England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
Peter Smith J
Lower Court NC Number HC03CO1980

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/06/2005

Lord Justice Carnwath :

Background

1. This is an appeal from a judgment of Peter Smith J, relating to the assessment of damages for negligence on the part of the Second Defendant, a barrister.
2. The Claimants are trustees of a settlement made by Mr Stuart Glyn (a chartered surveyor) for the benefit of his children. They owned a property known as 206-238 Muswell Hill Broadway, London N10 (the "Property"). It consists of two Edwardian buildings, with shops on the ground floor and flats on the three floors above. Of the flats, ten were in residential use, of which one was let on a protected tenancy. Other flats were used for business purposes. The judge accepted Mr Glyn's evidence that the primary purpose of the trust was to provide income for the beneficiaries, rather than capital growth.
3. The Claimants regarded the property as a single unit, and as such it had particular attractions for investment purposes. The judge summarised the evidence of Mr Tobin, their expert.

"… the two parts put together comprised in the Property were attractive because there were very few un-fragmented blocks (i.e. blocks where the Landlord would be able to let the entirety of the flats out on (for example) assured short hold tenancies ("AST's") for all the properties comprised in the Building). … the attractiveness of that is that the Landlord retains control over the whole block and can make decisions as he thinks as regards the general maintenance, insurance and refurbishment of the block free from any restrictions that might be encountered if there are tenants in the building who have long leases and thus must be the subject of service charge recovery, which is an entirely different and more complicated requirement."

4. The trustees' strategy had been to try to obtain vacant possession of the individual flats with a view to reletting on short-term tenancies. This had been largely successful, but problems remained in respect of Nos 228, 234, and 236, in respect of which Mrs Tuttle had long leases. In November 2000, she served notices under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 claiming to exercise the right to acquire a new lease of each flat at a premium. The First Defendants served counter-notices on behalf of the Claimants under section 45 of the 1993 Act, challenging her right to new leases.
5. Proceedings were commenced in the Clerkenwell County Court seeking declarations to that effect against her, but they were compromised on the advice of the Second Defendant. The effect of the consent order was that she gave up any claim to a new lease of number 236; but the Claimants accepted her claim to new leases of 228 and 234, and were required to serve fresh counter-notices (disputing only the proposed terms) on or before 30^th July 2001.
6. Unfortunately the advice which led the Claimants to accept her claim was wrong. As the judge explained:

"Unfortunately, nobody noticed that the term of years referred to in Mrs Tuttle's leases had been backdated. Thus whilst the lease demised a term exceeding twenty-one years, she had not been granted a term exceeding twenty one years when calculated from the date of the grant of the lease, which is the relevant date of the commencement of the granted term. This is a requirement from section 7 (1) (a) of the 1993 Act." (para 14)

7. That, however, was not the end of the Claimants' problems. The new counter-notices were served on 26^th July 2001, but were challenged by Mrs Tuttle in new proceedings in the Clerkenwell County Court. She sought a declaration that those counter-notices were invalid, and an order requiring the new leases to be granted on the terms contained in her initial notices. The detailed arguments behind this application do not appear from the papers before us. They were never tested in court, because those proceedings also were compromised on 18^th December 2002 (on the advice of another counsel, Christopher Pymont QC). The Claimants agreed to grant long leases of flats 228 and 234 for a premium of £190,000 each. (This compared with the premium of £278,000 for a lease granted in November 2002 for another equivalent flat in the same property.)
8. The Claimants brought proceedings in the High Court against the First and Second Defendants. They claimed damages for negligence, in relation both to the original advice which led to the acceptance of Mrs Tuttle's claim, and to their part in drafting the second set of counter-notices. The Second Defendant admitted negligence in respect of the first advice. By an order made by the Chief Master on 21^st August 2003, the claims against the First Defendant, and the balance of the claim against the Second Defendant, were stayed generally with liberty to restore.
9. The hearing before the judge was therefore concerned solely with the assessment of damages against the Second Defendant for the admitted negligence. He made a total award of £252,995.36. The bulk of that sum, with which the appeal is concerned, was described as "losses of a capital nature", in respect of which he summarised his decision as follows:

"72. I accordingly determine that the Claimants had an intact block worth £2,358,223.00… and they had a block afterwards worth £1,685,208.00…, giving a net figure of £673,015.00….

73. There then falls to be deducted from that figure the LVT values of the flats as determined as at July 2001 (£470,250.00…) giving a figure for damages for capital loss in my Judgment £202,765.00…".

The assessment of damages

10. The Claimants' case was based, conventionally, on the diminution in the value of their interest in the property at the date of assessment. The judge held that date to be July 2001, when the Defendant's negligence caused the Claimants to acknowledge wrongly that Mrs Tuttle was entitled to the two leases (para 49 – 51). That aspect of the judgment is not challenged. The Claimants based their assessment of market value on what was described as the "investment" basis; in other words, they assumed a sale in the open market, at the relevant date, to a hypothetical purchaser, interested in acquiring the property for retention and letting, as an investment.
11. In the event most of the relevant figures were agreed between the respective valuers. In particular it was agreed that for investment purposes the reduced attractiveness of the property, resulting from the grant of the two long leases to Mrs Tuttle, could be reflected in a difference in the assumed yields for valuation purposes: 7.75% in the "before-sales valuation" and 8.50% in the "after-sales valuation". In simple terms that difference of 0.75% can be taken to represent the increased yield which would be expected from an investor to reflect the disadvantages explained by Mr Tobin.
12. On that basis, taking account of the figures as finally accepted by the judge, the value of the property, before and after the negligence, was as shown in the following table:

(a) Before the negligence

9 x £19,752 =	£177,768
1 x £5,040 =	£5,040
Total income =	£182,808
x multiplier (100/7.75) =	12.90
Total:	£2,358,223

(b) After the negligence

7 x £19,752 =	£138,264
1 x £5,040 =	£5,040
Total income =	£143,304
x multiplier (100/8.5)	11.76
Total:	£1,685,208

It was common ground that the valuation should be based solely on the ten residential flats, one of which was held on a protected tenancy and was a constant factor (represented by the annual rent of £5,040 in the above table). To arrive at the figure for damages, the "after-negligence" investment value needed to be increased to reflect the capital value of the two flats sold to Mrs Tuttle, which as I have noted the judge put at a total of £470,250. That figure is the subject of the cross-appeal to which I shall return.

13. The Second Defendant's case on the measure of damages was not clearly articulated in either the pleadings or the opening skeleton argument. The Defence simply put the Claimants to proof of their alleged loss and damage and of the alleged causal link with the breaches of duty. The skeleton argument made three points:-

i) That since the Claimants did not wish to sell their property it was wrong to calculate damages by reference to a hypothetical sale.

ii) That the assessment of damages should be made by reference solely to the two flats sold to Mrs Tuttle, which were the only parts of the property directly affected by the negligence.

iii) That the valuation should be by reference to the so-called "post-negligence valuation" basis, rather than the investment basis, because on the agreed figures the market value of each flat was higher than the value assessed by capitalising the rent achievable from an assured tenancy.

14. The first two points have not been pursued on the appeal, and rightly so in my view. The first point implies a misunderstanding of the conventional approach to assessment of damages for negligence affecting property. Depreciation in market value is taken because it is a convenient and well understood method of assessing loss, not because of any supposed link with an actual sale in the real world. The second point was negated by the valuer's agreement on the differential in yields for the property as a whole resulting from the sale of the two long leases. There is no reason to think that the causal link was not sufficiently direct to sound in damages.
15. The third point forms the main issue in the appeal. The judge rejected the vacant possession basis. He said that, having accepted the Claimants' evidence as to the purpose of their acquisition of the property, he thought that their interest should be valued on the same basis, and that therefore "the best and most reasonable basis for valuing the property is the investment basis" (para 43).
16. Before this court Mr Hodge summarised his case in this way. The vacant possession valuation basis involved identifying the value of the flats if sold off individually on long leases. Any alternative basis would overcompensate the respondents for the loss they had suffered, because in the real world they still have the ability to sell the flats off individually on long leases and keep the full vacant possession value of each. Indeed the evidence showed that the flats had continued to increase in value since the assessment date. The open market vacant possession value of the flats individually as at July 2001 had been agreed by the valuers at £247,500. Accordingly the appropriate "after-negligence" comparison should be:-

After the negligence:

7 x £247,500 = £1,732,500

Protected tenancy, say £60,000

£1,792,500

17. I would reject this argument, though for slightly different reasons than the judge. Talk of the valuation on "vacant possession basis" begs the question how the value is assumed to be realised. If one is valuing on the market value basis, one necessarily assumes a sale on a particular date, into the market as it exists on that date. Although the valuers had agreed market values for the individual flats, it was not agreed that a hypothetical sale of all the flats on the same date would be achievable at those values without some discount. Mr Tobin was asked specifically about the price which would be paid by a hypothetical purchaser in July 2001 purchasing the whole block with a view to selling off nine long leases. His answer was –

"He would in my view pay nine times what he could get by selling individually, less a margin of 10% or 15% which would represent his profit for trouble and bother of having to sell them individually and the delay in doing so".

The evidence of Mr Buchanan, the Defendant's expert, was less clear-cut, but he seems to have accepted in principle that a purchaser of the whole block would make some allowance for the extra costs and potential delay in achieving sales. Thus on a conventional market value approach, which assumes a hypothetical purchaser at a particular date, it is clearly wrong simply to take a figure arrived at by multiplying the values of individual flats, without some discount.

18. Mr Hodge's approach, as I understand it, is rather different. He in effect rejects the conventional market value approach, including the assumption of a hypothetical purchaser. He relies on the fact that in the real world the property was retained by the Claimants, and they retained the ability to sell the flats at market value at any time, and to receive a rent in the meantime. This approach in my view is open to objection both in principle and because it is not supported by the evidence. It clearly represents a departure from the conventional "diminution in value" approach, which relies on a comparison of market values at a particular date. That is not necessarily objectionable, but any departure from that approach needs to be justified by the evidence and internally consistent.
19. As Bingham LJ said in Watts v Morrow [1991] 1WLR 1421, 1444 D-F

"Since it is ultimately a question of fact what sum of money is necessary to put a particular plaintiff in a position he would have been in if the particular Defendant had properly performed the contract in question, I would accept (counsel's) contention that the measure of damages cannot be governed by an inflexible rule of law to be applied in all cases irrespective of the particular facts and regardless of whether or not such measure gives effect to the underlying principle. But this does not mean that there may not be sound prima facie rules to be applied in the ordinary run of cases."

The diminution in value rule, as established in cases such as Phillips v Ward [1956] 1 WLR 471 was such a prima facie rule, which should be taken to "govern cases to which it is not shown to be inapplicable".

20. In my view the Defendants have failed to show that the normal basis for assessment of damages is inapplicable on the facts of this case. However, even if they had been able to do that, it would be necessary that the alternative approach be internally consistent. It cannot be right to compare a pre-negligence assessment based on market value with a post-negligence assessment based on some other approach. As I understand Mr Hodge's submission, he is seeking to assess the post-negligence position by reference to what the Claimants themselves could have realised from the property on the assumption (as was the case) that they had retained it in their own hands. However, if that is to be the approach, one must compare like with like. The relevant comparison would be between holding nine flats all available for letting or sale with vacant possession, and holding on to seven flats with two on long leases. For that purpose the market value as at July 2001 would be of no relevance, since that assumes a hypothetical sale at that date, rather than holding for letting or later sale. Even assuming that it would be possible to make a realistic appraisal on that basis, there was certainly no evidence to support it in this case.
21. Accordingly, I would reject the appeal. I would add this comment. It is essential in cases of this kind that each party should make clear in the pleadings, or at least before the hearing, precisely what bases of assessment it seeks to advance, and that the expert evidence if any should be clearly directed to the bases that are going to be put forward. If that is not done, there will be a danger of the issues becoming confused at the hearing, and a temptation to pick and choose different strands of valuation material in order to construct a new case, which may have superficial attractions but is not properly supported by coherent evidence.

Cross Appeal

22. The cross appeal was directed solely to the allowance to be made for the value of the leases sold to Mrs Tuttle. As has been noted the payment received in respect of those was £190,000 each. That followed the compromise of her separate proceedings challenging the validity of the counter-notices. The judge determined however that the allowance to be made for those two flats should be £235,125 per flat, giving a total of £470,250 (para 47). That was his determination of the amount which the LVT would have determined as being the premium for those flats had the matter proceeded to hearing on the basis of valid counter-notices.
23. Mr Wonnacott submitted before the judge and before us that that was the wrong approach. Regardless of the strength of Mrs Tuttle's case that the counter-notices were defective, he submits that the reduced value reflected in the compromise was one of the risks inherent in the negligent advice provided by the Second Defendant, and should be included as one of its consequences.
24. He relied on the well-known decision in The Oropesa [1943] P 32, a case on very different facts. In that case two steam vessels collided. In the course of the rescue attempts the master of one of the ships sought to transfer to the other in a lifeboat in very rough weather, with the result that the lifeboat capsized and nine of the occupants drowned. The Court of Appeal held that the drowning was a consequence of the collision for which the negligent ship owners were responsible. Lord Wright said:-

"If the master and the deceased in the present case had done something which was outside the exigencies of the emergency, whether from miscalculation or from error, the plaintiffs would be debarred from saying that a new cause had not intervened. The question was not whether there was new negligence, but whether there was a new cause… To break the chain of causation it must be shown that there is something that I will call ultroneous, something unwarrantable, a new cause which disturbs a sequence of events, something which can be described as either unreasonable or extraneous or extrinsic"(p 39).

Mr Wonnacott says that here any problems with the counter-notices were not extraneous to the Second Defendant's negligence. On the contrary if the Claimants had been advised correctly there would have never been any need to serve counter-notices at all, and no risk of them being arguably defective.

25. In South Australia Asset Management Co –v- York Montague Limited ("SAAMCO") [1997] AC191, 218 Lord Hoffmann referred to The Oropesa as exemplifying a principle which he explained as follows:

"The second category of cases relied upon by the plaintiffs concerns the question of whether the plaintiff's voluntary action in attempting to extricate himself from some financial predicament in which the Defendant has landed him negatives the causal connection between the Defendant's breach of duty and the subsequent loss. These cases are not concerned with the scope of the Defendant's duty of care. They are all cases in which the reasonably foreseeable consequences of the plaintiff's predicament are plainly within the scope of the duty. The question is rather whether the loss can be said to be a consequence of the plaintiff being placed in that predicament. The principle which they apply is that a plaintiff's reasonable attempt to cope with the consequences of the Defendant's breach of duty does not negative the causal connection between that breach of duty and the ultimate loss. This is the principle of which, in the sphere of physical damage, The Oropesa [1943] P.32 is perhaps the best known example."

26. Like the judge, I do not regard that as a helpful analogy. Mr Wonnacott boldly attempted to equate the difficulties of precise compliance with the procedural requirements of the 1993 Act with the nautical perils so vividly described by Lord Wright in The Oropesa (at P.36). In my view however there is no valid analogy. Indeed it is dangerous to draw comparisons between such wholly different factual situations, or between the principles applying to personal injuries and financial loss. The reasonable consequence of the admitted negligence of the Second Defendant was that the Claimants had to go through the statutory procedure prescribed by the 1993 Act. The fair and reasonable expectation was that that procedure would have resulted, in the absence of an agreement, in the matter being determined by the LVT in the way in which the judge decided. We do not know what went wrong because that issue was not before the court. However, there is no reason to see that as the responsibility of the Second Defendant.
27. The judge relied on Lord Hoffmann's well-known illustration of the doctor advising a mountaineer about to take a difficult climb. Lord Hoffmann said:

"I can illustrate the difference between the ordinary principle and that adopted by the Court of Appeal by an example. A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.

On the Court of Appeal's principle, the doctor is responsible for the injury suffered by the mountaineer because it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor's bad advice because it would have occurred even if the advice had been correct."

In that example, if the doctor's advice had been correct the leg would have been sound, and the mountaineer would have undertaken the climb with the same consequences. So here, if the Second Defendant's advice had been correct the Claimants would have had to go through the 1993 Act procedure, and have been subject to the same risk of there being an error in the counter-notice.

28. In paragraph 30 of the judgment, the judge mentioned this example, but mis-quoted it:

"They are as Mr Walker submits, matters which would have happened whether or not the correct advice had been given…..".

Lord Hoffmann's question, however was, not what would have happened if the correct advice had been given, but what would have happened if the advice which was given had in fact been correct. Subject to that correction, I agree with the judge's conclusion on this issue.

29. Accordingly, I would dismiss both the appeal and the cross appeal and uphold the judgment of the learned judge.

Lord Justice Neuberger

30. I agree with the reasoning and conclusions of Carnwath LJ.