence before the deputy
judge and before us leaves unclear the precise effect of the rent review clause
at that stage. Two pieces of evidence suggest that the underlessee’s proposed
rent may have been tied to a percentage of the mesne lessor’s rent under the
headlease. The first piece of evidence is a manuscript note of Mr Rose in these
terms:
£3,500
comm’c’ng rent, 5 years. Thereafter %age of whole rent + rates + wr and ins’ce
and cl’ng and lighting stairs & passageway
The other is
an inquiry made by Mr Rose of Mr Cook’s solicitors on January 9 1979:
What is to be
the percentage of the landlord’s rent of the whole building, as reviewed in due
course, which the tenant will pay? It
must be borne in mind that the rental payable pursuant to the underlease includes
general and water rates. It therefore seems relevant that the underlessees
should know the present rent payable under the headlease (which knowledge
cannot affect this transaction) so that they might be advised fully as to their
position under clause 1 of the underlease.
Before the
date of this inquiry Mr Rose had received a copy of the headlease of the whole
building from Mr Cook’s solicitors. This was for a 15-year term with rent
reviews in the fifth and tenth years. The clause was in a familiar form with
provision for notice and counternotice and independent determination in default
of agreement. The rent could be revised upwards only, so as to accord with the
open market rental value of the premises on the review dates.
Only three
points need be noted on the headlease. First, the rent payable under the
headlease was cut out from the copy sent to Mr Rose. This is why he inquired
what the rent was. Second, there was a covenant against assigning or subletting
without the head lessor’s written licence, such licence not to be unreasonably
withheld. Third, the lessee covenanted that on any subletting the sublessee’s
right to security of tenure under the Landlord and Tenant Act 1954 should be
effectively excluded.
On January 10
1979 Mr Rose wrote to Mrs Feldman concerning the draft underlease, of which Mrs
Feldman as well as he had copies. He told her that he had received a copy of
the headlease with the rent cut out and he advised her on the rent review
clause in the underlease, indicating that in one respect (not now material) it
appeared to be favourable to her. He suggested that he should take Mrs Feldman
through the headlease and the underlease ‘so that you might clearly understand
your obligations in the matter both on behalf of the Company and so far as
concerns Kathy and yourself, as guarantors’. He thought that a suitable time
for such a meeting might be after the result of inquiries and searches had been
received.
Mr Cook’s
solicitors answered the inquiry I have quoted above by saying:
The wording
has now been revised.
This was, it
seems, a reference to a revised draft underlease which Mr Cook’s solicitors
sent to Mr Rose on January 9, their letter crossing with Mr Rose’s inquiries.
Whatever the rent clause may have said before, it now provided for a
yearly rent
of £3,500 inclusive of General Rates and Water Service charges (‘the initial
rent’) for the first five years of the term created by the Head Lease (or such
lesser period thereof as shall remain at the commencement of the term hereby
created) and thereafter paying for the periods set out in the Head Lease an
amount equivalent to the initial rent increased by the same percentages as the
Landlord’s rent has been increased under the terms of the Head Lease.
On January 24
1979 Mrs Feldman and Mr and Mrs Balfe attended at Pulver’s offices. Mr Rose
went through the underlease and the headlease with them. He dictated a letter
to Mr Cook’s solicitors in their presence. The attendance lasted about one
hour. What Mr Rose said on that occasion, and whether it was sufficient to
discharge the duty of care which Pulver’s, by Mr Rose, owed to the company, are
the questions which lie at the heart of this appeal. But before considering
those matters in detail I should briefly complete the narrative.
The company was
allowed into possession of the ground-floor rooms on February 19 1979 and the
lease and counterpart were exchanged very shortly thereafter. In May 1979
Pulver’s received from Mr Cook’s solicitors a certified copy of the headlease,
showing the rent of the whole building under the headlease to have been £2,250
per year exclusive of rates (as compared with £3,500 inclusive for the
ground-floor rooms only in the underlease). Problems then arose because the
head lessor had not given consent to the subletting of the ground-floor rooms,
his sticking point being that Mr Cook had not excluded the right to security
under the 1954 Act in the underlease. The subletting was therefore in breach of
covenant and rendered Mr Cook’s interest under the headlease (and thus the
company’s interest under the underlease) liable to forfeiture. Resolution of
these problems took a very long time, during which the company was advised by
Pulver’s in a manner of which no complaint is now made. Eventually a new
underlease (running from the same date and otherwise unchanged) was executed,
security having been excluded and the head lessor having given his consent.
This was in July 1982. By that time the company, despairing at the time taken
to finalise the new underlease and other matters, had instructed other
solicitors, Aubrey Croysdale & Stern, to act for them.
Towards the
end of 1983 the company wished to dispose of its sublease and the goodwill of
its business. An offer of £17,000 was obtained. But this offer fell through,
partly because there was no security and partly (it seems) because of
uncertainty surrounding the whole question of rent review.
In the spring
of 1984 the first rent reviews were negotiated. The rent under the headlease,
originally fixed at £2,250 exclusive (found to be the true open market rental)
was by agreement increased to £5,800. The yearly rent payable pursuant to the
underlease, originally agreed at a level at least three times higher than the
market rent for the two ground-floor rooms, rose ‘by the same percentages as
the Landlord’s rent has been increased under the terms of the Head Lease’ to
£9,022. At open market value the yearly rent would, on the evidence, have been
£2,600 inclusive. The company refused to pay this rent, and eventually the
mesne lessor (an assignee of Mr Cook) accepted a surrender of the sublease on
payment of £16,000 plus a sum of £2,761 representing the increased rent payable
since the rent review date under the headlease. The company claims that sum,
plus £17,000 lost on the prospective sale of the underlease and goodwill, as
damages for negligence against Pulver’s.
The learned
deputy judge concluded that Pulver’s, by Mr Rose, had been negligent in failing
to advise the company that the security provisions of the 1954 Act would have
to be excluded and the consequences of that exclusion, and in failing to advise
the company not to enter into the original underlease until the licence of the
head landlord had been obtained. But he held that no damage flowed from those
failures. These conclusions have not been challenged on this appeal. It is,
therefore, enough to say that they appear to be plainly correct, as the parties
have accepted.
The company’s
allegations of negligence (so far as relevant to this appeal) were that
Pulver’s, through Mr Rose,
(1) failed to ascertain the initial rent under
the headlease or warn the company of the risks entailed in taking the original
sublease without knowing the amount of that rent;
(2) failed to advise the company to obtain
valuation advice upon the initial rent under the headlease and under the
underlease compared with market value; and
(3) failed to advise the company about the
operation of the rent review clause in the underlease and the undesirability of
entering into such a clause.
These
allegations were directed to the period January-February
meeting on January 24 1979 when Mr Rose took Mrs Feldman and Mrs Balfe through
the headlease and the underlease.
The learned
deputy judge found that the rent review clause in the underlease was most
unusual, a finding on which the company strongly relies. He then continued in
these terms:
What I have to
decide is whether in the light of what he was instructed to do and without the
benefit of hindsight, Mr Rose fell short of the standard of what a reasonably
competent practitioner would do having regard to the standards normally adopted
in his profession, and the authority for that is the case I have just cited, Midland
Bank v Hett, Stubbs & Kemp [1979] Ch 384. I have to bear in mind
that a solicitor is not obliged to advise on value, Bowdage v Harold
Michelmore & Co (1962) 106 SJ 512, but is obliged to explain any
unusual clauses in a document upon which he is asked to advise, Sykes v Midland
Bank Executor & Trustee Co Ltd [1971] 1 QB 113.
Upon these
principles I have come to the conclusion that Mr Rose was not negligent in any
of the respects pleaded above in relation to the rent review clause.
I find as a
fact that Mr Rose did explain the rent review clause to Mrs Feldman at least
despite her assertion that he did not. Mrs Feldman is far more businesslike and
intelligent in business matters than she would have me believe. I do not
criticise her for this. In the light of the financial disaster which has taken
place and her belief that it was Mr Rose’s fault, she has convinced herself
that the matter was not explained to her. The same applies to Mrs Balfe with
the additional factor that Mrs Feldman was clearly the leader in business
matters. Mr Rose cannot give evidence. The documentary evidence supports my
conclusion that he did explain the clause. First, it is clear from the
enquiries before contract that Mr Rose was concerned over the rent review
clause. He wanted to know what was the percentage of the rent of the whole
premises which the plaintiff would have to pay and asked for particulars of the
landlord’s rent having regard to the fact that the rent under the underlease
included general and water rates. He asked for the rent under the headlease.
The answer simply records that the wording had been altered. I infer therefore
that whatever was in the original clause, it was altered simply to provide, as
does the present underlease, that the original rent would vary in proportion to
the increases in market value. On January 10 1979 Mr Rose wrote to Mrs Feldman
saying that he would like an early opportunity of going through the headlease
and underlease with her. As a preliminary point Mr Rose wrote that the rent
review clause was favourable to her in that it would or might take effect from
February 19 instead of at the date of the earlier lease. Mrs Feldman told me
that she had met Mr Rose for this purpose at his office and had the draft
underlease with her. Mrs Feldman says that that is all he ever said about the
rent review clause. Mr Rose knew Mrs Feldman very well. I am sure he would have
been concerned to do his best for her. Further I believe and find that he would
have carried out his intention of going through the underlease. He may not have
spent much time on the rent review clause. It is short and as a matter of
English it is clear. Mrs Feldman said that all Mr Rose said was that it was
favourable because of the later date which might defer the review for a time
and that she did not read it. If it was mentioned I infer from the documents
and circumstances that Mr Rose would have explained its effect, namely that the
original rent would be reviewed upwards in step with the increases in market
value in the headlease. Alternatively the burden of proof was on the plaintiff
to establish that Mr Rose did not give this explanation and in my judgment it
has not been discharged.
Mr Rose did
not give any further or fuller explanation, pointing out that much might depend
on the extent to which each rent was at market value at the outset, nor did he
suggest that valuation advice should be obtained. But upon the standards of
competence required I do not think that he was bound to do so. The plaintiff
relied on Sykes v Midland Bank, to which I have referred, to
establish that Mr Rose was under a duty to explain the unusual clause and that
this was an unusual clause and the explanation should have extended to the
valuation implications. I do not accept that this was so. Sykes’ case,
which I have referred to, is authority for the proposition that a solicitor
must explain the legal consequences of an unusual clause. I do not think that
it requires him to explain the financial implications at any rate upon the
retainer given and in the light of the fact that the rent had been agreed
before Mr Rose was consulted.
It was
suggested that Mr Rose should have been put on inquiry by the fact that the
rent was cut out of the copy of the headlease supplied to him. That should have
made him so suspicious that he should have advised the taking of valuation
advice or insisted on being told the amount of the rent under the headlease.
The point is one upon which my mind has been inclined to one side and the other
in considering the evidence and the arguments, but I have come to the
conclusion that Mr Rose need not have done more than he did. The rent of the
underlease had been agreed at arm’s length before he was consulted. The ground
floor would be much the more valuable part of the premises and the rent was
inclusive of rates. I can well see good reasons why the underlessor would not
want to give the rent he was paying, lest it led to arguments for which there
was no foundation. I do not think that the inference could be drawn that the
purpose was to conceal an excessive rent for the underlease, or alternatively,
that it should have drawn Mr Rose’s attention to it so strongly as to put him
on inquiry.
The principles
of law governing the decision on liability in this case were not in serious
issue between the parties. The starting point is Salmon LJ’s observation in Sykes
v Midland Bank Executor & Trustee Co Ltd [1971] 1 QB 113 at p125H:
In my view,
it is quite impossible to lay down any code setting out the duties of a
solicitor when advising his client about a lease. A great deal depends upon the
facts of each particular case. A solicitor’s duty is to use reasonable care and
skill in giving such advice as the facts of the particular case demand.
Attention was
also drawn to a sentence in the judgment of Harman LJ in the same case at
p124B:
When a
solicitor is asked to advise on a leasehold title it is, in my judgment, his
duty to call his client’s attention to clauses in an unusual form which may
affect the interests of his client as he knows them.
It seems
obvious that legal advice, like any other communication, should be in terms
appropriate to the comprehension and experience of the particular recipient. It
is also, I think, clear that in a situation such as this the professional man
does not necessarily discharge his duty by spelling out what is obvious. The
client is entitled to expect the exercise of a reasonable professional
judgment. That is why the client seeks advice from the professional man in the
first place. If in the exercise of a reasonable professional judgment a solicitor
is or should be alerted to risks which might elude even an intelligent layman,
then plainly it is his duty to advise the client of these risks or explore the
matter further.
Mr Krolick for
Pulver’s quite rightly emphasised two matters, which should be constantly borne
in mind. The first is that Pulver’s, through not fault of their own, have lost
the benefit of Mr Rose’s evidence, and have had to conduct their defence to
this claim without access to all the relevant documents. This being so, and with
the relevant oral evidence of fact relating to matters six years earlier, much
has had to depend on inference. The second is the danger of hindsight. It is
easy to be mesmerised by the figures which resulted from the rent review in
1984. That would be wrong. The correct approach is to view matters as they
should have presented themselves to a reasonably careful and competent
solicitor in January and February of 1979.
There were, on
the facts of the present case, three things which should have impinged on the
mind of a reasonably careful and competent solicitor practising in this field.
First, Mr Cook or his solicitors did not wish the company and Pulver’s to know
the rent being paid for the whole building under the headlease. This was not in
itself shocking or sinister. There could have been a perfectly good reason for
it. It did, none the less, appear to be a fact. Secondly, Mr Cook (trading as
Home Counties Businesses) was taking a headlease of the whole premises with a
view to subletting part. That again was not in itself surprising. He may simply
have wanted the use of the upper part of the building. But he was likely to try
to make a profit if he could. Third, this was a most unusual clause. These
things, and particularly the third, should (I think) have caused a reasonably
careful and competent solicitor to think about this clause rather more
carefully than would have been appropriate had the clause been in a familiar
standard form. It would have been appropriate to consider whether there was
anything in the terms of this clause which might prove disadvantageous to the
client.
On such
consideration it should have been obvious that the clause required the client,
on both rent reviews, to pay the same percentage increase as was made between
two other parties to a figure of which Mr Rose and the company were unaware. If
it were safe to assume that the initial levels of both the (unknown) headlease
rent and the underlease rent were in accord with open market levels that
arrangement might just be acceptable. The headlease rent would necessarily be
higher than the underlease rent. The mesne lessor would therefore have an
incentive to hold out for the lowest percentage increase possible. He could
never make an increased profit by allowing his own rent to rise. But very
little reflection would show that the position might be very different if
either of these assumptions could not be safely made. If the headlease rent
were below the market level, the percentage uplift to be applied to it at the
first rent review would be greater than the percentage uplift experienced in
rents generally, with the result that the company’s rent would be increased by
more than any general increase in rents warranted. If the agreed underlease
rent were above the open market level, the excess might be exponentially
increased during the 15-year term of the lease, even if the initial headlease
rent were at the open market level. If perchance the initial headlease rent for
the whole building were below the underlease rent for the ground-floor rooms,
then the mesne lessor would have no incentive to hold out at the rent reviews
for the lowest rent increase obtainable because the greater his own rent the
greater the profit rental he could exact from the company. These reflections
involve no element of valuation, on which a solicitor is plainly unfitted to
advise. They are reflections which, in my judgment, would and should occur to a
reasonably careful and competent solicitor called upon to consider and advise
on this clause against the background I have described. Having done so, he
would and should have advised the company that it was, on existing information,
impossible to say how the clause would operate in practice, but that its
operation might to a greater or lesser extent be disadvantageous to the
company; that unless both initial rents were known and investigated and found
to be at open market levels, the risk of disadvantage could not, on the
proposed wording, be eliminated; and that, as matters stood, the company should
not consider entering into a lease which contained this clause. Distasteful
though it is to make a finding of negligence against a dead man who cannot
defend himself, the inescapable fact is that Mr Rose did not give this advice
or anything like it and, in my view, he was negligent in failing to do so.
It follows
that I cannot agree with the approach of the deputy judge to this matter. I
accept the inference which he drew ‘that Mr Rose would have explained its
effect, namely that the original rent would be reviewed upwards in step with
the increases in market value in the headlease’. This explanation was not
itself entirely accurate, if the headlease rent was below the open market
level, but more importantly, it did nothing to alert Mrs Feldman to the
possible risks I have mentioned. The deputy judge found that Mr Rose gave no
further or fuller explanation, but I (unlike the judge) think he was bound in
law to do so. I cannot accept the distinction drawn between legal consequences
and financial implications, because in this case the significance of the legal
consequences lay in the financial implications. Even accepting that Mrs Feldman
was not a naive innocent in the commercial world, I regard this as a classic
case in which the professional legal adviser was bound to warn his client of
risks which should have been apparent to him but would, on a simple reading of
the clause, have been most unlikely to occur to her.
It was argued
for Pulver’s that if, contrary to their primary submission, Mr Rose was
negligent at all, no damage flowed from that negligence. This submission rested
on the conduct of the company in instructing other solicitors, Aubrey Croysdale
& Stern, before the second underlease was granted. That, it was said, broke
the chain of causation; any damage which the company may be shown to have
suffered flowed from the negligence of these new solicitors and not Pulver’s.
It is quite true that when the new solicitors were instructed they knew, as
Pulver’s in February 1979 had not known, the rent under the headlease. But
Pulver’s had known that rent in May 1979, two-and-a-half years before they
ceased to act. They advised on the new underlease in October 1980. The deputy
judge held that Pulver’s were not at that stage at fault in failing to review
the whole transaction. That finding was not challenged on appeal. The decision
was then made to seek a new underlease, the head lessor’s consent having been
obtained and the security of tenure provisions excluded. The new solicitors
were instructed to implement that decision, not to review it. There is nothing
in the facts as found to support the conclusion that anything done or omitted
by the new solicitors broke the chain of causation between Pulver’s negligence
and whatever damage the company suffered.
The deputy
judge accepted Mrs Feldman’s evidence that if she and Mrs Balfe had known of
the financial implications of the rent review clause the company would not have
proceeded. Having, however, concluded that there was no effective negligence by
Mr Rose, the deputy judge made no finding on damages. In this court it is
accepted that we cannot carry out a detailed inquiry into damages. But we have
been asked to rule on the principles to be applied in assessing damages and
this we agreed to do.
The company
claim as damages the three sums which I have already mentioned: the capital sum
of £16,000 paid to the mesne lessor in consideration of his accepting a
surrender of the underlease in June 1984; £2,761 arrears of rent paid to the
mesne landlord as part of that settlement and £17,000 lost on the prospective
sale of the underlease and the goodwill of the company’s employment agency
business. It is to be observed that these figures exclude any element
attributable to the first five-year period of the underlease, during which it
may fairly be said that the rent paid by the company in excess of the open
market rent was the result of the company’s willingness to pay the rent asked.
It plainly had nothing to do with the operation of the rent review clause.
Pulver’s
attacked this method of calculating the claim as being bad in principle. It was
said that the correct measure of damage (whether in contract or in tort) for
negligent advice is the difference between (a) the open market value of the
asset acquired as it actually was and (b) whichever is lower of the price paid
and the open market value of the asset in the state in which, as a result of
the negligent advice, it was thought to be. I shall for convenience call this
‘the diminution in value rule’. In Pulver’s submission the diminution in value
rule is to be applied as at the date of breach of contract or entry into the
transaction and account should not in general be taken of events which occur
later.
The principles
to be applied in assessing damages in this case are, in my judgment, these:
(1) The overriding rule was stated by Lord
Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25
at 39 and has been repeated on countless occasions since: the measure of
damages is
that sum of
money 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.
As Megaw LJ
added in Dodd Properties v Canterbury City Council [1980] 1 WLR
433 at 451E:
In any case
of doubt, it is desirable that the judge, having decided provisionally as to
the amount of damages, should, before finally deciding, consider whether the
amount conforms with the requirement of Lord Blackburn’s fundamental principle.
If it appears not to conform, the judge should examine the question again to
see whether the particular case falls within one of the exceptions of which
Lord Blackburn gave examples, or whether he is obliged by some binding
authority to arrive at a result which is inconsistent with the fundamental
principle.
(2) On the authorities as they stand, the
diminution in value rule appears almost always, if not always, to be
appropriate where property is acquired following negligent advice by surveyors.
Such cases as Philips v Ward [1956] 1 WLR 471; Pilkingon v
Wood [1953] Ch 770; Ford v White & Co [1964] 1 WLR
885; and Perry v Sidney Phillips & Son [1982] 3 All ER 705
lay down that rule and illustrate its application in cases involving both
surveyors and solicitors.
(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 (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 (Dodd Properties, supra, at p 456H, 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.
(4) While the general rule undoubtedly is that
damages for tort or breach of contract are assessed as at the date of the
breach (see, for example, Miliangos v George Frank (Textiles) Ltd
[1976] AC 443 at p 468 per Lord Wilberforce), this rule also should not
be mechanistically applied in circumstances where assessment at another date
may more accurately reflect the overriding compensatory rule. Dodd
Properties, supra, both affirms this principle and illustrates its
application.
(5) On the facts of the present case the diminution
in value rule would involve a somewhat speculative and unreal valuation
exercise intended to reflect the substantial negative value of this underlease.
It would also seem likely to lead to a total claim well above the figure the
company claims. By contrast, there is firm evidence that £18,761 is what it
actually cost the company, as a result of an arm’s length negotiation after
expiry of the first five years of the underlease, to extricate itself from the
consquences of the negligent advice it had received. Unless (which seems
unlikely) it can be shown that payment of this sum did not represent a
reasonable attempt by the company to mitigate the loss it had suffered, this
figure would represent a fair assessment of one head of the company’s loss.
(6) Even after an appropriate measure has been
found to reflect damage recoverable under the first limb of the rule in Hadley
v Baxendale [1854] 9 Ex 341, there will be cases in which a plaintiff
will not be adequately compensated unless he receives damages to reflect his
loss under the second limb also. In claiming £17,000 for loss of its
prospective sale of the lease and the goodwill of the business the company
advances the present as such a case. It must, however, be accepted on the
findings of the deputy judge that if it had not been negligently advised the
company would not have entered into this underlease at all. This being so,
damage cannot be assessed with reference to a specific gain which the company
would only have made if it had entered into this underlease, unless it be
proper on the facts to conclude that, properly advised, the company would
probably have been able to negotiate the grant of this underlease but without
the offending clause. Even then the offer of £17,000 would call for closer scrutiny.
(7) It may alternatively be proper to conclude
when the facts are investigated that even if the company, properly advised,
would not have taken an underlease of 109 Queen Street, it would none the less
have taken an underlease of other premises from which to conduct its employment
agency business. On their initial introduction to Mr Cook, Mrs Feldman and Mrs
Balfe were shown other premises in Maidenhead and it may be that they would
have accepted the other premises had the Queen Street transaction fallen
through. Had they done so and had the company conducted its business from the
other premises, it may be correct to infer that goodwill would have been
established and (perhaps) a saleable lease obtained. But it would be proper to
approach this assessment in a cautious and conservative manner: the premises
chosen were clearly thought to be the more promising for purposes of the
business it was proposed to conduct; it does not follow that the business could
have been conducted as successfully from other premises; the value of the
company’s potential goodwill would have to be looked at in the light of its
accounts; there might be no prospect of obtaining a significant premium on sale
of a lease at open market rent; and the speculative nature of the assessment
should be borne in mind.
(8) Any damages awarded would no doubt attract an
award of interest in the usual way.
I would
accordingly allow the appeal and remit the case to a Chancery Master for the
assessment of damages in accordance with the principles stated.
STEPHEN BROWN
LJ agreed and did not add anything.
SIR NICOLAS
BROWNE-WILKINSON V-C said: I only add a few remarks on two points.
First on the
issue of liability for negligence. In addition to those matters referred to by
my lord, in my judgment the rent review clause was in itself so unusual that
any careful solicitor would have considered its repercussions very carefully.
Its effect was to make the rent payable under the underlease wholly dependent
on the proper operation of the rent review clause in the headlease. The rent
review clause in the headlease required the service of a counternotice by the
tenant, time being of the essence, if the revised rent proposed by the head
landlord in his notice was not to become binding. The hazards involved in the
operation of such rent review machinery are notorious. Even if the machinery
were properly operated, under this clause the underlessee had no say whatsoever
in the negotiation or fixing of the rent payable under the headlease on a
review.
Faced with
such a clause, a solicitor properly discharging his duty to his client would
have had to consider very carefully its repercussions. If very careful
consideration had been given to this clause, Mr Rose would very soon have
discoverd the actual hazard which has caused damage in this case, which my lord
has illustrated. Having discovered that, he would have had to warn the clients
(the company) of the risks involved in accepting such a clause, at least
without knowing the rent payable under the headlease.
In the
circumstances, it seems to me that Mr Rose was most clearly put on inquiry as
to the effect of this clause. He neither pursued the necessary inquiries nor
gave adequate warning of the hazards to the client.
As to measure
of damages, in my judgment the diminution in value rule is wholly inappropriate
to the quantification of damages in this case. The diminution in value rule is
concerned with a case where the client has purchased for a capital sum a
property having a capital value. Such client thinks that it has certain
features which render it more valuable. Due to the shortcomings of his
professional adviser he is not aware of the fact that it lacked these features.
The measure of damage is the difference, put broadly, between its actual value
and the value it would have had had it possessed the features which he thought
it had. The essence of such a rule is to compare two actual values. In the
present case the company was buying an asset which, as it thought, could have
not capital value; it was buying an underlease at a rack market rent which
would have no capital value. As a result of the negligence by the solicitors the
company has exposed itself to a long-standing liability requiring it to pay
substantial sums out of pocket. To apply any test of capital diminution in such
circumstances would be wholly artificial. The loss suffered is the liability to
pay a sum over a period of time. The company managed to extricate itself from
such liability by the down payment of a capital sum. In my judgment, the
capital sum it had to pay is the true measure of damage under that head.
I agree with
my lord in saying that the price paid to the landlord to accept a surrender is
the right measure of damage under that head.
For those
reasons, and for all the other reasons given by my lord, I agree that the
appeal should be allowed on liability and the case remitted to a Chancery
Master for assessment of damages in accordance with the principles stated in
Bingham LJ’s judgment.
The appeal
was allowed on the issue of liability and the case was remitted to a Chancery
Master for the assessment of damages. Costs were reserved.