APPROVED JUDGMENT
The Honourable
A. INTRODUCTION
1. In these proceedings, the Claimants seek in excess of £4 million in damages against the Defendants for professional negligence arising out of the Defendants’ valuation reports of April 2005 relating to the four budget hotels now owned by the four individual Claimants. Although this case has a number of unusual features, it is, at its heart, a straightforward dispute about whether or not the valuations produced by the Defendants in their reports were within or outside a reasonable bracket/margin of error. Similar claims in respect of four other hotels were compromised shortly before the trial.
2. One of those unusual features concerns the identity of the four Claimants. A ‘K/S’ is a commercial entity with a legal personality under Danish law. It is, to all intents and purposes, a limited partnership. The four K/S Claimants in this case respectively own budget hotels in
3. The answer to that question lies in the inter-relationship between a number of parties, with rather different interests, who all feature in this story. In
4. Obviously, in order to find property in the
5. In about November 2004, ESL learnt that LR Economy Hotels Limited (“LR”) were planning to sell off eight of their hotels. Each of those hotels was leased out to the Accor hotel group, and operated under the ‘Ibis’ brand. They included the four hotels that are now the subject of this action. Within a few weeks, Scanplan had agreed to buy the eight hotels for £38 million. Thereafter there were some delays, which appear to have been connected to Scanplan’s need to raise financing for the purchase. Ultimately, the West Bromwich Building Society provided loans in respect of the purchase of the hotels in
6. After some further delays, on 27th May 2005, Scanplan exchanged contracts for the purchase of the eight hotels, including these four. Completion was achieved on 29th June 2005.
7. Although Scanplan were wholly responsible for the purchase of the hotels, the legal entity that bought each hotel was the individual K/S Claimant. At the time of the purchase, the only partner in those four K/S entities was Scanplan. Thereafter, in 2005, having purchased the hotels in the name of the individual K/S entities, Scanplan then looked for the necessary investors to buy shares in each K/S. In this way, Scanplan then divested themselves of any interest in the K/S entities and their hotels, and became entitled to about £1 million by way of fees. To that end, Scanplan produced detailed prospectuses for the individual K/S entities, which were then sent out to potential investors. A limit of 10 investors for each K/S was permitted. And that is how people like
8. The Defendants are expert hotel valuers. They acted for a variety of parties with an interest in these hotels. In October-December 2004, they were asked by LR’s bank to produce a valuation of the hotels. They produced a detailed valuation which suggested a total value for the eight hotels, including these four, of just over £39 million.
9. Scanplan/ESL then wanted their own valuation of the hotels in order to raise financing and, because of the Defendants’ particular knowledge, they wanted them to produce that valuation. Although the issue of a potential conflict of interest was properly raised by
10. There are two principal elements of the claim in negligence against the Defendants. The first focuses on what the Defendants said, or did not say, about the lack of rental growth in respect of these four hotels. It is the Claimants’ case that they would never have bought these hotels if they had realised that, because of an unusual feature of the lease arrangements, the base rent was not likely to be exceeded by the (higher) turnover rent, at least in the medium-term, and that therefore, in the absence of a rent review provision, there would be no, or very little, prospect of rental growth. It is the Claimants’ case that they were misled into thinking that there would be rental growth by mis-statements in the Defendants’ valuation reports.
11. The second part of the case in negligence is the allegation that the valuations for these four hotels were too high and outside any permissible bracket/margin of error. It was common ground that a key factor in identifying the value of a hotel is its net initial yield, which is stated as a percentage. That percentage is then translated into a multiplier which, when multiplied by the annual rent, produces the valuation figure. The lower the yield percentage, the higher the multiplier, and therefore the higher the value of the hotel. It is the Claimants’ case that the Defendants’ yield figures, which were all in the region of 6.25%, were much too low and should have been in the region of 7% and, for
12. Before addressing each of those issues, I must address a number of the difficulties which have arisen in connection with the documentary evidence and the oral evidence in this case. I do that at Section B below. Then, at Section C below, I set out the relevant events by reference to such documents as have been provided. Thereafter, at Section D below, I deal with the negligent mis-statement case against the Defendants in respect of rental growth and, at Section E below, I analyse the over-valuation case. There is a brief summary of my conclusions at Section F below. I should at this stage express my gratitude to leading counsel for the efficient way in which this trial was conducted and kept to its original timetable.
B. OBSERVATIONS ON THE EVIDENCE.
B1. The Missing Documents
13. Both before and during the trial, there was a persistent problem with the Claimants’ disclosure. A large number of documents which I would have expected to see, and which I regard as important, were simply not disclosed. Some, but not all, of these difficulties can be traced back to the fact that, although Scanplan had set up the purchase of the hotels and, at the time of the purchase, was the only partner in the K/S entities, they no longer had any share or interest in the Claimants. Indeed, I was told that the Claimants are now pursuing separate claims against Scanplan in
14. First and foremost, there has been no disclosure of the internal Scanplan documents. I accept
15.
16. Having considered this material carefully, I have reached the firm conclusion that further efforts should have been made to obtain the internal Scanplan documents. That is because:
a) At the time that the K/S entities were created, they were wholly owned by Scanplan. Therefore, it seems to me that the K/S entities had the legal right to see all of Scanplan’s internal documents relating to the purchase of the hotels, and could have issued an application for third party disclosure, either here or in
b) Mr Stockler’s affidavit records that Scanplan had told him that going through their emails “was a big job” and they would need to use a keyword search to facilitate the process. But there is no evidence as to what keywords were used, and how (or even if) such an electronic search was actually conducted.
c) Mr Stockler’s affidavit is also rather vague as to what precisely he was asking for and what responses he was getting. There are no contemporaneous documents, letters or attendance notes evidencing his requests to Scanplan or their responses.
17. In addition,
18. The Defendants’ criticisms are not limited to Scanplan’s internal documents. Although, somewhat reluctantly and late in the day, certain files were produced by ESL, it was plain from the evidence that there were other documents relating to this purchase which ESL would have had or created, and which have not been disclosed. Given ESL’s central role, these omissions are potentially significant. In addition, Scanplan’s mortgage broker,
19. I consider that the Claimants were entitled as of right to a copy of all of ESL’s files and all of Mr Hinks’ files. They were both acting as agents for the K/S entities at the time of the purchase of the hotels, and the documents would have been held by them on behalf of their principals. For the reasons that I have given, I am not persuaded that proper attempts were made by the Claimants to obtain what were, in law, their own documents.
20. As a result of these omissions, as I made plain to the parties during the closing submissions, I am uneasy that, in telling the detailed story in this case, and making findings of fact in a large case of professional negligence, I am doing so on an incomplete understanding of all of the relevant events. That is an unsatisfactory position for any judge to be in. Unhappily, my unease has been compounded by the Claimants’ decision to claim privilege in relation to their then solicitors’ file (and other documents as well).
B2. The Privileged Documents
21. The solicitors acting for Scanplan at the time of the purchase of the eight hotels were Maxwell Batley. Their input and advice was obviously of great importance to the issues before me, particularly in relation to the terms of the Accor leases: the Claimants’ case in these proceedings on rental growth arises out of the unusual terms of those leases. Although the Claimants have disclosed Maxwell Batley’s Reports on Title, and some other Maxwell Batley documents, they have claimed privileged for the remainder of the Maxwell Batley documents.
22. I acknowledge at once that no adverse inferences may be drawn as a result of the Claimants’ assertion of legal professional privilege: see Sayers v Clarke Walker [2002] EWCA Civ 910 and China National Petroleum v Fenwick Elliott [2002] EWHC (Ch) 60. I therefore draw no such adverse inferences in this case. But it is only right to make plain that the Claimants’ decision to assert such privilege has compounded the difficulties created by their own inadequate disclosure, identified above. It has only heightened my concern that I am being asked to make findings on information that, one way or another, has been circumscribed.
B3. The Missing Witnesses
23. The problem of missing evidence in this case extended to the witnesses called on behalf of the Claimants. I was told that the critical decision in this case – the decision to purchase the hotels in May 2005 – was taken by
24. In addition, the individuals most closely involved with giving advice to Scanplan in the run-up to and at the time of that purchase were
25. Although
B4 The Factual Witnesses
26. As noted, the Defendants called
27. The Claimants called a number of the investors who now, through the K/S entities, own a share of these hotels. They were Mr Moller, Mr Stovring-Hallsson, and Mr Nyborg. They were all clear and concise. What came over from their evidence was the critical importance to them, as investors, of rental growth. Each of them said essentially the same thing: that the prospectuses published by Scanplan to encourage investors to buy shares in the K/S entities stated that, in relation to each of these hotels, there would be medium-term rental growth, because there would come a time in the relatively near future when the turnover rent would exceed the base rent. The investors each said, and I accept, that they would not have bought into the K/S entities if they had known that, in reality, there would be no rental growth, certainly not in the short and medium-term. Whose fault it was that these investors were misled in this way is an issue that I deal with in Section C10 below.
28. There was a witness statement from
29. As a witness, however, I found
C THE RELEVANT EVENTS
C1 The Accor Leases
30. In 2000, the four hotels that are the subject of these proceedings were owned by LR. They were let to Accor UK Economy Hotels Ltd (“Accor”), perhaps the best-known operator of budget hotels in
31. There was no rent review clause. Instead there was an arrangement by which, in certain circumstances, a higher rent, known as turnover rent, would become payable instead of the base rent. The turnover rent payable was assessed by reference to the amount by which 28.6% of gross turnover for any relevant turnover period exceeded the base rent payable in respect of that period. In other words, if the turnover of the hotel increased to a certain point, then Accor would have to pay rent at a commensurately higher level.
32. There was, however, an unusual feature of this arrangement. The lease provided that, in any turnover period where the specified percentage (28.6%) was less than the base rent, then the shortfall would be taken into account in the next and each successive turnover period, and would be deducted from the next payment of turnover rent. In other words, where the tenant failed to reach the specified percentage from its turnover, so that there was a shortfall when compared to the base rent, then the tenant carried forward the benefit of that shortfall to the next and successive turnover periods. So turnover rent would only actually become payable when the total shortfall, which might have been built up over a number of years, had been fully accounted for.
33. The evidence was that this was an unusual and ‘tenant-friendly’ provision. I shall refer to it below as “the shortfall clawback provision”. It meant that, depending on the precise forecasts for turnover growth, any rent higher than the base rent may not actually be payable for many years because, no matter how optimistic the forecast, the tenant had an entitlement to set-off the shortfall, which would have doubtless accumulated in the early years, before the turnover reached parity with the base rent. In this way, the prospect of rental growth in these hotels was adversely affected. It was this provision in the leases that the subsequent investors in the K/S Claimants complained that they had simply not been told about.
C2 The November 2004 Valuations
34. The documents suggest that, at some point in September 2004, the Defendants were asked to value the LR hotels. The instructions were originally issued informally by LR and then, more formally, by their bank, the Bank of Scotland, in a letter dated 22nd October 2004. The valuation date was 10th October 2004. A combined valuation report was provided to the Bank of Scotland, at least in draft, in about November 2004. It was dated 12th November 2004. It dealt with each of the eight hotels that were eventually bought by Scanplan, and therefore included the four with which these proceedings are concerned.
35. The hotel at
“The lease also provides for a surplus rent to be paid, when the turnover rent of 28.6% exceeds the guaranteed rent. However, based upon our projections the hotel will not generate any surplus rent until the 10th year of trading, and in our valuation we have taken this fact into account.”
36. The part of the report dealing with the hotel in
“Based upon our projections the hotel will generate surplus rent, and in our valuation we have taken this factor into account, by valuing this income stream at a capitalisation rate of 7.5% to reflect the additional uncertainty of this rent.”
37. In respect of the hotel in
“In our projections, the hotel will not generate any surplus rent until the sixth year of trading and in our valuation we have taken this fact into account. We have capitalised this income stream at 7.5% and applied a discount rate of 10% to reflect the additional uncertainly attached to it.”
38. Finally, in relation to Wellingborough, the Defendants indicated a net value of £4,790,000 and a net initial yield of 6.52%. Dealing with the rent, the text of the report said:
“The lease also provides for a surplus rent to be paid, when the turnover rent of 28.6% exceeds the guaranteed rent. However, based upon our projections the hotel will not generate any surplus rent, and in our valuation we have taken this fact into account”.
The spreadsheet setting out the calculations in relation to the hotel at Wellingborough identified the turnover rent at ‘0’ percent. That of course was an error; there was a turnover rent kicking in at 28.6% but, in the Defendants’ view, the rent was never going to exceed the base rent, so it was therefore not ultimately a relevant figure. As noted below, the error was spotted and understood by ESL.
39. The total valuation of the eight hotels arising out of the Defendants’ November valuation exercise was £39,080,000.
C3 The Early Involvement Of Scanplan/ESL
40. It appears that, at some point in November 2004, Scanplan, through ESL, expressed an interest in buying the eight hotels. Because of the missing documents, there is nothing which indicates how or why the possible sale of these hotels first came to the attention of Scanplan/ESL. However, the documents which ESL have disclosed demonstrate that, from the very outset of their involvement, ESL and Scanplan were aware of the particular rental provisions described in Section C1 above.
41. In an e-mail dated 5th November 2004, from David Owen at ESL to Andy Tudor, an estate agent at Donaldsons who seems to have been acting on his own behalf in bringing the possible sale of these hotels to the attention of ESL,
“Also we will need to see at what level the occupancy kicker comes in on each property and historic information on how close they are to hitting that level to try and estimate whether we will ever get anything over the base rent. Or we can give you a figure now assuming that we will only ever get the base rent and nothing else. On this basis I cannot imagine the yield will be that exciting though.”
42. On 16th November 2004,
“I need some more information on the Accor hotels, and some hep with getting the rent estimated, and a better description of what gets the rent to increase.”
43. Although, when he gave evidence,
“The way the lease works is that there is a fixed rent payable but once a certain turnover figure is reached the owner will receive 28.6% of the increased rent in excess of this figure. However, while the turnover is below that figure the shortfall between 28.6% of turnover and the actual rent paid will accumulate to effectively be repaid out of excess rent that should be paid to the owner once the turnover hurdle is exceeded.
I have attached a sheet which shows that, taking the average of the portfolio, this would happen in 2009 assuming that the average turnover increase for the previous two years is maintained. We are waiting to hear from the valuers as to whether this is a reasonable approach to take. You will see that the growth on some has been much better than the growth on others. We would either need to take this into account on the net initial yield we pay for each or (and I think you will probably tell me this will not be possible) try and find some way that each K/S could share in the average excess rent across the whole portfolio rather than just a single hotel.
Andy, could you confirm that once the hurdle is exceeded the excess rents will actually be paid to us rather than sitting in an accumulation account. This is obviously important for case flow.”
44. The calculations referred to by
45. Accordingly I find that, in consequence of these e-mails, ESL, and
46. It seems that Scanplan made a decision to buy the eight hotels on about 1st December 2004. There are no documents whatsoever to indicate their decision-making process; nothing to demonstrate what Mr Betting was relying on and why. However, given the email exchanges to which I have referred in paragraphs 41-45 above, it is clear that Scanplan agreed to enter into the (non-binding) agreement with LR to buy the eight hotels in the full knowledge of the shortfall clawback provision in the leases. This is important because Mr Kaalund, when shown in cross-examination the ESL email about the shortfall clawback provision referred to at paragraph 43 above, said that if he had seen it at the time, he would not subsequently have suggested to investors to buy into the K/S entities. He said that, in the light of that email, he was ‘very surprised’ that Mr Ashton had gone ahead with the purchase.
47. There is an e-mail from
48. There is one other event of note at this time. The day before the non-binding agreement was entered into,
C4 The Production of the Defendants’ November Report
49. As noted in Section C2 above, the Defendants had prepared their valuations for the Bank of Scotland in November 2004 and the bottom line figure of £39 million had been provided to LR. It appears that LR had used that figure to reach the non-binding agreement with Scanplan in the sum of £38 million. However, it appears that the final production of the reports themselves was delayed and they were not provided to the Bank of Scotland until some time in December. On 7th December 2004, LR told the Defendants about the non-binding agreement to purchase, and about Scanplan’s request that their own bank be allowed to rely on the Defendants’ valuation report. The e-mail said that if that happened “clearly he [Scanplan/their banks] will be paying for them”. This was the start of a long-running difficulty that the Defendants experienced in recovering their fees for the work that they had done in October-December 2004. The evidence was that LR/Bank of
50.
51. Just before Christmas 2004, the Bank of Scotland raised a number of points arising from the November valuation report produced by the Defendants. One of the questions that they asked was: “Have you been advised that there are a number of the hotels where there exists a subsidy account to take account of previous turnover shortfalls in relation to the base rent levels?” In his reply,
C5 Communications Between Scanplan, ESL and
52. At the end of 2004, and in the early months of 2005, there were a number of important communications between Scanplan, Mr Hinks and ESL. I identify below some of those which I consider to be of the most significance to the issues in the trial. The sequence of events set out in this part of the Judgment is also taken from those emails.
53. On 16th December 2004,
54. There were then delays as a result of problems in
55. In March and April 2005, the Defendants were instructed by the lenders to produce new valuations. Those instructions, and the valuation reports themselves, are dealt with in Sections C6 and C7 below. It appears that, in the meantime, ESL, Scanplan and Mr Hinks were somehow provided with copies of the Defendants’ November 2004 valuation report, summarised in Section C2 above. The November 2004 report was plainly studied carefully. For example, on 24th March 2005, in an e-mail to
56. Also at this time, Scanplan’s solicitor,
“I spoke to Maxwell Batley last night having read the original valuation report and my interpretation of the “turnover rent” and surplus over “base rent” differs from theirs. I read it as very tenant friendly i.e. if the base rent is £50k higher than the turnover rent in 1 year then it exceeds the base rent by £200k in the second year, the tenant will actually pay an additional £150k (£200-£50k) over base rent. Do you know whether that is right?”
Mr Harris’ understanding of the shortfall clawback provisions, as set out in this email, was entirely accurate. This therefore suggests that, at least at this stage, Mr Marks had a different (and erroneous) view, which was less ‘tenant-friendly’, and therefore more in Scanplan’s interests. Information concerning that interpretation, and who might have been aware of it, has not been disclosed.
57. On the same day, there were a number of other important e-mail exchanges on this same topic. At 11.43am,
58. The clarification from Lawrence Graham to
“The procedure outlined in the last paragraph on page 19 is a mechanism whereby the tenant is relieved of its liability to pay the Turnover Rent in circumstances where, in a previous accounting period, no Turnover Rent was payable on account of the fact and to the extent that the base rent exceeded the Specified Percentage of Gross Turnover. This difference is not payable by the Landlord back to the Tenant, but a record of this amount is kept and set off against future payments of Turnover Rent.”
Again, I find that this was a clear statement of the way in which the shortfall clawback provision worked. In the absence of any documents to the contrary, I assume that this correct analysis was passed by Mr Marks to Scanplan, ESL and Mr Hinks.
59. Also on this topic, and also on 1st April, at 5.24pm,
“Anthony, are you clear how the turnover rent/base rent provisions in the lease work on the above? Apologies if David has already covered this with you.”
On the 3rd April 2005
60. I make two findings about this exchange. First, I find that
61. Secondly, I find that
62. On 4th April 2005, again prompted by the Defendants’ original valuation report,
“This is all academic because presumably the previous shortfalls would wipe out any excess. The same applies for Wellingborough- it will never reach base rent but we will still need the correct percentages in there.”
“From the lender’s point of view, I do not think the structure of the lease would be a problem, because they tend to assume no growth anyway. So if it works for the Danes, it should work for the lenders.”
63. A number of points arise from this exchange. First, it demonstrates that, by this time, the Defendants’ valuation report of November 2004 had been carefully studied by ESL and Mr Hinks. To the extent that there were even minor errors in those reports, concerned with the correct rounding of figures and the like, these were well understood by ESL and
64. Thirdly, by reference to
65. On 14th April 2005, Mr Owen sent Mr Ashton a series of spreadsheet documents entitled “Interim Turnover Rent Certificate”. These documents were prepared by LR Hotels. They clearly stated the amounts of shortfall which had accumulated on each hotel being carried forward to the next period. The figures showed that, by the end of 2004, across the eight hotels, the total shortfall to be carried forward was in excess of £4 million. Again, the fact and the size of the shortfall would have come as no surprise, either to ESL or to Scanplan, in view of the previous communications to which I have already referred (paragraphs 41-45 and 56-63 above).
66. The whole purpose of the Certificates was to identify the level of the shortfall that was to be carried over when Scanplan bought the hotels. I find that, again, Mr Ashton, as the recipient of these e-mails, can have been in no doubt as to the effect of these figures. They revealed a total shortfall, as at the end of 2004, of over £4 million, and Mr Ashton can have been in no doubt that this large sum would have to be paid off before any surplus rent (over and above the base rent) would be payable to the owners. In cross-examination, Mr Ashton agreed that these documents would only have made sense to someone (like him) who understood the shortfall clawback provision.
67. In the middle of April 2005, it appears that
68.
C6 The Defendants’ Instructions
69. On 16th March 2005, the West Bromwich Building Society instructed the Defendants to undertake the valuation of the hotels, including
“With regard to specific instructions relating to this property, these are detailed as follows:-
To provide a satisfactory report and valuation of the current open market value of the property. You are requested to advise and comment upon the following:-
-the durability and saleability of the property over the proposed mortgage term of 20 years.
-the tenant demand for the property
-the current open market vacant possession value of the property
– the current open market rental value of the property
-the current open market investment values of the property based on both the current passing rents and current open market rents
-fire reinstatement value of the property.”
70. The
“Where premises are subject to occupational leases:
a) State whether the passing rent is above, at or below current market rents for the occupational lease.
b) Give an opinion on the financial standing of the tenant
c) State whether there is a guarantor
d) Describe the alienation provisions especially in relation to privity of contract and authorised guarantee agreements
e) Describe the landlord’s position relating to the recovery of outgoings
f) Describe the rent review provisions and comment if the landlord’s interest is adversely affected.
g) State whether there are any rental or service charge arrears.”
71.
72. Internally, the Defendants were clear that this work would involve making adjustments to their November valuation reports in two ways: first, by bringing it up to date to reflect current market conditions; and second, by altering the percentage for the notional costs of purchase. In the reports of November, this percentage had been put at 2.5% but the Defendants were now expressly requested to state it at 5.75%. In an e-mail of 24th March to
“Ibis Hotels-Tim Hinks will need the portfolio revaluing- the date is too late for his funders and the values are wrong (stamp duty exempt etc) I told him he had paid for a copy of the November report and he would need to re-commission this. Not mentioned fees, but a desk top would do. He was hoping that if we relooked at them, the values would stay the same or increase (he needs costs of 5.75% rather than 2.5% that we have allowed) I suggested that with the movement in the market this was likely to be OK. I said you were around to chat next week and you would discuss fees…”
73. It is clear that, even though they did not consider the work to be onerous, the Defendants were not overly-enthusiastic about these further instructions, due to the non-payment of their original fees. Their internal e-mails demonstrate this lack of interest. Eventually it was agreed that LR would cover the additional fees to allow the November report to be amended, up to a maximum of £5,575 plus VAT. Once this had been agreed, the Defendants then worked out how long it would take to revamp the November report.
74. Mr McCutchion confirmed in his cross-examination that, as a result of these exchanges, there were only two matters that he needed to consider when revamping the November report: the changing of the transaction costs percentage to 5.75%, and the adjustment of the yield to reflect any changes in the market since the previous valuation date of October 2004.
75. On the same day, Mr Hinks told Mr Owen and Mr Ashton that he had spoken to the Defendants and was chasing them for a schedule of values. He went on: “I will push them as much as possible on the numbers…” On 19th April 2005,
76 The 19th April 2005 was taken as the valuation date for the Defendants’ April 2005 valuation reports, dealt with in Section C7 below. The reports themselves were produced after that date. Thus, as
77. Although it had been agreed in March that the Defendants would provide eight separate reports (one for each hotel), in late April they initially refused to split up the original full report, apparently on cost grounds. Eventually, however, this is what happened. At the same time, it appears that one or two minor changes were made to the vacant possession values, again at the direct request of
C7 The April 2005 Valuations
78. In general terms, the valuation reports of April 2005 were in precisely the same form, with the same text, as identified in Section C2 above. As advertised, the changes were twofold: a change to reflect the purchase costs of 5.75%, and a change to the yield to reflect the movement in the market since the previous valuation date of October 2004. The evidence was that the market for budget hotels was improving throughout the latter part of 2004 and into 2005. It is common ground that a reduction in the yield identified in the November valuations was appropriate to reflect this. The Defendants therefore reduced the yield by about 0.25% in each case. However, since these were the reports on which the Claimants say they relied when they purchased the hotels, I identify the key ingredients of the four reports below.
a)
79. The April report stated at page 5 that “the hotel will be subject to a base rent which will be payable to the landlord each year. In the event that the base exceeds the rent in a year, the landlord will receive the base but any excess payment (above rent) can be claimed back by the tenant in any subsequent years where the rent exceeds the base”. This is agreed to be a correct statement of the shortfall clawback provision.
80. In a table headed ‘CBRE Projected Trading’ on page 37, forecasts were shown for years 1, 2, 3, 4 and 5.
81. The spreadsheet showing the figures was in the same form as before but now showed a net value of £4,920,000 and a net initial yield of 6.26%. Consistent with the text, it identified the turnover rent being higher than the base rent in year 6. There was an extremely important exchange about this spreadsheet towards the end of Mr Ashton’s cross-examination, when the point being made related to each of the four spreadsheets produced by the Defendants. It was put to Mr Ashton that he knew, when he looked at the spreadsheet at the time, that the shortfall had to be exhausted before the turnover rent shown there was payable. He agreed with that proposition.
b)
82. The text contained the same correct statement as to the shortfall clawback provision as is set out in paragraph 79 above. The figures assumed inflation growth of 2.5% per annum. There was an equivalent paragraph as to surplus rent being generated as could be found in the November report (paragraph 36 above). The net value increased to £5,430,000 figure and the net initial yield was reduced to 6.26%. The spreadsheet showed the turnover rent exceeding the base rent in year 7.
c) Wellingborough
83. Again, the report on Wellingborough contained the same correct statement as the shortfall clawback provision (paragraph 79 above). The text was largely replicated from the November report with the consequence that, whilst the full figures for 2004 were obviously not known in November 2004, and the report said so, the same statement was made in April 2005, even though, of course, by then the figures would have been known.
84. The report also included at page 38 the same paragraph as set out in the November report (paragraph 38 above), to the effect that, based on the Defendants’ projections, the hotel at Wellingborough would not generate any surplus rent. Again, the 0% for turnover rent, which was not an accurate statement of the turnover rent but a reflection of the Defendants’ conclusion that turnover rent would never be payable, was set out in the spreadsheet. Of course, this error had already been spotted by ESL in the original report and deemed by them to be of no account (see paragraph 55 above).
85. The valuation of the Wellingborough hotel was now £4,840,000, and the net initial yield had again been reduced to 6.26%. One of the points made by
d)
86. Again, there was the same correct statement in the text as to the shortfall clawback provision (paragraph 79 above). There was the same paragraph as in the November report to the effect that, according to the Defendants’ forecast, a surplus rent would not be generated until the tenth year of trading (see paragraph 35 above). This was then reflected in the spreadsheet. The net value was now put at £4,640,000. The net initial yield was put at 6.25%.
C7 The Reports On Title
87. At exactly the same time, the Reports on Title were provided by Maxwell Batley to the Claimants on the 8th May 2005. There is a report on each of the eight hotels. There was a detailed analysis of the turnover rent provisions. The relevant section of each report, for the purposes of these proceedings, was in the same terms:
“d) Failure to meet Specified Percentage
Where the Tenant’s turnover does not reach the Specified Percentage for any Turnover Period then the Tenant is only obliged to pay the Base Rent. The Lease goes on to provide that in any Turnover Period where the Specified Percentage is less than the Base Rent then this amount (“the Shortfall”) is taken into account in the next and each successive Turnover Period. The Shortfall will be deducted from the next payment of Turnover Rent. In effect, then, where the Tenant fails to reach the Specified Percentage from its turnover so that there is a Shortfall, then the Tenant carries forward the benefit of the Shortfall to the next and successive Turnover Periods.”
88. There was no dispute about the correctness of this passage and I find that it was a clear and unequivocal statement as to the working of the shortfall clawback provision in each of the relevant leases.
C8 The Decision To Purchase
89. The decision to purchase the eight hotels was made by Scanplan, who were the sole partners in each of the relevant K/S entities at the time of the purchase. According to Mr Ashton, the decision was actually made by
a) The valuation reports produced by the Defendants;
b) The Reports on Title produced by Maxwell Batley;
c) The plethora of advice received by and from
90.
91. Mr Speaight demonstrated in his re-examination of Mr Ashton that there was some pressure on Scanplan to go ahead with the purchase of these eight hotels in any event, because of the irrecoverable costs that they had already incurred by May 2005. These costs, which would had to have been payable even if Scanplan had pulled out, included the lender’s legal fees, the loan fee, some fees to Mr Hinks, a third of the fees incurred by Maxwell Batley, fees due to Danish lawyers, and fees due to a company which may have been a vehicle for Mr Tudor. This liability would have been quite considerable.
92. In addition, Scanplan and ESL had other reasons for wanting the deal to happen. The evidence was that they both stood to earn around £1 million each by way of fees if the sale went through. That was also a powerful motive for ensuring that no last minute hitches got in the way of the purchase.
93. One of the difficulties created by the absence of so many of the documents and the failure to call Mr Betting as a witness is the absence of any compelling evidence as to what, if any, room for manoeuvre Scanplan had in May 2005, and how their own commercial interest in the purchase going ahead was balanced against the potential risks. Were they obliged to go ahead because they had spent too much to back out now? Was there any room for negotiation with LR or were Scanplan in a weak negotiating position because of their decision, long before the Defendants’ April 2005 valuations, to enter into the agreement to purchase of December 2004? What, if any, priority was given to the fees that ESL and Scanplan would earn from the purchase?
94. The complete absence of relevant evidence makes it all but impossible to answer these questions. However, I am prepared to infer from the evidence that it is more likely than not that Scanplan relied upon the Defendants’ valuation figure for each of the hotels, as set out in each of the eight reports. In particular, I think that the email traffic, such as the email from
C9 The Scanplan Prospectuses
95. Following
96. The prospectuses were each in very similar form. It is therefore only necessary to consider one in any detail, and I take the prospectus in relation to Wellingborough, which
a) The opening page, which was a summary of the best features of the hotel from an investment point of view, said:
· “UK Hotel property in an attractive location in Wellingborough
· 20 year non-terminable lease contract guaranteed by Accor (UK) Limited. Accor (UK) Limited is part of the Accor chain with its 4,000 hotels is the world’s largest hotel chain.
· In addition to the agreed minimum rent, the rent rises with the hotel’s turnover”
b) At page 1, the rent was referred to as “a minimum of £320,253, with the option of an additional rent, which tracks the turnover of the Ibis Hotel Wellingborough”.
c) Page 7 of the prospectus said that: “It is the aim of the prospectus to provide a true and comprehensive picture of the limited partnership’s assets liabilities, financial position, and expected financial performance.”
d) At page 9, a comparison between the rental market in the
e) In relation to lease details, at page 15 the prospectus said this:
“The lease contract has been entered into with Accor UK Economy Hotels Ltd with a guarantee from Accor UK Limited. The rent is set throughout the lease term at 28.6% of the lessee’s turnover, subject to a minimum, however of £320,253, referred to as the basic rent.
Over and above this agreed basic rent, the investor will thus receive 28.6% of the rise in the hotel’s turnover, once the turnover exceeds approximately £1.1 million. Turnover, today, is almost £0.9m. In other words, the rent starts to rise in parallel with the hotel’s turnover when the latter has risen by around 26%. In relation to standard
1) Annual rate of increase
2) No or very low costs in relation to rent reviews
3) Reduced uncertainty concerning the rate of increase in the rent.
Firstly, the lease contract provides for annual rises in the rent, once the hotel’s rent turnover has passed the £1.1 million. Normal
Secondly, the expense of rent reviews is saved, which can frequently be significant. This is because, in this case, hiring a chartered surveyor to carry out the rent review, as would normally be the case, is not necessary.
Thirdly, uncertainty surrounding the rate of increase in the rent is reduced, as there are the hotel’s official financial statements to use as a basis, and it is not necessary to identify similar leases to calculate the increase in the rents.
Experience furthermore suggests that the turnover of hotels of this type follows the retail prices index.
Over the last 10 years this index has risen on average by 2.65% pa. According to the latest published figures, the rise in the RPI is now 3.4% pa. The hotel itself has actually, over the last 2 years, shown a growth in turnover of 1.9% and 12.5% respectively. Nonetheless, we have budgeted carefully, projecting the first rise in rent in 2014, which corresponds to an annual growth in turnover of only 2.5%.
f) At page 33 there was what was described as a “Summary of the solicitor’s review”. The critical part of this page said:
“No rent review has been agreed in relation to the basic rent, which is therefore fixed at £320,253 pa. The annual rent is, however, adjusted upwards to the extent that 28.6% of the gross turnover exceeds the base rent. The gross turnover is defined as the gross revenue from the lessee’s sale of service units in a period aligned with the calendar year. If turnover does not reach the specified percentage in the period, the lessee is obliged to pay only the basic rent”.
97. I find that, in two critical respects, the prospectus issued by Scanplan in respect of K/S Wellingborough bore no relation to the advice provided to it by its
98. Secondly, the ‘Summary of the solicitor’s review’ was, in reality, no such thing. In his Report on Title,
99. These two omissions could not have been more important. Each of the investors bought into the K/S entities as a result of these prospectuses. They told me that, if they had known that there was in fact no prospect for medium-term rental growth (either because the turnover would not exceed the base rent or because of the shortfall clawback provision) they would not have invested in the K/S at all. But, certainly in relation to Wellingborough, neither of those omissions can be traced back to the Defendants or to Maxwell Batley; on the contrary, although both the Defendants and the solicitors had provided the correct advice, that advice was not included in the prospectus. Why not?
100.
101. I can deal more shortly with the prospectuses in respect of
102. As to rent rises, the prospectus for
103. Finally, I should also note that each of the four prospectuses emphasised that Scanplan had bought the hotels for less than the valuations provided by the Defendants. This provides further support for the conclusion that Scanplan relied on the Defendants’ valuations when buying the hotels, although it also suggests that, if the Defendants’ figures had been lower then, depending on the precise figures involved, Scanplan would have attempted to re-negotiate rather than pull out altogether.
C10 The Production and Effect of the Prospectuses
104. In his opening and closing submissions,
105. In my judgment, there is no evidence on which I could find that the omission from the prospectuses of any reference to the shortfall clawback provision (or its effect) was inadvertent. On the other hand, there is a considerable amount of evidence which leads me to infer that the omission must have been deliberate. Amongst the particular factors which lead me to infer that the omission was deliberate are the following:
a) Scanplan would have known that the possibility of medium-term rental growth was important for the investors. In those circumstances, they would have had a clear incentive to play down forecasts which suggested that there would be no such rental growth. Whilst I note Mr Speaight’s submission that they would have been unlikely to have knowingly excised the offending passages, because they would have known that this would subsequently result in trouble with the investors, that argument assumes that, in the summer of 2005, Scanplan intended to be in business for the longer term. But, as with so many matters surrounding Scanplan, I have no direct evidence as to that, because of the failures noted in Sections B1 and B3 above. In addition, I note that Scanplan have subsequently been through a name-change, the departure of key staff like Mr Ashton, complaints about Mr Betting’s conduct that were made to the authorities in Denmark, the suggestion of a police investigation, and now the Danish equivalent of receivership/liquidation. That all suggests that Scanplan (or more properly Mr Betting) may not have had an intention to be in business for much longer after 2005.
b) Further, I cannot help but record other evidence which, in my view, indicated a cavalier attitude on the part of Scanplan to the subsequent investors, and which was therefore consistent with the deliberate omission of pessimistic material from the prospectuses. There was the evidence of Mr Moller that, although Scanplan were aware of the rental growth problem in 2006, they sent a representative to the board meetings of K/S Wellingborough in 2006 and 2007 who made no mention of the problem at all. And there was the evidence of Mr Stovring-Hallsson to the effect that he raised the problem with Mr Betting directly, who had no explanation and took no action. It seems to me that such evidence is consistent with the deliberate excision of the warning in the Maxwell Batley Reports.
c) The warning about the shortfall clawback provision was clear in those reports; indeed it was also apparent from at least one part of the text of the Defendants’ valuation reports (paragraph 79 above), as well as the numerous emails from ESL set out in Sections C3 and C5 above. It is inherently unlikely that those at Scanplan putting together the four prospectuses would have inadvertently failed to address this critical information, given that it came from (and was contained in) so many different source documents.
d) If the omission was a mistake, it was not made once but on four separate occasions, in four separate prospectuses, each of which was different. (Indeed, I assume that the same omission also arose in connection with the other four prospectuses as well, in respect of which the claims have been compromised). Moreover such a mistake itself would have been based upon the failure to register advice from numerous sources. Again, such a scenario is so unlikely that it must again suggest that the omission was deliberate and not inadvertent.
106. Furthermore, I have noted that, in relation to rental growth, and the date when surplus rent might become payable, the prospectuses do not reflect the Defendants’ reports, and instead set out Scanplan’s own forecasts and calculations. In the case of Wellingborough, this involved forecasting rental growth when the Defendants had said that there would be none (paragraph 84 above), and when ESL had also said that there would be none (paragraph 62 above). In the case of the other three hotels, it involved a different and more optimistic forecast than that provided by the Defendants (paragraph 102 above), and different again to the forecasts produced by Mr Bentzen (paragraph 68 above). How, one asks rhetorically, can that have been a mistake? Specific figures and calculations were inserted by Scanplan into the prospectuses which did not come from the Defendants. In the absence of any evidence as to how these figures were arrived at, I cannot accept that they were included in the prospectuses ‘by mistake’.
107. I have already said that I accept that Scanplan relied on the Defendants’ bottom-line valuation figures. But the findings set out in the previous paragraphs will be relevant to the wider negligent mis-statement case dealt with in Section D below, where the issue of reliance is central. In addition, what this analysis of the omissions from the prospectuses also highlights is that the investors who now constitute the four K/S Claimants are only here, pursuing this claim against the Defendants, because they relied on the terms of the Scanplan prospectuses which were, in my view, wholly misleading.
D. THE NEGLIGENT MIS-STATEMENT CASE ON SHORTFALL/RENTAL GROWTH
D1. Duty
108. On behalf of the Claimants, Mr Speaight argued that, in addition to the admitted duty which the Defendants owed to the Claimants in relation to the valuation exercise, the Defendants also owed a duty to take reasonable care not to mis-state in their reports any important matter that they might have considered when undertaking that valuation exercise. He submitted that, by reference to the classic statements of duty in the professional negligence context, such as Hedley Byrne & Co v Heller & Partners [1964] AC 465 and Customs & Excise Commissioners v Barclays Bank Plc [2006] UKHL 28, the Defendants in this case voluntarily assumed such a duty to the Claimants because they possessed a special skill and, in return for fees, made statements which they knew or could reasonably have foreseen would be relied on by the individual Claimants and lead to foreseeable loss.
109. On behalf of the Defendants,
110. I consider that, taking account of all the circumstances, there was a separate duty of care, as alleged by the Claimants. It seems to me to be artificial to suggest that a valuer in the position of the Defendants owed a duty in relation to the ultimate valuation, but no duty in respect of any other statements in their report that might be both significant and erroneous. There may be difficulties with such a case for other reasons (being able to establish reliance, for example, on any part of the report beyond the stated valuation figure) but that is a different issue. Accordingly it seems to me that, in relation to these hotels, the Defendants owed a duty of care in tort that extended beyond the pure question of valuation, to the making of negligent statements.
111. For what it is worth, however, I do not accept that, in relation to the hotels at Bradford and Wellingborough, the duty was extended further or confirmed by the letter of instruction from the Alliance and Leicester (paragraph 70 above) which expressly required the Defendants to “describe the rent review provisions and comment if the landlord’s interest is adversely affected”. There were no rent review provisions in this case, something which the Defendants made plain in their report, and something of which Scanplan made much in the prospectuses. The issue therefore did not separately arise for the Defendants to consider.
D2. Breach
a)
112. It is the Claimants’ case that the Defendants were in breach of duty in relation to these three hotels because the valuation reports of April 2005 said that the hotels would generate surplus rent in the sixth, seventh and tenth year of trading respectively, and those statements were wrong and negligent because they failed to take into account the shortfall clawback provision. In particular, they draw attention to the forecasts, referred to at paragraphs 80, 82 and 86 above, which the Claimants say mis-stated the position, because they ignored the effect of the clawback.
113. The Defendants say that, although these statements were ineptly worded, they have to be seen in the light of the fact that each of the April 2005 reports also expressly set out the shortfall clawback arrangement at the outset of the report (in the terms set out in paragraph 79 above) and that, seen in that context, these statements were not made in breach of duty.
114. I have concluded that the Defendants’ forecasts as to when surplus rent might be generated on these three hotels did constitute a negligent mis-statement. The average intelligent reader of the April valuation reports would have concluded that the shortfall clawback provision, referred to at the outset of each report, had been taken into account in the Defendants’ future projections as to when the surplus rent would be payable. To that extent, I do not regard the passages in the April reports as being in any way inconsistent; the paragraph in the earlier part of the report summarises the shortfall clawback provision, whilst the later paragraph would reasonably have been taken to have allowed for that provision in the forecast.
115. It is easy to see how this breach of duty occurred. The spreadsheet was set up in such a way that it tracked, by reference to forecast increases in turnover, the year when the turnover rent would exceed the base rent. That calculation was then fed straight into the text. Thus the text took no account of the shortfall clawback provision. So I agree with Mr Speaight that the error which the Defendants made was to fail to make any allowance in the spreadsheet (or more properly in the computer programme which ran the spreadsheet) for the effect of the shortfall clawback provision.
b) Wellingborough
116. In my judgment, there was no similar breach in relation to Wellingborough. Contrary to their reports on the other three hotels with which I am concerned, the Defendants made it plain that, in relation to the Wellingborough hotel, there was no possibility of surplus rent. That statement was clearly set out on the face of their April valuation report and, even if the statement of the turnover rent at 0% was a technical error, it seems to me that, in one way, it made it even clearer that, in their view, no surplus rent would ever be payable.
117. I reject the suggestion that, in some way, the Defendants erred because they did not set out the forecast that there would be no surplus rent on Wellingborough in what might be called neon terms. It seems to me that this criticism is entirely artificial. The court has to assume that the Defendants’ April 2005 valuation reports, which are at the heart of this case, would have been read carefully by an intelligent reader. Had they been read carefully at Scanplan (and there is no evidence that they were not), it would have been seen at once that there was no prospect of rental growth on Wellingborough.
118. Of course, in one sense, the Defendants were fortunate in respect of Wellingborough, because there was nothing to say that they had considered the shortfall clawback provision here, any more than on the other three hotels. The point, however, was that the clawback was academic at Wellingborough, because the Defendants had advised that turnover would never get to the stage when the base rent was exceeded, just as
119. In those circumstances, I reject the negligent mis-statement claim against the Defendants in relation to the hotel in Wellingborough.
D3 Causation and Reliance
a) The Issues
120. Accordingly, although I reject the case at the breach stage in relation to Wellingborough, I accept the Claimants’ case that, in relation to the hotels in Lincoln, Chesterfield and Bradford, the Defendants owed a separate duty to the Claimants and that they were in breach of that duty because they made forecasts as to future rental that failed to take into account the shortfall clawback provision. Thus it is necessary for me to go on to consider issues of causation and reliance which, on this part of the case, was where the parties were principally at odds.
121.
122. In addition, Mr Lawrence said that ESL, who were at the very least Scanplan’s agents, and therefore the agents of the legal entity who constituted the K/S at the time of purchase, were also well aware of the provisions. He relied on the proposition that where, in the course of any transaction in which he is employed on the principal’s behalf, an agent receives notice or requires knowledge of any fact material to that transaction, then the principal is precluded from relying upon his own ignorance of that fact and is taken to have received notice of it from the agent: see Ayrey v British Legal and United Provident Assurance Co Ltd [1918] 1KB 136 and paragraph 137 of Halsbury’s Laws of England, 5th Edition, Volume 1 (Agency), 2008.
123.
124.
b) Analysis
125. The findings that I have made in Section C above that are relevant to the issue of reliance can be summarised as follows:
a) Scanplan (certainly Mr Ashton) knew about the shortfall clawback provision and how it worked. They knew about it because they had received repeated advice about the provision and its effect from ESL (see in particular the e-mail exchanges at paragraphs 41-45 and 56-61 above) and because of the clear terms of the Maxwell Batley Reports on Title.
b) Scanplan (certainly Mr Ashton) had not queried any of this advice (paragraph 45 above) and had subsequently confirmed that they understood it (paragraph 61 above). This should be compared with Mr Kaalund’s genuine surprise when he first saw the advice that Mr Ashton had received about the shortfall clawback provision (paragraph 46 above).
c) Scanplan (certainly Mr Ashton) had received detailed advice from the same sources as to the relevant figures, which demonstrated the potentially significant financial effect of the shortfall clawback provision. They had been advised, for example, that sums in the order of £2.27 or £4 million by way of turnover rent had to be earned before a penny of surplus rent would actually become payable (paragraphs 44 and 65-66 above).
d) Scanplan and/or ESL also knew that the forecasts provided to the lenders would be based upon the assumption that there would be no rental growth (paragraphs 53 and 62 above) and, despite having opportunities so to do, they had not indicated that Scanplan had a different or contrary interest (paragraph 63 above). Indeed, they cheerfully accepted that, at least for some hotels, rental growth was “academic” (paragraph 62 above).
e) Mr Ashton confirmed in his cross-examination that he knew, when looking at the spreadsheets produced by the Defendants in their valuation reports, that the shortfall had to be exhausted before the turnover rent there forecast would become payable (paragraph 81 above). That it was not difficult to spot this point was consistent with the evidence of one of the investors, Mr Stovring-Hallson, who did not even have the forecasts, but said that he immediately saw the problem when he read the lease (paragraph 48 above).
f) Scanplan (certainly Mr Ashton) were also aware that the Defendants had advised that at least one of the hotels with which we are concerned, namely the hotel in Wellingborough, was not going to achieve anything other than the base rent over the 20 year term of the lease (paragraphs 38 and 84 above).But when they came to produce their prospectus, Scanplan plainly did not rely upon the rental growth forecast in the Defendants’ Wellingborough report. If they had done, the prospectus on Wellingborough would have made it plain that there was going to be no rental growth. Instead, Scanplan did their own calculation (paragraphs 97 and 106 above).
g) Similarly, in relation to the hotels in
h) Maxwell Batley’s Reports on Title were not properly summarised in the prospectuses because the advice about the shortfall clawback and its effect was omitted altogether. That again suggests that Scanplan were not relying on at least some aspects of the advice which they received (paragraphs 98 and 105 above).
126. Armed with all this detailed information (both positive and negative), Scanplan – who were, at the time of the purchases, the sole partner in each of the K/S Claimants – went ahead and bought the hotels. In the absence of any evidence to the contrary, I conclude that this decision can only have been taken because Scanplan believed that, despite the clear advice/knowledge concerning the shortfall clawback provision which they received, the hotels represented a worthwhile investment opportunity for them. The findings summarised in paragraph 125 above lead to the overwhelming conclusion that, whilst they relied upon the Defendants’ final valuation figure for each hotel, Scanplan did not separately rely on the Defendants’ rental growth forecasts, and therefore did not rely on the Defendants’ failure to take account of the shortfall clawback provision when undertaking those forecasts.
127.
128. Whilst Mr Speaight was right to say that the courts will often be prepared to infer reliance from relatively limited material, it is not appropriate to infer that the claiming party relied on a statement that purported to say X, when the overwhelming evidence is that the claiming party knew that the position was, in truth, Y. That is this case. Moreover, Mr Speaight’s authorities on the issue of reliance were all concerned with reliance upon the ultimate valuation figure (which I have found to have occurred in this case, but which is irrelevant to this part of the claim) and not with reliance upon separate statements in the report, which is the issue with which I am presently concerned.
129. One of the cases to which I was referred was Tenenbaum v Garrod [1988] 2 EGLR 178, in which the Court of Appeal dismissed an appeal in a case where the claimant alleged that he had relied on a letter from the respondent estate agent who had valued a property at £400,000. The judge accepted, and the Court of Appeal agreed, that the letter was not intended as a genuine independent valuation; that it was known to the appellant that it was sent as a bargaining counter in negotiations with the liquidator; and that the appellant did not therefore rely upon the valuation figure. It seems to me that this is not that far removed from the present case: whatever the Defendants’ reports said on the topic of rental growth (and whether or not they took into account the shortfall clawback provision), Scanplan did not rely upon it, because they had received clear advice from a variety of sources that focused expressly on that very provision, and ultimately undertook their own calculations and forecasts.
130. I reiterate that, on the issue of reliance, I have been hampered by the lack of any evidence, either oral or contemporaneous, from
131. Of course, on the basis of my findings of fact, summarised above, the issue as to whether Scanplan (as principal) should be imputed to have the knowledge that ESL had (as their agent) is largely immaterial. Assuming for the moment that Mr Speaight is right, and reliance is entirely a subjective matter, the evidence of Mr Ashton and the evidence of the contemporaneous documents is clear beyond any doubt: ESL (and others) had told him about the shortfall clawback provision and its financial effect, and he had acknowledged that he understood that advice. In those circumstances, the only inference that I can properly draw is that Scanplan in general, and
132. However, although it is not strictly necessary for me to decide the point, I should add that, in my judgment, Mr Lawrence was right to say that Scanplan were fixed with the knowledge of their agents (in particular, ESL). It would be absurd to find that Scanplan did not know about the shortfall clawback provision, and its legal and financial effect, in circumstances where ESL – who were acting on their behalf throughout – had a complete knowledge of both matters. Such a conclusion would also be contrary to the principle of law set out in paragraph 122 above.
133. For all these reasons, I conclude that the separate claim based on negligent mis-statement fails on the issue of reliance. The Claimants did not rely on the Defendants’ mis-stated forecasts when purchasing the hotels.
D4. Loss
134. Again, although it is unnecessary for me to express a view as to the loss claimed arising out of the mis-statement case (because I have concluded that there was no reliance) I ought to add, for completeness, that I was not at all convinced on the evidence that an entitlement to the pleaded loss said to arise from the mis-statements had been made out. The Claimants’ case on loss is the same in respect of both the negligent valuation case and the negligent mis-statement case; it is principally the alleged over-payment for the hotels. Whilst, of course, that would be the prima facie measure of loss arising out of the claim for negligent valuation, it by no means follows that that would be the measure of loss arising out of the separate mis-statement case in respect of rental growth. Even if, contrary to my finding above, there was reliance on the mis-statements as to rental growth, there was no evidence to support a conclusion that, if the Defendants’ valuation figures had been non-negligent but the error in their rental growth forecast had been known, Scanplan would not have gone ahead and bought the hotels.
135. In order for the Claimants to recover the alleged over-payment for the hotels as a result of the mis-statement case alone, it seems to me that they would need to demonstrate that, notwithstanding the reasonableness of the Defendants’ valuation (which would have to be assumed for this purpose), specific advice about rental growth and the shortfall clawback provision would have meant that they would have not bought these hotels after all, thus entitling them now to claim damages for mis-statement on the basis of over-payment for the hotels. I was troubled about the absence of cogent evidence to support such a case and put the point to
D5 Summary on Negligent Mis-Statement Allegation.
136. A separate duty was owed by the Defendants to the Claimants to take reasonable care in making statements about rental growth in general and the shortfall clawback provisions in particular. For the reasons set out above, I find that there was no breach of that duty in respect of Wellingborough. In relation to the hotels at
137. Of course, as I have made plain throughout this section of the Judgment, that only deals with the Claimants’ case concerned with the negligent mis-statements themselves. If the negligent mis-statements as to the shortfall clawback provision/rental growth gave rise to or formed part of a negligent valuation by the Defendants (because, for example, the failure to note the effect of the clawback resulted in an unjustifiably optimistic valuation figure), then the Claimants would have an entirely separate cause of action against them. Moreover, that claim would not be vulnerable to the same causation/reliance arguments, because I have found that Scanplan did rely upon the Defendants’ valuations of each hotel when they purchased them. I therefore turn to deal with that second (and rather more conventional) part of the Claimants’ case.
E. THE NEGLIGENT VALUATION CASE
E1 The Issues
138. There were a number of issues between the parties in respect of the negligent valuation element of the claim. They can be summarised as follows:
(a) What is the focus of the court’s enquiry in a negligent valuation case? Is liability made out every time a particular failure of approach or methodology is demonstrated, or is there no case on liability if, despite the breach or breaches that may have been established, the valuation figure itself was within a permissible bracket? This was very largely a dispute of law, and I deal with it in Section E2 below.
(b) Although they agreed that it was the critical calculation, the parties were in dispute as to the appropriate net initial yield percentage. The Defendants’ figures were all in the region of 6.25%. Their expert,
(c) What, on the evidence in this case, is an appropriate bracket/margin of error? This was a dispute which encompassed some principles of law and some expert analysis.
(d) Finally, taking into account all of the foregoing matters, I have to decide whether the defendant’s valuation of these four hotels was negligent: Section E5 below.
E2 The Law
139. The issue between the parties can be summarised by reference to two of the many authorities cited to me. It was the Claimants’ case that “there is no proposition of law that in valuation cases a valuer is not negligent if his valuation falls within such a [permissible] bracket”: see
140. The debate can also be seen in the pages of the text books. In Jackson & Powell, at paragraph 10-060, the authors say:
“…the English courts have held that it is a necessary condition for liability, at least in the case of errors in the assessment of rentals or yields, that the final result should be outside ‘the bracket’. The extent of authority is now such that it appears unlikely that a first instance judge will find a valuation negligent unless it is outside the bracket.”
On the other hand, in Professional Negligence & Liability (Informa, 2008), at paragraph 8.148, the learned editor writes:
“It is submitted that, while reference to a margin of error, or bracket, may justifiably be used to cast doubt on the degree of skill and care exercised by a valuer, the concept should be permitted no greater status than this. The legal duty of a valuer, like any other professional adviser, is to exercise reasonable skill and care, and evidence as to the figure which the valuer has put forward cannot itself show whether or not this duty has been fulfilled.”
141. It is not the purpose of my Judgment to re-invent this particular legal wheel. That is partly because I believe there to be Court of Appeal authority, binding on me, which gives a clear answer to this question; partly because this issue has recently been considered and, in my view, resolved by Lewison J in Goldstein v Levy Gee (a firm) [2003] PNLR 35 (page 691); and partly because I have reached a firm conclusion of my own which is consistent with these authorities. All point in exactly the same way: that, whilst a valuer might be in breach of duty because he fell below the standard of a reasonable valuer in his methodology, that valuer will not be liable in negligence if it can be shown that, notwithstanding the error, the valuation figure that he produced was within a reasonable bracket. I set out briefly below those three strands of my reasoning.
(a) The Decision in Merivale Moore PLC v Strutt & Parker (a firm) [2000] PNLR 498
142. In this case, the judge at first instance had found that the valuer had been negligent in two respects: first, in his finding that the potential rental income was £60 per square foot; and secondly, in his failure to qualify a 7.50% yield figure as being speculative, given the lack of an extensive market in that type of lease. The Court of Appeal held by a majority that the finding of negligence in respect of the rental income could not stand, because the over-valuation was of the order of 9% and was therefore within the permissible margin of error. However, they went on to dismiss the appeal because they concluded that the finding of negligence in respect of the absence of a warning about the yield figure was justified.
143. In dealing with the law on this topic, Buxton LJ said this, at pages 515-516:
Negligent valuation: authority
“It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent: see for instance the often quoted judgment of Watkins J in Singer & Friedlander Ltd v John D Wood [1977] 2 EGLR 84 at p85G; and the House of Lords in the Banque Lambert case, [1997] AC 191 at p221F-G. That has led to the courts adopting a particular approach to claims of negligence on the part of valuers.
In the general run of actions for negligence against professional men:
‘it is not enough to show that another expert would have given a different answer…the issue…is whether [the defendant] has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession’: Zubaida v Hargreaves [1995] 1 EGLR 127 at p128A-B per Hoffmann LJ, citing the very well-known passage in Bolam v Friern Hospital Management Committee [1957] 1 WLR 582 at p587.
However, where the complaint relates to the figures included in a valuation, there is an earlier stage that the court must be taken through before the need arises to address considerations of the Bolam type. Because the valuer cannot be faulted in any event for achieving a result that does not admit of some degree of error, the first question is whether the valuation, as a figure, falls outside the range permitted to a non-negligent valuer. As Watkins J put it in Singer & Friedlander , at p86A,
‘There is, as I have said, a permissible margin of error, the ‘bracket’ as I have called it. What can properly be expected from a competent valuer using reasonable care and skill is that his valuation falls within this bracket’.
A valuation that falls outside the permissible margin of error calls into question the valuer’s competence and the care with which he carried out his task: ibid. But not only if, but only if, the valuation falls outside that permissible margin does that enquiry arise. That is what I take to have been the view of Balcombe LJ, with whom the remainder of the members of this court agreed, in Craneheath Securities v
‘It would not be enough for Craneheath to show that there have been errors at some stage of the valuation unless they can also show that the final valuation was wrong’.
As it was put by His Honour Judge Langan QC in Legal & General Mortgage Services v HPC Professional Services [1997] PNLR 567 at p574F, in an analysis that I have found helpful, once it is shown that the valuation falls outside the ‘bracket’:
‘the plaintiff will by that stage have discharged an evidential burden. It will be for the defendant to show that, notwithstanding that the valuation is outside the range within which careful and competent valuers may reasonably differ, he nonetheless exercised the degree of care and skill which was appropriate in the circumstances’”.
144. It seems to me plain from that analysis that Buxton LJ, with whom, on this point, Nourse LJ agreed, was making it plain that a discrete breach of duty in arriving at the valuation figure would not give rise to liability, unless the valuation figure produced by the breach was outside the permissible bracket. Subject to the next issue, I consider that that conclusion is binding on me.
145. In order to minimise the potential effect of the decision in Merrivale Moore,
(b) The Decision in Goldstein v Levy Gee
146. Between paragraphs 37 and 69 of his careful judgment in this case, under a heading ‘How is Negligence Established?’, Lewison J analyses the relevant authorities on this issue, what might be called the battle between methodology, on the one hand, or result, on the other. Save for one point, addressed briefly below, it is unnecessary for me to set out that analysis in any detail. Suffice to say that, at the end of that part of his judgment, Lewison J concluded that the passage in the Court of Appeal judgment in Merrivale Moore, to which I have already referred, was part of the ratio and that he was bound to follow it. As I have already made plain, that is a conclusion which I too have reached.
147. One of the difficulties that Lewison J noted in connection with this debate was that there were indications in speeches by Lord Hoffman that the method route was to be preferred to the result route. Reference in particular was made to his advice in the Privy Council case of Lion Nathan v C-C Bottlers Limited [1996] 1 WLR 1438 and his speech in SAAMCO v
148. Accordingly, I regard the analysis in Goldstein v Levy Gee as extremely helpful, and I consider, with respect, that Lewison J’s conclusion, to the effect that a judge at first instance must analyse a valuer’s liability by reference to the results route, not the methodology route, is correct.
(c) My Own Views
149. For what they are worth, my own views can be summarised in this way. A professional valuer, asked to value a property, a company or some other kind of asset, is in a slightly different position to other professionals. In the ordinary course, he knows that, ultimately, all that is likely to matter will be the final figure that he puts on the asset being valued. He knows that, in the commercial world, his clients may not understand or even look at the text of his report or the methodology that he has adopted to arrive at his valuation. Particularly in property valuation, all that usually matters is the result: the figure on the last page of the report.
150. This is rather different to the position of other professionals. An architect’s design advice will be judged by reference to a whole raft of factors: structural, aesthetic, economic, and whether the design is permissible under planning or building regulations. A lawyer who gives advice as to the prospects of success in a particularly difficult case will know that, whilst his suggested percentage chance of success (if he has been unwise enough to state such a percentage) will be of importance to his client, so too might be his analysis of each of the particular difficulties which have given rise to that ultimate percentage. So a bullish advice on the limitation aspects of a claim which may face other difficulties might lead the client to adopt a particular course of action, even if the overall chance of success in the case is considered low. Accordingly, it seems to me only a matter of common sense that, in the ordinary valuation case, the valuer’s performance should be judged by reference to the final figure, not the minutiae of how he got there.
151. There is another reason why I consider this to be the appropriate analysis. It is often quite easy to point to particular aspects of a valuation process in any given case which were less than satisfactory. In the present case, the Defendants went about some aspects of their work in a sloppy fashion, doubtless a reflection of the rumbling dispute about their fees for the November 2004 report. But if, on analysis, their final valuation was within a reasonable bracket, then what would be the effect of a finding of breach which did not take the valuation outside a reasonable bracket? Where would such a finding lead? What loss would be caused? Save in an exceptional case, if the valuation was within a reasonable bracket, any discrete breaches would not have caused any loss and therefore there could be no finding of liability in any event.
152. This can be illustrated by a simple example. Suppose the valuer made a negligent error as to the appropriate comparables, which resulted in a grossly over-stated starting figure. And then suppose that, in doing his detailed calculations, the valuer made another inexcusable error, this time a purely mathematical mistake, which led to a final figure that was much lower than it would otherwise have been if he had done the maths correctly. These two breaches may cancel each other out so that, whilst the valuer may have been in breach of duty twice over, his ultimate valuation figure may be very close to the correct figure. In those circumstances, liability would not have been made out because, possibly as a result of sheer luck, his final figure cannot sensibly be criticised.
(d) Summary
153. For all these reasons, I am in no doubt that, in valuation cases, the law properly focuses on the end result, not the way in which that end result may have been achieved.
E3 The Appropriate Yield Percentage
(a) Introduction
154. As noted above, the parties were in dispute about the appropriate net yield percentage. The differences can be summarised in the table below:
| Hotel | Defendants’ Figure | Chess Original | Chess Final | Elliott |
|
| 6.26% | 6.75% | 7% | 6.55% |
6.26% | 6.75% | 7% | 6.41% | |
|
Wellingborough | 6.26% | 6.75% | 7% | 6.45% |
|
| 6.25% | 7% | 7.25% | 6.44% |
155. The column headed ‘Chess Original’ needs to be explained. As
156. Mr Chess confirmed that those figures came from him. Although he suggested in his report that these figures were produced before he had inspected the properties and so forth, it became apparent in cross-examination that this was incorrect and that he had inspected the properties and undertaken a good deal of work by the time he calculated these yield figures. Indeed, despite extensive questioning on this point by
157. It was common ground that the appropriate method of calculating the net initial yield in this case was to identify the yield that would be appropriate for an ordinary lease (that is to say, a lease with a five year rent review), and then to add an allowance to that yield (which would reduce the final valuation figure), to reflect the fact that, in this case, the shortfall clawback provision meant that the base rent would not be exceeded, either for many years into the future, or at all.
(b) The Basic Yield Figure
158. The basic yield figure is largely a product of the relevant comparables. There was a list of such comparables at Section 3 of the Experts’ Joint Statement. The list includes two types of property. The first was a number of Travelodge hotels, which would all have been the subject of five year rent reviews. The experts were agreed that the Travelodge hotels were directly comparable to the Ibis hotels with which this case is concerned (save, of course, for the shortfall clawback provision which is addressed in the next section of this Judgment).
159. The other comparables in the list are a number of Holiday Inn Express hotels, two Days’ Inns, and the Central Hotel in
160. The experts were agreed that the comparables showed an improvement in the market during the latter part of 2004/early 2005 and therefore what was called a ‘sharpening’ of the yield. In April and May 2004, the yield achieved on the sale of the Travelodge in Buckingham and the Travelodge in Berwick on
161. In March 2005, the sale of the Travelodge in Sutton Scotney achieved a net initial yield of 5.58%. It seems to me that this was the single best comparable in this case. It was a yield achieved the month before the Defendants completed their relevant valuation reports. It was achieved on a Travelodge which the experts agreed had numerous similarities with the Ibis Hotels with which we are concerned. And it achieved a yield that was entirely in line with the improving figures being achieved in the preceding six months or so.
162. Unhappily, although this was an agreed comparable, and plainly of great relevance, it appears that, very late in the day,
163. Furthermore, I accept
164. It was the Claimants’ case that the appropriate basic yield percentage was 6%. That was supported by the fact that, on one view of their reports, that was the percentage used by the Defendants at the time. It was the Defendants’ case at trial that the appropriate base percentage was 5.4%. They arrived at this by identifying the 5.6% figure from Sutton Scotney and Shrewsbury, and then making a small further reduction to reflect the agreed evidence that the Accor covenant was, at least at this time, superior to the Travelodge covenant, and that the Accor hotels were of a better standard and more recently built than the Travelodge hotels.
165. Accordingly, on the evidence, the appropriate range for the yield, before factoring in the effect of the shortfall clawback provision, was between 5.4% and 6%. I have concluded that the right percentage was in fact 5.6%, which was the yield achieved on the best single comparable (the Travelodge in Sutton Scotney) and which was supported by the figure of 5.6% achieved on the sale of the Travelodge at
(c) The Percentage Addition to Reflect the Shortfall Clawback Provision
166. In his report,
167.
168. It seemed to me that
169. In addition, there was also good deal of argument and counter-argument between the experts at the trial about IRRs (Internal Rate of Return) which, as I pointed out, was a little unrealistic in circumstances where, although the Defendants had done a calculation of IRR on the spreadsheet, it had not previously featured in any of the allegations (or in any detail in the written experts’ reports). In this connection, Mr Chess did some other calculations during the trial which seemed principally designed to demonstrate that, on altered assumptions, his own figure of 1.19/1.25% could be exceeded.
170. The principal point I took from this somewhat arid debate was that the figures were shown to be very susceptible to even minor changes in the underlying assumptions: it really did seem possible to prove anything by these increasingly arcane calculations. I was not persuaded that any of the IRR calculations produced in the latter stages of the trial were of any real assistance to me.
171. I have concluded that a significant percentage increase in the yield was justified to reflect the unusual and tenant-friendly rental provisions. On all the evidence, I would add one percentage point to the yield to reflect the tenant-friendly nature of the lease in general, and the shortfall clawback provision in particular.
(d) Summary
172. Accordingly, for the reasons set out above, I consider that the correct yield percentages for each of these hotels was 6.6%. I arrive at that by taking the 5.6% figure for the basic yield (paragraph 165 above) and 1% for the adjustment to reflect the specific shortfall clawback provision (paragraph 171 above).
173. Another way of approaching the figures is to consider the permissible range of figures and calculate the mean, as Lewison J did at paragraphs 132 – 134 of his judgment in Goldstein. The permissible range of figures for the basic yield, as I have noted in paragraphs 158 – 165 above, was between 5.4% and 6%, giving a mean figure of 5.7%. For the reasons set out in paragraphs 166 – 171 above, I consider that the permissible range for the additional adjustment to reflect the leases was between 0.5% and 1.25% with a mean figure of 0.87%.
174. These figures can be averaged in two alternative ways. The two mean figures of 5.7 and 0.87, taken together, produce a total of 6.57%. Alternatively, I can add together the two lowest figures (5.4 and 0.5), which produces 5.9%, and the two highest figures (6 and 1.25), which produce 7.25%. The half-way figure between 5.9 and 7.25 is also 6.57%. These calculations therefore broadly support my conclusion that the correct yield in this case was 6.6%.
175. I am confirmed in my conclusion by a wider consideration of the expert evidence. Generally, I preferred the evidence of
176. I was also very surprised that, in his report,
177.
178. I should deal here with
179. For all these reasons, I conclude that the correct yield percentage on each of the four hotels was 6.6%.
E4 The Margin of Error
(a) The Law
180. There are a number of authorities dealing with the appropriate margin of error. The starting point is Singer and Friedlander Limited v John D Wood & Co [1997] 2 EGLR 84 at 85H-J where Watkins J said:
“The permissible margin of error is said …to be generally 10% either side of a figure which can be said to be the right figure… in exceptional circumstances, the permissible margin…could be extended to about 15%, or a little more, either way.”
181. The only case to which I was referred where a lower percentage was imposed was in Axa Equity and Law Home Loans Limited v Goldsack & Freeman [1994] 1 EGLR 175, where a bracket of roughly plus or minus 5% was fixed by the judge. That was a case involving residential property. There are other cases involving residential property where the experts agreed that a plus or minus 5% range was appropriate: see for example, BNP Mortgages v Barton Cook and Sams [1996] 1 EGLR 239. I can certainly see that, for standard estate houses for example, a smaller bracket than 10% may well be appropriate.
182. There are a number of cases in which a higher bracket has been identified. A bracket of 15% up or down was adopted in Corisand v Druce & Co [1978] 2 EGLR 86 where the property in question was a hotel. And there are other cases, such as Mount Banking Corporation Ltd v Cooper & Co [1992] 2 EGLR 142 and Arab Bank plc v John D Wood Commercial Ltd [1998] EGCS 34, where the relevant percentages were, respectively, 17.5% and 20%. However, in all of these cases, the relevant percentages were agreed between the experts. They were not the subject of consideration by the court because, unlike the present case, the margin of error/bracket was not itself in dispute.
183. It seems to me that, as a matter of general principle, the position to be taken from the authorities is as follows:
a) For a standard residential property, the margin of error may be as low as plus or minus 5%;
b) For a valuation of a one-off property, the margin of error will usually be plus or minus 10%;
c) If there are exceptional features of the property in question, the margin of error could be plus or minus 15%, or even higher in an appropriate case.
b) The Evidence In The Present Case
184. The problem for the court in the present case was that the experts approached the question of margin of error/bracket from two entirely different starting-points. Mr Chess said that the margin of error should be calculated by reference to the yield, and that a margin of error of just 0.5% on the yield, that is to say plus or minus 0.25%, was appropriate. Mr Elliot on the other hand, said that a margin error of more than 10% on the final valuation figure was appropriate in this case.
185. The immediate difficulty with
186. In my judgment, it is not appropriate to consider the question of margin of error/bracket by reference to the yield percentage. There are a number of reasons for this. First, it gives rise to the real risk of artificiality, because what mattered most to the Claimants (and the lenders) was the overall valuation of the hotel, and not the yield. Secondly, it does not reflect the process of valuation adopted by the Defendants. Although the yield was an important element of the valuation, it was, at least in this case, a figure that was produced by the valuation of each hotel, rather than an element of the valuation process itself. In other words, as a number of the witnesses confirmed to me, the yield percentage arose out of the valuation figure rather than the other way round. Again, therefore, it seems to me that it would be inappropriate to calculate the bracket by reference to yield as opposed to the overall valuation.
187. Thirdly the evidence demonstrated that small adjustments to the yield gave rise to large differences in value and, in such circumstances, I consider that it would be potentially misleading to calculate the bracket (and therefore to consider the allegations of negligence) by reference to the yield, as opposed to the overall valuation figure. This was neatly demonstrated during the cross-examination of Mr Chess, when he was asked whether he was really saying that a valuer who had identified a yield of 6.5% on the hotels in
188. Again, therefore, I prefer the evidence of Mr Elliott to that of Mr Chess, and I consider the margin of error/bracket by reference to the correct valuation of each hotel. Therefore I will take what I consider to be the correct valuation for each hotel, and then apply a percentage up and down to delineate the margin of error. What is the correct percentage?
189. Beyond their case as to a range of 0.5% on the yield, which I have rejected, the Claimants had no positive case as to margin. By reference to the authorities summarised above, it seems to me that the margin should be at least 10%, up or down, on the correct valuation figure. On behalf of the Defendants,
a) There were limited comparables, particularly because many of the hotels purchased involved management contracts as opposed to standard leases.
b) The investment market in hotels was immature; as Mr Chess accepted, this was true “when compared with other markets”. Thus, although there are numerous publications which contained comparable figures for yields in relation to residential and commercial property, there are none in relation to hotels.
c) By 2004/2005, there was a rising hotel investment market, as demonstrated by the sharpening of the yields referred to above, but the experts were agreed that this improving market also gave rise to particular difficulties for valuers.
190. In cross-examination,
191. Taking all that into account, it seems to me that this is a case where the appropriate margin of error may well be in excess of 10%. There were particular factors involved in the valuing of these hotels, noted in paragraphs 189 and 190 above, that probably justified a wider than normal margin of error. I conclude, however, that 15% would have been very much the upper limit of the permitted range.
E5 Were The Defendants’ Valuations Negligent?
a) The Figures
192. As set out in Section E3 above I have identified what I consider to be the correct yield percentage at 6.6%. The tables used by valuers, and the figures provided to me in this case by the parties, translate yield percentages into appropriate multipliers in increments of 0.25%. I have therefore calculated the value at a figure that is half way between the two figures produced by a yield of 6.5% and a yield of 6.75%, which exercise marginally favours the Claimants. All the valuation figures allow for the reduction of 5.75% in order to reflect the costs of the transaction. The relevant figures are set out in the table below:
| Hotel | Yield | Correct Value | 10% + | Def’s Figure |
|
|
6.75% 6.5% 6.6% |
£4,560,000 £4,720,000 £4,640,000 |
£5,104,000 |
£4,920,000 |
|
6.75% 6.5% 6.6% |
£5,030,000 £5,210,000 £5,120,000 |
£5,632,000 |
£5,430,000 | |
|
Wellingborough |
6.75% 6.5% 6.6% |
£4,480,000 £4,640,000 £4,560,000 |
£5,016,000 |
£4,840,000 |
|
|
6.75% 6.5% 6.6% | £4,290,000 £4,450,000 £4,370,000 |
£4,807,000 |
£4,640,000 |
193. I have not done a calculation showing the minus 10% figures, because the table demonstrates that, for each hotel, the Defendants’ figure was in excess of the correct value that I have calculated. However, each time, the Defendants’ figure was within the plus 10% margin of error, let alone the margin of error that I consider appropriate in this case which, for the reasons set out above, I have concluded should be greater than 10%, and perhaps even as much as 15%. Accordingly, on the basis of the figures, the Defendants’ valuations were well within the permissible margin of error and liability in negligence has not been made out.
194. In the circumstances, it is unnecessary for me to consider the particular criticisms made by
b) The Defendants’ Good Fortune
195. I acknowledge that there is one sense in which the Defendants might be considered to have been fortunate. It follows from my findings in Section D above that they failed to take account of the shortfall clawback provision when they undertook their valuations. I am in no doubt that this explains why their valuations were higher than those which I have calculated to be the correct figures at paragraph 192 above. But, for reasons which may well be lost in what both sides were agreed was the Defendants’ over-complicated methodology, this error did not ultimately lead to a valuation which was outside the permissible bracket. This may be, as was suggested at the trial, because in the box headed ‘surplus’ on the Defendants’ spreadsheets, which might have been where they took into account surplus rent (and where the failure to make an allowance for the shortfall clawback provision would then have been expressly apparent in any valuation) the Defendants did no calculation at all. But, whatever the precise explanation, it seems to me that, like so many of the reported cases involving valuers, this case turned (and failed) on the issue of bracket/margin of error.
c) The Changing Nature of the Claimants’ Case
196. The evidence suggests that the Claimants were slow to realise the significance of the bracket/margin of error issue. When this case was first formulated by the K/S Claimants, it was advanced from the standpoint of the investors (those who had subsequently bought their shares from Scanplan), as opposed to those (like Mr Ashton) who had been involved in the original transaction. That explains why the original letter of claim, and the early focus of the Claimants’ solicitors’ letters, was all about the failure to warn as to the lack of rental growth and the shortfall clawback provision.
197. It was only when the Defendants’ solicitors pointed out that the case as originally formulated was hopeless (because no criticism was apparently being made of the valuations themselves), that the Claimants finally set out a case in relation to the Defendants’ valuation figures. It was at that stage that Mr Chess’s original yield percentages of 6.75% and 7% were put forward. Of course, as I have already noted, the yield percentage that I have taken is very close to Mr Chess’s original assessment (at least on three of the hotels) and demonstrates that the Defendants’ valuations were high, but well within the permissible margin of error.
198. The Defendant’s solicitors then pointed out to the Claimants that, now that they had belatedly considered this aspect of the case,
F. CONCLUSIONS
199. For the reasons set out in Section D above, I have concluded that, although on three of the four hotels there was a negligent mis-statement in relation to rental growth, that mis-statement had no causative effect whatsoever because Scanplan, who were the only partners in the Claimants at the time that the hotels were bought, knew that the shortfall clawback provision meant that there would be no medium-term rental growth. There was no reliance on the Defendants’ mis-statements. I also find that the only proper inference that I can draw from the evidence is that the relevant advice which they received as to the shortfall clawback provision and the lack of rental growth, including the advice from ESL and the Reports on Title from Maxwell Batley, was deliberately, as opposed to inadvertently, omitted from the prospectuses that the investors relied on when they came to buy their shares in the individual K/S entities.
200. For the reasons set out in Section E above, I have concluded that, although justified criticisms could be made of the way in which the Defendants went about their valuation exercise in April 2005, their valuation figures were, each time, well within a 10% margin of error. Accordingly, liability in tort has not been made out and the claim in relation to negligent valuation must also fail.
