England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		17/05/2010

Mr Justice Henderson:

Introduction

(continued from [2010] EWHC 961 (Ch) )

1. This is the second part of my judgment in this case, following the first part (dealing with liability) which I handed down on 30 April 2010. The two judgments are intended to be read together, and the paragraph numbering is therefore consecutive.
2. The principal matter left for me to deal with is Red River's claim for damages arising out of the Sheikhs' breach of contract in preventing completion of the refinancing of the Property with the Bank of Ireland. I have already held (see paragraph 123 above) that if Miss Sheikh had not sabotaged the composite transaction on 5 October 2007, it would have proceeded to completion either on that day or on the following Monday, 8 October. Furthermore, there can be no doubt that by the date of the breach, if not earlier, Miss Sheikh was well aware of Red River's wish to redevelop the Property itself. Explicit warning had been given in paragraph 18 of the (original) particulars of claim, dated 22 August 2007, that Red River would seek damages for the resulting loss of profit if the Sheikhs' breaches of the Settlement Agreement deprived it of the opportunity to redevelop the Property (see paragraph 19 above). Thus the first question that I have to consider, which is essentially a question of causation, is whether Red River would in fact have been able to redevelop the Property, and if so on what basis, had the refinancing transaction been completed. It will be remembered that the refinancing was only of the land, and that Red River hoped to be able to obtain development finance at a later stage, having first improved the existing planning permission (see paragraph 89 above). It is only if the court is satisfied, on the balance of probabilities, that Red River would have been able to redevelop the Property that any claim for loss of profit on the development can get off the ground.
3. In examining this question, I will deal first with the planning position, and will then move on to the all-important question of finance: in view of the increasing difficulties in the credit market from late 2007 onwards, would Red River have been able to obtain development finance?

(1) The planning position

4. I have already summarised (in paragraph 1 above) the nature of the conditional planning permission granted by the London Borough of Hackney ("the Council") on 5 July 2004: it permitted a mixed commercial and residential development on the site, comprising 32 residential units on four floors over a parade of six commercial units together with underground storage facilities and 20 car parking spaces. The conditions included: commencement of the development within 5 years, compliance with various design and amenity requirements, submission of a detailed contamination assessment, and conclusion of a section 106 agreement with the Council providing for 11 of the 32 residential units to be "affordable housing" and for specific payments to be made for "filling station remedial works" (£250,000, with any part of this sum not so used to be earmarked for affordable housing or landscaping at the Council's discretion), education (£71,882) and children's play facilities (£23,364). The total amount of these contributions was therefore £345,246.
5. The planning officer's comments in support of the recommendation to the Planning Committee to approve the proposal pointed out, among other things, that the proposed building would be erected to the same height and in much the same style as a recently completed development at 31-35 Stoke Newington Road (immediately adjoining the Property to the south), for which planning permission had been granted in July 2001. The officer said that the two buildings together would make a continuous street terrace, and the new building would be

"sympathetic to the existing terrace in terms of fenestration, particularly in terms of window treatment, reconstituted stone cornice detail, and vertical recessed render panels which serve to divide the building into blocks whilst maintaining the vertical emphasis of the terrace."

He also reported that a number of concerns about the proposal as first submitted, such as the inclusion of a large conference room in the basement, had been addressed by the amended proposal, which would now provide a satisfactory mix of retail and residential land uses, and the impact of which on surrounding properties would fall within acceptable limits.

6. The required agreement under section 106 of the Town and County Planning Act 1990 (as amended) was duly entered into between Red River, the Bank of Scotland and the Council on the date of completion of the purchase of the Property, 11 August 2004. The agreement provided for the formal grant of planning permission to take effect on that day, with the result that the five year period for commencement of the development was set to expire on 11 August 2009. The agreement also provided for payment of the contributions which I have mentioned, together with a further highway contribution not to exceed £10,000 in the first instance, although any excess over that sum in the cost of the specified highway works would be payable within 14 days of issue of a certificate. The contributions (which now totalled at least £355,246) all had to be paid on or before the implementation date, which was defined as the date of carrying out a "material operation" as defined in section 56 of the 1990 Act.
7. Mr Kilich had been retained by Red River earlier in 2004, and he was involved in the drafting of the section 106 agreement. He had been introduced to Mr Dogan by a friend, Mr Shakir, who was Mr Dogan's accountant. Mr Kilich was an experienced architect, who qualified in Turkey in 1971 and ran a practice in central London from 1983, originally in partnership with a colleague and more recently, since the end of the recession in the early 1990s, in his sole name under the style of Kilich & Co. Over the last quarter century, his practice has been responsible for the design and construction of various developments, from inception to completion, with contract values ranging from £50,000 to £10 million. The developments have included ones of a mixed residential and commercial nature similar to what was proposed for the Property. Mr Kilich deals with all stages of the project, and has experience of acting as the project manager of a development through to its completion and handover to the client. He also has extensive experience of negotiation with planning authorities.
8. Soon after the purchase of the Property, Red River instructed Mr Kilich to prepare some design plans for its development, to look into the implementation of the planning consent, and to investigate whether it might be possible to obtain an enhanced consent for 42 or 48 residential units. He was also asked to prepare a detailed feasibility study, which he did first of all in December 2004, and then again in May 2006 (subsequently revised in July 2006). In May 2006 he estimated the development cost of a 32 flat scheme (i.e. one based on the existing planning permission) as £4,235,000, and the development cost of a 42 flat scheme as £4,992,500.
9. In October 2006 Mr Kilich attended a meeting with the Council's planning department to discuss a proposal for a 42 flat scheme which he had submitted in August of that year for pre-application consultation. He was accompanied by Mr Dogan. The Council was represented by a senior planning officer, Mr Inglett, and a member of the urban design team, Ms Reitman. Mr Kilich prepared a note of the meeting which was subsequently approved by Mr Inglett as being generally in accordance with the comments he had made at the meeting. According to Mr Kilich's note:

(a) Mr Inglett had considered the scheme as submitted and found it generally in line with current planning policies, although he thought it appropriate to obtain Ms Reitman's views on matters concerning design and urban setting;

(b) Mr Inglett saw no objection to the proposal to provide 10 additional units, and although the omission of the basement due to ground contamination had led to a reduction in the area of proposed commercial use, and the number of shops would be reduced from 6 to 5, the proposed ground floor area was nevertheless acceptable, as was the proposed mix of residential units;

(c) an application with 20 car parking spaces would no longer receive approval, because the Council now operated a car-free zone policy for the area. The fact that the new scheme reflected this policy, with car parking spaces only for emergency vehicles and disabled drivers, together with 20 secure bicycle parking spaces, was a welcome feature;

(d) the number of affordable housing units to be included in the scheme would be a matter for decision by the planning sub-committee, to which Red River could put its case. The current policy requirement was for 50% of the total units to provide social housing, although a 35/65 split had been negotiated and agreed for the existing planning permission. Mr Inglett advised Red River to make its application in conjunction with a reputable housing association, and said that the number, size and allocation of units should be agreed and included in the updated section 106 agreement, together with appropriate contributions for education, highways, children's playing facilities etc;

(e) Ms Reitman expressed satisfaction that the overall height of the building would remain unchanged, although there would now be five rather than four floors of residential units, but she had reservations about the increased height of the circular feature at the corner of Stoke Newington Road and Barretts Grove and suggested that it be reduced by one floor. Mr Kilich said that this could be done without reducing the total number of flats, although two of the smaller ones might have to be changed from two bedroom to one bedroom units;

(f) there was discussion about various other design aspects of the scheme, including street elevations; and

(g) Mr Inglett undertook to place the proposal before the next major sites meeting and to seek indicative approval of the scheme prior to formal submission of a planning application.

10. The proposal was then considered at a major sites meeting on 26 October 2006, and on 1 November Mr Inglett informed Mr Kilich that the response was "fairly positive and the proposal was acceptable in principle", according to Mr Kilich's record of their telephone conversation in his letter of that date to Mr Inglett. Apart from a request for further information on certain design details, which Mr Kilich agreed to discuss with Ms Reitman, it was also made clear that the Council would be looking for an affordable housing allowance of 50%, although it would not refuse to consider a proposal for a smaller proportion of affordable housing "if justified".
11. Mr Kilich confirmed in his oral evidence that there was nothing unusual about his discussions with the planning officers in 2006, and that they were both quite sympathetic to the proposal. In particular, the increase in the number of units would help the Council to meet its housing targets under the London Plan and to provide more affordable housing. He also confirmed that in his experience there was scope for negotiating down the split of affordable housing required by a planning authority, and said that in the present case Red River could hope to make something of the fact that the proportion of affordable housing under the existing planning permission was only 35%. One possible compromise solution would be to split the ten new residential units 50/50, so that the total number of affordable units in a 42 flat scheme would be 16 (or approximately 38%). He did not regard the design points raised by Ms Reitman as giving rise to any significant problems, and thought that they could have been sorted out without difficulty.
12. Despite this favourable start, no further progress was made on the planning front until the following spring. This delay may have reflected the fact that Mr Dogan was fully engaged in various disputes with Miss Sheikh. Meanwhile, both Mr Inglett and Ms Reitman had left the Council, and when a new meeting was held on 11 May 2007 it was with their replacements, Mr Andrew Dillon and Ms Aurelia Duplovich. They both required to be fully briefed, and it was agreed that the proposal should be re-submitted with a full set of updated documents. In June 2007 Mr Kilich prepared a revised design and access statement for this purpose, and further discussions took place. On 5 September 2007 Ms Duplovich submitted the observations of the conservation and design team to Mr Dillon, saying that they were generally pleased with the layout and arrangement of housing units, but the continuity of the street frontage and the articulation of the building on the top floor were still of concern, and they felt that the architectural expression of the facades still required some refinement. A number of detailed points were then made in support of this general assessment. My impression is that all of these points should have been capable of resolution by the making of relatively minor adjustments to the design and specification of the building, and Mr Kilich confirmed that this was also his perception at the time. He agreed that the Council's comments presented him with something of a design challenge, but said it was one he was confident could be overcome.
13. The claimants' planning expert, Mr Wheeler, was less sanguine in his assessment of the conservation and design team's concerns. In his supplemental report he said that in his view the 42 unit scheme, as shown in Mr Kilich's pre-application drawings, did not fully respect the building envelope of the approved 2004 scheme:

"Whereas the approved 2004 scheme rises to 5 storeys in height, the 42 unit scheme rises to 6 storeys plus a 7 storey feature element in the north-east corner of the site.

The 42 unit scheme proposes lower floor to ceiling heights compared to the approved 2004 scheme. As a result, the combined height of the lower 5 storeys of the 42 unit scheme is comparable to the combined height of the lower four storeys of the approved 2004 scheme. However, from the drawings provided the lower 5 storeys of the 42 unit scheme appear to rise slightly higher than the lower 4 storeys of the approved 2004 scheme.

From the drawing provided it also appears that the set back 6^th storey of the 42 unit scheme rises slightly higher than the set back 5^th storey of the 2004 scheme. In the absence of scaled drawings it is not possible to make an accurate assessment; however, from the drawings provided it does not appear that the 42 unit scheme respects the building envelope of the approved 2004 scheme. Furthermore, as a result of the provision of an additional floor into the lower part of the building, the Stoke Newington Road elevation of the 42 unit scheme, and particularly the fenestration, does not respect the existing terrace to the south.

The 42 unit scheme also includes a 7^th storey feature element in the north-east corner of the site and thereby deviates from the approved building envelope of the approved 2004 scheme and the building line of the existing terrace."

14. In the light of these comments, Mr Wheeler went on to express his conclusion as follows:

"In light of these concerns regarding the acceptability of the design of the 42 unit scheme, I am not confident that planning permission would have been secured for the scheme if it had been submitted in January 2008. I have reviewed the Witness Statement by Mr Kilich (dated 10 March 2010) and confirm that its content does not change my view. I had already reviewed the note of the October 2006 pre-application meeting prepared by Kilich & Co. I had not reviewed the Observations of the Conservation and Design Team (dated 5 September 2007), but this confirms that, a year on from the pre-application meeting, the Council's Design Officers still had concerns with the 42 unit scheme, particularly in relation to the continuity of the street frontage, the articulation of the upper level and the architectural expression of the facades and the corner."

15. Mr Kilich was asked in his oral evidence to address Mr Wheeler's points, and as I have already indicated he disagreed with Mr Wheeler's assessment. He said that the proposed scheme did not increase the overall height of the building, measured from street level to the top of the parapet. The roof level behind the parapet would be some 80 centimetres higher, but this would not be apparent from ground level. With this minor increase in the roof level, four floors of residential units could be fitted in where there had been only three floors in the 2004 scheme. The height of the rooms on each floor would obviously be less, but still within permitted limits. The problems of façade continuity and fenestration raised by the design team would need to be addressed, and posed (as I have said) a design challenge, but he was confident they could have been overcome, and he saw no reason in principle why approval should not be obtained for the additional storey of residential units. As to the circular feature at the north-east corner of the site, Mr Kilich said he had already agreed with Ms Duplovich to reduce it in height by one storey, and he was also confident that her aesthetic concerns could be met.
16. These responses by Mr Kilich were put to Mr Wheeler when he gave his evidence, but he saw no reason to modify his views. He said that he shared the concerns expressed by the design team, and his personal view was that Mr Kilich's drawings did not provide a satisfactory solution to the problems of continuity with the rest of the terrace and fenestration. He also pointed out that the new parapet wall would be noticeably higher than the top of the terrace immediately to the south. He agreed, however, that, leaving aside design considerations, a 42 unit scheme was achievable on the site, although not in the way envisaged by Mr Kilich's plans. He also agreed that design is ultimately a subjective question, and not susceptible to scientific analysis. Ultimately, everything would depend on the views of the planning officers. Nevertheless, the more a scheme deviated from the norm, the more justification it would need in terms of high quality design.
17. I appreciate and see the force of Mr Wheeler's concerns, but on balance I am persuaded that Mr Kilich would probably have been able to deal with the points raised by the conservation and design team to their satisfaction, and that if an application for a 42 unit scheme had been submitted in (say) January 2008, it is more likely than not that planning permission would have been granted. I prefer Mr Kilich's more upbeat assessment of the prospects of success to that of Mr Wheeler, because Mr Kilich had the great advantage of being personally involved and had met the planning officers concerned. While making due allowance for the fact that he may have been too ready to overlook or play down possible defects in his own scheme, I am impressed by the generally favourable reception that it elicited from two successive pairs of planning officers, as evidenced by Mr Kilich's note of the meeting on 13 October 2006, the outcome of the major sites meeting on 26 October 2006, and the internal memorandum of 5 September 2007 from Ms Duplovich to Mr Dillon.
18. With regard to timing, Mr Kilich's evidence was that if he had obtained indicative approval from the Council in late September 2007 it would then have taken three or four months to put together a formal planning application, after which it would have taken at least three months for the Council to make a decision, so the earliest date on which planning permission could have been obtained would have been about April 2008. Before submission of the formal application, it would have been necessary to obtain advice and reports from a range of expert advisers, including a structural engineer, a specialist on sustainability and "lifetime homes", and specialists in the fields of renewable energy, landscaping, daylight calculations and contamination. In addition, it would have been necessary to make contact with, and obtain the co-operation of, a housing association, and to reach a decision with its assistance on the appropriate number and types of the affordable units.
19. I am satisfied that the percentage of affordable units would have ended up falling somewhere between a minimum of 35% and a maximum of 50%. The witnesses agreed that the Council had no legal right to insist on more than 50%, and the question would have been one for negotiation, with the financial viability of the proposal for the developer being a major, and perhaps decisive, consideration. I feel little doubt that the Council would have wished if at all possible to obtain some improvement on the 65/35 split in the existing permission, and unless Red River could have come up with powerful economic arguments in favour of a larger private allocation I think that Mr Kilich's proposal to divide the ten additional residential units equally would probably have been the least that the Council would have been willing to contemplate, and they would have been aiming to achieve an agreed split of at least 40% affordable to 60% private.
20. To bring matters up to date, in November 2009 the Metropolitan Housing Trust was granted conditional planning permission for the Property to erect a building of between four and seven storeys with basement to provide 1,040 square metres of retail space (comprising five retail units) and 38 residential units (14 one-bedroom, 12 two-bedroom, 9 three-bedroom and 3 four-bedroom) with four disabled parking spaces, 50 cycle parking spaces and associated landscaping. All of the 38 residential units were to be affordable ones, with a tenure mix of 18 social rented and 20 intermediate housing units. By this date, of course, the existing planning permission had expired, and since the Metropolitan Housing Trust was to purchase the Property from Red River, and was itself to develop the residential part of the building, it had no interest in obtaining permission for any private residential units. Red River's interest under the conditional contract that it has entered into with the Metropolitan Housing Trust is confined to the commercial units, which it is to construct at its own expense until the first run of bricks has been completed above first floor level, with finance to be provided by the Royal Bank of Scotland. When that stage is reached, the sale of the Property will be completed and Red River will be granted a long lease at no premium of the commercial units.

(2) Would Red River have been able to obtain development finance?

21. As Mr Dogan explains in his evidence, Red River's original plan was not to sell the Property but to develop it itself once an enhanced planning permission had been obtained. I have found that Red River would probably have been able to obtain planning permission for a 42 unit scheme in about April 2008, but the question remains whether Red River would have been in a financial position to develop the site with the benefit of that permission.
22. If the refinancing transaction with the Bank of Ireland had been completed, the advance of £1.75 million (less the interest retention of £140,000 and expenses) would have been exhausted in paying off the Bank of Scotland (which was owed about £1.214 million), paying the Sheikhs the £300,000 due to them under the Settlement Agreement, paying a small judgment debt of £9,000 due to Hadley Associates, and paying sums due to the Council of £48,000. The figures are set out by Mr Dogan in paragraph 40 of his first statement. He had agreed with Isadore Goldman that their fees would be deferred pending the securing of the enhanced planning consent and the proposed further round of refinancing. Other professional fees in connection with the enhanced planning consent would have been met by Mr Dogan from his own resources, for which purpose he had borrowed a sum in excess of £102,000 in June 2007 by mortgaging his home.
23. I come now to the proposed second round of refinancing to enable Red River to develop the Property. It needs to be remembered that Red River had no assets of any significance apart from the Property, and that after one year (i.e. from October 2008) the interest retention would have been exhausted, so Red River would then have become liable to pay interest to the Bank of Ireland (or any replacement lender) on the full advance of £1.75 million. There would therefore have been every incentive to obtain planning permission and the necessary finance as soon as possible. However, this was always going to be difficult. A commercial lender would no doubt have required a personal guarantee from Mr Dogan, as well as a first charge on the Property and a debenture from Red River, and perhaps additional security too. Nor was it an auspicious time to be seeking finance. This is recognised in the claimants' own pleaded case. The particulars of loss in paragraph 70(a) of the re-amended particulars of claim say that:

"As a result of the Defendants' breaches, [Red River] has not been able to conclude the proposed refinancing of the Property with the Bank of Ireland or with any other lender. As the Defendants were well aware at the time of their breaches, by October 2007 there were difficulties in the credit market and it was becoming increasingly difficult to identify lenders who were prepared to make financing available."

24. This difficulty is reflected in the unsuccessful efforts that Red River and Mr Dogan made to obtain development finance. Despite the best efforts of their finance broker, Fozia Dick, both before and after the date of breach in October 2007, nothing concrete materialised. The furthest that the Bank of Ireland was prepared to go, in the discussions which took place between Mr Bailey and Ms Dick in July to October 2007, was to indicate that the Bank would be prepared to consider development funding once the enhanced planning consent had been procured. Since the earliest date for procuring such consent would have been around April 2008, it follows that the Bank would not have been willing to consider a proposal in any detail until the late spring or early summer of 2008, by when the difficulties in the credit market were correspondingly more severe than they had been the previous autumn.
25. It is, I think, significant to note in this context that Ms Dick, whom I found to be a very sensible and intelligent witness, says nothing in her statement about the prospects of obtaining development funding after October 2007, apart from a general and chronologically unspecific comment that in her view there would have been "a good chance of securing it" from the Bank of Ireland, despite the Bank's refusal to commit itself. She then continues (paragraph 14 of her statement):

"Even then, once the enhanced planning consent was obtained I would have preferred to return to GMAC to their more favourable terms for development which were [more] appropriate for [Red River]. We would have then sought an enhanced facility for development upon the grant of the improved planning and this would have enabled [Red River] to pay Miss Sheikh."

26. The reference to GMAC is to an offer of development finance which Ms Dick had succeeded in obtaining, on terms which she considered to be exceptionally good, from GMAC-RFC Property Finance in early 2006. Unfortunately, this proposal had then been scuppered by objections raised by Miss Sheikh and Mr Sampat, which Ms Dick considered (with justice, in my view) to have been unreasonable and motivated, at least in part, by Mr Sampat's resentment at his own failure to procure a comparably attractive offer. Be that as it may, I would make two comments about what Ms Dick says in the passage I have quoted. First, it reinforces the point that the first step was to obtain the enhanced planning consent, and any return to GMAC would have followed the obtaining of the consent. Secondly, Ms Dick gives no reason to suppose that GMAC would have been as amenable to a funding proposal in (say) May 2008 as it had been in January 2006, more than two years earlier, at a time when the financial climate was still untroubled by the looming credit crisis.
27. Mr Dogan describes the efforts to obtain refinancing as follows:

"52. Apart from Miss Dick, other brokers were retained by my solicitors and enquiries made of various possible lenders to see if alternative funding was at all possible. This task was not easy, particularly in the financial climate at the time. A number of possible lenders were approached. I recall I had one meeting with Mr Alan Bird, a broker (introduced by Howard Richards) from North West London. At that meeting I was accompanied by my daughter and Mr Richards. We talked about raising funds and I provided Mr Bird with all the information he needed with regard to [Red River] and the Property. Mr Bird said he would try to see what was available. He did, however, require a valuation and I completed various forms and one was obtained through Cluttons. I left it with Mr Bird to take it forward. I did not meet with Cluttons as I left it for Mr Richards to provide them with any information, although I paid a fee. Their valuation which was produced ultimately in January 2008 based on a 32 unit development was £3.675m as can be seen from their report. They also indicated that if the scheme were to be enhanced to, say, 42 units the property would be worth £4.55m. As a result of their provisional view in a report prepared in November 2007 I was told by Mr Bird that Kaupthing Singer Friedlander ("KSF") had indicated that they would advance.

53. The "indicative terms" as they were characterised by KSF were to advance £3m to assist in the "re-financing from HBOS" and the repayment of monies to the Defendants. It was a condition of the re-financing that KSF secure a first charge over the Property. There were other conditions set out in the indicative terms, the significant ones of which had been dealt with by the Company and [me]. Solicitors were instructed and were in touch with [Red River's] solicitors. The last remaining matter was the securing of a further valuation of the Property and this was, as I refer to above, … undertaken.

54. Although approved by the Credit Committee of KSF the loan ultimately was not sanctioned for reasons which I suspect were very much to do with its own financial position at the time. Another potential lender at the time was Investec but they wanted a substantial slice of [Red River] and their terms were not ones which I was prepared to accept. We also talked about a sale of the Property by [Red River]. We were approached by a number of different agents in late 2007 and early 2008 but I really wanted to develop the Property, not sell it."

28. In my judgment this evidence, and in particular the withdrawal of KSF in early 2008, fully bears out the pessimistic assessment in paragraph 70(a) of the re-amended particulars of claim. Further corroboration is provided by the evidence of Guluzar Dogan, who says:

"I knew it was very difficult to get any institution to advance because of the credit crunch",

and again,

"The credit crunch and its timing now made it very difficult for us. We could not proceed with developing the site but had to make sure we did not lose the planning consent."

As a result of these difficulties, Mr Dogan reluctantly gave up his plans to redevelop the Property and instead turned his attention to trying to secure a deal with a housing association for the sale and development of the site. An introduction to interested parties was effected through a Turkish acquaintance of Mr Dogan's, and after some negotiations in May to June 2008 an offer was received from the Metropolitan Housing Trust which Red River provisionally accepted. From then onwards, no further efforts were made by Red River to obtain independent development funding, and the focus was instead on finding a way forward with the Metropolitan Housing Trust. In due course a formal agreement was concluded between Red River and the Trust on 19 December 2008, subject to a number of conditions precedent including removal of the Restrictions.

29. Perhaps realising the evidential difficulties that were likely to confront the claimants on this part of the case, Mr Leonard asked Mr Bailey and Fozia Dick some brief supplemental questions about the viability of the proposed development and the prospects of obtaining finance for it. In his statement Mr Bailey had been at pains to emphasise that no commitment had been given on the part of the Bank to make any further advance on expiry of the £1.75 million loan facility, which had a one year term, and that his discussions with Ms Dick had been hypothetical only. In his oral evidence he would not be drawn on what the Bank's attitude would have been had Red River subsequently made an application for development finance, but he agreed that the scheme as reflected in Cluttons' valuations appeared to be a viable one. However, the Bank would have waited for the enhanced planning permission to be obtained before entering into discussion of the scheme with Red River. Fozia Dick was also asked, by reference to Cluttons' figures, whether she saw anything likely to cause difficulty in obtaining development finance, to which she replied that she could see no problem. In my judgment these brief answers, unsupported as they were by any detailed analysis or reasoning, carry little weight. The strong impression which I gain from the evidence as a whole is that Red River would not have been able to obtain finance to develop the Property itself, even if the £1.75 million land banking facility with the Bank of Ireland had not been sabotaged by the Sheikhs. The facility was only of one year's duration, and Red River would still have needed to obtain an enhanced planning consent before entering into any detailed funding negotiations. That could not have happened before April 2008 at the earliest, by when the problems in the credit market were rapidly worsening. The efforts which Red River in fact made to obtain development finance were all unavailing, and I can see no good reason to suppose that the position would have been significantly better if the first round of refinancing with the Bank of Ireland had not fallen through. In short, the proposed redevelopment by Red River was overtaken by the credit crunch, and this is not something for which the Sheikhs can be blamed.
30. For these reasons I am not satisfied, on the balance of probabilities, that Red River would have been able to obtain development finance if the initial £1.75 million refinancing with the Bank of Ireland had gone ahead. It follows that Red River would not have been able to redevelop the Property itself, even if the Sheikhs had not sabotaged the Settlement Agreement, and that the claim for loss of the profit which Red River would have made on such a redevelopment must fail in its entirety. In these circumstances, it is unnecessary for me to consider the loss of profit claim any further, and I will therefore confine myself to some fairly brief comments on it.
31. The quantification of the loss of profit claim, if one gets that far, is a matter of considerable complexity. The methodology upon which the claimants rely is explained in the amended further and better information on paragraph 70(b) of the re-amended particulars of claim dated 19 March 2010. The figures there set out, which themselves derive from detailed calculations in Savills' original and supplemental expert reports, were further adjusted by Mr Leonard in his closing written submissions which I received on 31 March, the day after the end of the hearing. In bare summary, the procedure followed was:

(a) to take the projected gross profit on the development, on four alternative assumptions about the number of residential units and the split between private and affordable units that the enhanced planning permission would have authorised, and on the further (unreal) assumption that Red River would have had to finance not only the development costs but also the acquisition of the Property;

(b) to add back the financing costs of the acquisition of the Property, in order to neutralise the unreal assumption and reflect the fact that Red River would have started the development as the owner of the site;

(c) to reach an aggregate figure for the gross development profit by starting with the profit figure based on the least favourable planning assumption (38 units, split 50/50) and adding appropriate amounts to reflect the loss of 80%, 60% and 40% chances respectively of being able to develop on the three more favourable bases, the most favourable of which was 42 units split 65/35 private to affordable;

and then to deduct, assuming an estimated timescale for completion of the development of 26 months from October 2007:

(d) the amount that would have had to be repaid to the Bank of Ireland (about £2.05 million);

(e) the £900,000 plus interest that would have been payable to the Sheikhs under the Settlement Agreement (the interest amounting to about £138,500 down to 29 December 2009); and

(f) the value of the net current equity in the Property, estimated to be no more than £161,378 and diminishing.

32. On the basis of this methodology, the preferred figure that Mr Leonard ultimately put forward for the net loss of profit was £824,716. However, the calculation which I have summarised did not include any discount from the gross profit figure to reflect the possibility that Red River would not have been able to obtain development finance and other contingencies which might for one reason or another have prevented the development from proceeding. Had I been persuaded on the balance of probabilities that Red River would have been able to obtain development finance, I would certainly have thought it appropriate to apply a substantial discount to the gross profit figure in order to reflect these contingencies. In his written submissions, Mr Leonard argued plausibly that the gross profit on a 42 unit development with a 62/38% private/affordable split would have been about £4.2 million. Adding back the residualised acquisition cost of the Property (item (b) in paragraph 166 above) would increase this figure to around £4.75 million. A discount of 30%, which is probably the least that I would have considered appropriate, would then reduce it to £3.325 million, which is only slightly more than the sum of the deductions (items (d), (e) and (f) above, totalling about £3.25 million). In other words, and without going into the matter in any greater detail, it seems to me most unlikely that the loss of profit claim would have yielded any significant recovery for the claimants, even assuming in their favour that Savills' approach and calculations are fundamentally sound. It is quite possible that the claim would still have failed altogether, because the deductions would have amounted to more than the discounted gross profit.
33. A further, and difficult, question which it would have been necessary for me to consider, and which in fairness to the Sheikhs Mr Leonard very properly drew to my attention, is whether the potential gain to Red River arising from its contract with the Metropolitan Housing Trust should be taken into account as a further deduction in the loss of profit calculation. This would seem to turn on the degree of connection between that contract and the Sheikhs' breach, and the principles relating to "avoided loss" discussed in McGregor on Damages, 18^th edition, para 7-097 and following. The cases on the subject are very fact-sensitive, and by no means easy to reconcile. It is enough for me to say, without deciding the point, that I see considerable force in the argument that the agreement eventually reached between Red River and the Trust represented an alternative way for Red River to realise the development potential of the Property, and essentially formed part of a single commercial enterprise by Red River, such that fairness would require any potential gain on the contract, or any loss thereby avoided, to be taken into account and set against the claim for loss of profit flowing from the Sheikhs' breach of contract. If that were right, the loss of profit claim would have faced this additional hurdle, and the prospects of its yielding anything of value would have been even more remote.
34. I would, finally, make the obvious point that my dismissal of the loss of profit claim means that the complex expert evidence adduced by the claimants has for the most part proved to be irrelevant, and the Sheikhs have not, therefore, been disadvantaged by their inability to challenge or deal with it at the hearing.

Other heads of damage

35. Apart from the loss of profit claim, the claimants also seek to recover as damages for breach of contract:

(a) the additional interest and other charges which Red River has become liable to pay to the Bank of Scotland as a result of its inability to complete the refinancing with the Bank of Ireland in October 2007; and

(b) the sum of £3,000 paid to Cluttons for their valuation in November 2007 and report in January 2008.

36. In my judgment the first of these heads of loss is properly recoverable, and the measure of the loss is the difference between the interest and other charges for which Red River has become liable to the Bank of Scotland since 8 October 2007, down to the date when the Bank of Scotland is finally paid off, less the interest that Red River would have had to pay over the same period on replacement finance. I do not have the material before me to perform the necessary calculations, and if Red River wishes to pursue the matter I propose to direct an inquiry before the Master to quantify the damages recoverable.
37. I am not satisfied, however, that the fee paid to Cluttons is recoverable. Cluttons were engaged as part of Red River's quest for development finance, and as I have already explained I consider that Red River's difficulties on this front would have been essentially the same even if the refinancing with the Bank of Ireland had gone ahead. Accordingly, this cannot be characterised as expenditure which flows from and was caused by the Sheikhs' breach of contract.

The amended counterclaim

38. The Sheikhs' amended counterclaim will be dismissed. As I explained in the first part of this judgment, I can see no substance in the alleged fraudulent transaction, and the Sheikhs are no longer entitled to recover any of the sums that were originally due to them under the Settlement Agreement. I have not discussed various other claims that appear to be advanced in the amended counterclaim, for example claims based on economic duress and/or undue influence, illegality, and "inducement to breach". I am satisfied that there is no evidential support for any of these claims, and that they are wholly devoid of merit.