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Cite as: [2011] EWHC 768 (QB)

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		Neutral Citation Number: [2011] EWHC 768 (QB)
		Case No: HQ10X00463

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

30/03/2011

B e f o r e :

THE HONOURABLE MR JUSTICE MACKAY
____________________

Between:

	Proteus Property Partners Ltd	Claimant
	- and -
	South African Property Opportunities PLC	Defendant

____________________

Jeffrey Chapman QC (instructed by K&L Gates LLP) for the Claimant
Cyril Kinsky QC (instructed by Travers Smith LLP) for the Defendant
Hearing dates: January 24-28, February 7-8.
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Mackay:

A: The Parties

The defendant South African Property Opportunities PLC (variously abbreviated as "SAPRO" or "SAPO") was incorporated in the Isle of Man on 27 June 2006. It was the brainchild of the Principle Capital Group ("Principle") and was intended to exploit property development opportunities in the emergent market in South Africa. At the relevant time its directors were Quentin Spicer (Chairman of the Board), David Humbles, Richard Tice (also Chairman of its audit committee), Peter Bester and Brian Myerson, who represented Principle on the board.

SAPRO had no employees and its business was managed by Proteus Property Partners Ltd the claimants ("Proteus"). James Peggie was legal advisor to both Principle (the majority shareholder in Proteus) and Proteus, and Brian Myerson was also a director of Proteus. Proteus' role was to manage the business of SAPRO under the terms of a management agreement.

So far as the core business of SAPRO was concerned its management on the ground was provided on behalf of Proteus by Proteus Property Advisors (Pty) Ltd, a South African company ("PPA"). PPA retained Keith Wolstenholme and Richard Currie to provide the services needed. They had between them considerable experience of the financial/investment world and South African property development; each of them held 4% of the shares of Proteus. They were paid a salary and bonus.

Another subsidiary of Principle, Silex Management Ltd ("Silex"), through its accountant and senior manager Stephen Read administered the subsidiaries of SAPRO which held the properties acquired. General administration services were provided to SAPRO itself by Galileo Fund Services Ltd ("Galileo") through Suzanne Jones.

SAPRO was listed on the AIM of the London Stock Exchange on 26 October 2006. Its initial offer raised £30m and a second offer raised £32m in May 2007. As a company it was unique in the sense that it was the only UK listed company dealing exclusively in South African property. Its Nominated Adviser or "NOMAD" was Paul Fincham, initially operating through Teather and Greenwood and latterly Landsbanki and Matrix Securities. The auditors of SAPRO were PwC (Isle of Man) and the accountant there dealing with SAPRO was Michael Davies. SAPRO's solicitors were Stephenson Harwood and advice and services were provided to SAPRO in respect of the matters with which this action is concerned by Andrew Sutch the senior partner. As properties were acquired over time they were re-valued biannually by the valuers CB Richard Ellis.

This is a disputed claim by Proteus for non-payment of performance fees and underpayment of management fees; the defence includes a counterclaim for mistaken overpayment of management fees.

SAPRO's business model involved the acquisition of property for development rather than for investment purposes. The Admission Document prior to listing envisaged both, but as Mr Wolstenholme said in evidence the feedback he had from would-be large investors was that there were plenty of companies offering investment properties, but they wanted what they called "sex and violence", the higher risk and return offered by development projects.

B: The Management Agreement of 20 October 2006

This action is concerned with the terms of this agreement as amended by a subsequent written document, the Letter Agreement signed on 16 February 2009.

The management agreement said that the primary investment objective of SAPRO was to achieve capital growth and income from a portfolio of commercial and residential properties in South Africa and it required Proteus to provide investment management services and strategies to that end. The agreement took effect as from the date of its signing. Either party could determine it after three years by giving the other one year's written notice of termination.

The terms as to remuneration should be set out.

6.1 In consideration for the services rendered by the Manager hereunder SAPO shall pay to the Manager the following fees:

(a) the amount of 2 per cent per annum of the Net Asset Value, such fee payable quarterly in advance on the first Business Day of January, April, July and October (based on the Net Asset Value at the last Business Day of the immediately preceding month)…. and

(b) a performance fee in accordance with clause 6.3 below.

…..

6.3 SAPO shall, in addition to the fees payable pursuant to clause 6.1(a), pay to the Manager a performance fee calculated and payable in accordance with the following provisions of this Clause 6. Such fee, if any, shall be charged to the capital or revenue Account of SAPO in such proportions as the Board may determine. The performance fee is payable by the reference to the increase in Net Asset Value per Ordinary Share over the course of a "performance period" referred to Clause 6.3 (a) and (b) below. The Manager shall be entitled to receive a performance fee (subject to the provisions of this Clause 6) payable in respect of:

(a) the period from Admission up to 30 June 2009; and

(b) each period commencing 1 July and ending 30 June (the first such year ending on 30 June 2010)

6.4. The Manager will be entitled to a performance fee in respect of a performance period if the following performance hurdles are met;

(a) In respect of the period from Admission to 30 June 2009, the performance fee hurdle is 100 pence per Ordinary Share increased at a rate of 12 percent, per annum, on an annual compounding basis up to the end of the period, but adjusted by subtracting, as at the date(s) of payment, the amount in pence per Ordinary Share of any dividend paid or distribution made in respect of the Ordinary Shares during such period;

.…

6.5 If the respective performance hurdle referred to in Clause 6.4 is met, the performance fee payable will be an amount equal to 20 percent of the amount of the increase in the Net Asset Value per Ordinary Share, multiplied by the time- weighted average of the number of Ordinary Shares in issue, in each case since the performance period in respect of which a performance fee was last earned ( or since Admission if no performance fee has yet been earned). For the avoidance of doubt the Net Asset Value per share as at Admission shall be calculated after deducting the expenses of the Placing".

The interpretation clause of the agreement defined "Net Asset Value" as -

"… the net asset value of the Group as calculated in accordance with customary accountancy or industry practices relating to SAPO".

The following features of this agreement therefore are immediately apparent.

i) The Manager's appointment can be terminated for any reason within four years of the date of the agreement, and thereafter on one year's notice.

ii) The performance fee is payable when a defined "hurdle" is met. If that hurdle is surpassed, even by £1, the performance fee is payable in full; there is no sliding scale. If it is not surpassed nothing is payable but the management fee.

On 16 February 2009 the parties entered into a further agreement which has been called the Letter Agreement, the construction of which is at the heart of this litigation. The letter referred to the management agreement and read in its relevant parts as follows:-

"This Letter sets out the terms under which the Management Agreement is amended with effect from Admission to clarify the calculation of the Net Asset Value of the Group for the purposes of the calculation of the management fee (including any performance fees). The Company and the Manager hereby agree as follows:

1 …

2. The Management Agreement shall be clarified by the amendment of the definition of Net Asset Value to read as follows;

"Net Asset Value" means the net asset value of the Group as calculated in accordance with customary accountancy or industry practices relating to SAPO but valuing the Group's property assets on an open market basis in accordance with the prevailing RICS Valuation Standards published by the Royal Institution of Chartered Surveyors, such property valuation to be prepared by an internationally recognised firm of surveyors, or in accordance with such other guidelines as the Board and the Manager may from time to time agree.

3. To the extent that the clarification referred to in paragraph 2 requires an adjustment to be made to the amount of any management fee previously paid to the Manager, the Company and the Manager shall agree the adjustment in management fees and the relevant amount shall be payable within 14 days of such agreement…

4. The terms of the Management Agreement shall in all other respects continue to apply in full to govern the relationship between the Company and the Manager".

C: Relevant Accounting Recommendations and Guidance

The meaning of net asset value or NAV lies at the heart of the dispute in this case. As a UK listed company SAPRO was required to conform with International Financial Reporting Standards ("IFRS").

IAS 2 said that assets held for sale in the ordinary course of business (which would apply to properties described in this case as trading or development properties, projects where property is acquired or built on a green field site with a view to sale or other disposal) should be carried in the accounts of the company at the lower of cost and net realisable value. By contrast investment property, defined as property held to earn rentals or for capital appreciation or both, and not for sale in the ordinary course of business, under IAS 12 could be carried at either cost or fair value. In the latter case there would have to be an adjustment for deferred taxation liabilities and no discounting of deferred tax was either required or permitted.

By 2008 15 properties had been acquired by SAPRO. All but one of these fell to be categorised as trading or development properties and only one as an investment property. All these properties were carried on the books of the company at cost without any adjustment for the half-yearly re-valuations which were being carried out. There was therefore no question of deferred tax or any adjustment for it. There was also no prospect of the managers achieving the substantial annual increases in Net Asset Value which were required by the management agreement to be achieved if the performance fee hurdle was to be surpassed. In fact, as later published reports were to show, Wolstenholme and Currie had achieved a high level of growth from the 15 properties in which they had invested SAPRO's money, looking at the position as at the end of 2008.

Unknown to the parties at the time when they concluded the management agreement a body called the European Public Real Estate Association ("EPRA") had provided additional guidance tailored to the particular needs of property companies. In the introduction to the May 2008 edition of their recommendations appeared the expressed hope that the recommendations would advance their efforts -

"….to make the financial statements of public real estate companies in Europe clearer, more transparent and comparable across Europe".

It acknowledged that most EPRA members reported in accordance with IFRS. The EPRA recommendations were said to provide "specific additional guidance for real estate companies within the IFRS framework". The recommendations included two forms of measure of NAV.

(i) EPRA NAV

"Represents fair value of equity on a long term basis. Items that have no impact on the company long term, such as … deferred taxes on property fair value, are therefore excluded".

EPRA NAV was a measure based on cost price plus fair current value and was therefore capable of reflecting periodic revaluations.

(ii) EPRA Triple Net NAV, which was said to represent -

"….fair value of equity and includes fair value adjustments of all material balance sheet items which are not reported at their fair value as part of the NAV per IFRS balance sheet statement."

This measure required-

"Provision for deferred tax in respect of the latent capital gains tax or similar according to each country's tax rules arising on the revaluation of investment and development properties and other investments to market value."

It added that discounting this provision was a common method to arrive at an approximation of fair value of that deferred tax based on the average expected holding period and manner of realisation. This changed in the 2010 edition of the recommendations, but that change does not affect the issues in this case.

D: The factual background – first phase

There is relatively little dispute about the facts leading up to the signing of the Letter Agreement. There is, however, considerable controversy as to the admissibility of some or all of these matters, with which I will have to deal below. For the present I will set out the facts which seem to me potentially relevant, if not to the issue of construction then to the alternative claim based on estoppel by convention, if that falls to be considered.

By early February 2008 Mr Peggie, the principal witness for the claimant, became aware of the problem posed by the wording of the Management Agreement and the fact that it could not reflect increases in the value of the properties acquired. He was not aware at first of the existence of the EPRA guidelines but soon became so and looked them up on a website. He drew the attention of Mr Tice and Mr Read to them, giving the website reference.

By 6 March he was proposing to the NOMAD Mr Fincham that the changed agreement should refer to "…the higher of the IFRS NAV and the EPRA Triple Net, as in time it is likely that the EPRA Triple Net will be overly conservative".

On 20 March he wrote to among others Mr Spicer reporting that Mr Fincham was sounding out shareholders on the problem of the existing NAV definition and he said "As previously discussed we wish that statement to be clarified so that the NAV is the Triple Net NAV, i.e. the IFRS NAV adjusted for the valuation of the property portfolio". That seems to show a degree of unfamiliarity with the EPRA guidelines on his part at this stage.

The interim report to 31 December 2007 was published on 26 March 2008 and the Chairman's report included both EPRA NAV and EPRA Triple Net NAV figures.

Mr Sutch was taking his instructions, in effect, from Mr Peggie rather than directly from the board. On 1 September Peggie wrote to Sutch recording his understanding that it had been agreed in principle that the Performance Fees should be based on "an Adjusted NAV basis" and asking him to draft a letter clarifying the management contract. His two suggestions were what he called "an adjusted NAV" (effectively EPRA NAV though not labelled as such by him), or as an alternative they could "… use the Triple Net (which is probably better for shareholders as it makes a tax assumption)". The response of Mr Sutch was a first draft dated 2 September which redefined Net Asset Value as before but added " …valuing the Group's property assets in accordance with the Best Practice Policy Recommendations of [EPRA]"

He was therefore not making any choice as between the two available EPRA measures.

From this point on there can be detected a distinct hardening of Mr Peggie's position. His reply to Mr Sutch in effect proposed EPRA NAV and stated -

"I don't think Triple Net is the right approach as making assumptions on tax is not fair to us in the event the tax is lower or non-existent or delayed for a number of years' which are all quite possible outcomes".

I do not doubt that this was the result of his conversations with Wolstenholme and Currie whose evidence was clear, that they were strongly opposed to any deduction for deferred taxation, and were prepared to look for other opportunities if they did not get the measure they wanted. Mr Wolstenholme in his evidence said that such assumptions were objectionable as you did not know whether you would end up with a gain at all, how the tax authorities would treat it (as a capital or revenue gain) and what tax mitigation may have been put in place by then.

The result was that Mr Sutch prepared his second draft, defining Net Asset Value as "'the Diluted EPRA NAV" as set out in [the EPRA recommendation] dated May 2008'". He suggested sending it to Wolstenholme, who did not like the draft and responded to the effect that he would be happy with EPRA NAV "as it seems very similar to Red Book [ i.e. RICS] valuations" but added -

"My only concern would be by going the EPRA route we leave ourselves open to be persuaded to use the EPRA Triple Net NAV which might be detrimental".

On 11 September Mr Peggie sent Mr Sutch a suggestion that he change his draft

"… such that it is simply valuing the property assets on an open market basis in accordance with the prevailing RICS Valuation Standards…"

Mr Sutch responded on 12 September by sending his third draft, which is word for word the same as paragraph 2 of the Letter Agreement and to which no alteration was made over the next five months up to the date on which that agreement was signed.

None of the statements of the parties in the course of this six or seven month period of negotiation is admissible as an aid to the construction of the contract. But Mr Kinsky relies on it in connection with the alternative claim for estoppel by convention. Mr Peggie in his evidence said that his initial proposal about using Triple Net was due to his "trying to shoot for something all might agree to" and denied that it was intended to reflect the original deal. This is wishful thinking on his behalf says Mr Kinsky QC for SAPRO and it simply shows that he knew that the original agreement always envisaged taking account of tax. I do not accept his criticism. When Mr Peggie's position hardened at the beginning of September I am satisfied it was the result of having his resolve stiffened by conversations with the two working agents Wolstenholme and Currie.

E: The factual background – second phase

On 3 November 2008 there was a board meeting of SAPRO attended by all relevant parties, which recorded that Proteus had put forward a proposal "such that management and performance fees were based on the Market Value NAV rather than the IFRS NAV". It was thought that the proposed NAV took into account the increase in property values and was in line with industry practice and also consistent with the admission document used for the IPO. The board were sympathetic to the proposal but said it wanted the NOMAD's feedback on shareholders' views.

Thereafter the focus moved away from the wording of the proposed agreement to the question of incentivisation of Wolstenholme and Currie, who were the key players who needed to have a proper incentive to perform well. If as was expected the proposed amendment of the agreement resulted in Proteus receiving a significant performance fee the incentivisation would be diluted if that fee went disproportionately to the other Proteus shareholders as compared with the men who had done the work. There was therefore discussion as to the terms upon which the two men could feel the benefit of the performance fee by increasing their existing 4% shareholdings in Proteus. The initial proposal was that SAPRO would lend them money with which to purchase further shares. An alternative of options over SAPRO shares was discussed and rejected. In the end Proteus prevailed upon its shareholders to give the two men further shares so that they held 20% of the shares of the company between them. This issue was not resolved until 4 February 2009.

It is noteworthy that in the middle of this particular debate Mr Tice in an email to his colleagues on 15 December, seeking to sponsor the share options proposal, made the point that the final draft agreement meant that based on EPRA NAV the (SAPRO) shares were very attractive.

F: The factual background – final phase

On 30 January Mr Read sent Mr Peggie a calculation showing that an EPRA NAV measure would mean that the hurdle was likely to be beaten. Peggie lost no time forwarding that to Messrs Tice, Spicer and Humbles. With justification, as I find, Mr Chapman QC for the claimant argues that this is clear evidence of a transparent or cards on the table approach by him, the opposite of any attempt to obscure the meaning of the proposed amendment, to smuggle EPRA NAV past SAPRO's board or trap them into acquiescence. I agree.

On 9 February Suzanne Jones of Galileo sent the board the latest version of the interim financial statements and attached a copy of the final draft of the Letter Agreement. She pointed out that the current financial statements did not contain an accrual for the performance fee which would foreseeably result from the change in the agreement and would amount to the sum of £4.1 m.

On the same day David Humbles replied confirming that the board had previously approved this and that the outstanding fee adjustment was purely due to the adoption of the correct calculation methodology from the start. He agreed that the amount should be accrued.

Later that same day Ms Jones emailed the board saying she had discussed the matter with the PwC audit manager and they both agreed that if the NAV definition was revised before the accounts were signed "this performance fee accrual of £4.1m will have to go through the accounts as it is prudent."

Mr Tice was sceptical, but only on the ground that it was "a little presumptive to include it at this stage in the formal EPRA NAV". He was therefore accepting that that was the right basis of calculation but was merely questioning whether prudence required an accrual at this stage when there were nearly five months to go before the performance fee fell to be measured.

Later still that day Mr Read replied that the interim EPRA NAV was above the hurdle on a straight line basis therefore it was appropriate to accrue for the potential performance fee at this stage. PwC gave their view on 12 February advising that an accrual should be included and the opposition to it was withdrawn.

On 11 February Mr Tice reported to his fellow directors that he had concluded a round of meetings with the main shareholders and that all were very happy with Wolstenholme and Currie, concerned over their incentive and encouraged to hear that there had been agreement as to new arrangements to incentivise them. The investment managers had done what they set out to do, he said, and it looked as though they would earn a performance fee of over £4m. He floated further and better forms of incentivisation for the future.

On 13 February 2009 the audit committee of SAPRO met. It comprised Messrs Tice, Spicer and Humbles. Galileo was represented. Mr Peggie and Mr Read were present as was Mr Wolstenholme. It approved the draft interim financial statements as at 31 December 2008 which included in the Consolidated Income Statement an accrual for potential performance fees of £4,116,383. The Chairman's statement at page 3 (in earlier drafts but not the final version) said that –

"… the Company has adopted the IRFS NAV adjusted by the open market valuation of the property portfolio for the purposes of calculating Proteus Property Partners' remuneration under the investment management agreement, which is equivalent to the EPRA NAV."

The interim results were also approved and it was agreed that the Letter Agreement was recommended to the board for approval. Late that same day the board approved the Letter Agreement, which was signed three days later.

G: Events following the signing of the Letter Agreement

SAPRO paid some £347,286.77 to Proteus for a shortfall in management fees based on EPRA NAV and paid quarterly management fees invoiced on 1 April, 1 July and 1 October 2009, again all based on an EPRA NAV calculation.

On 30 December 2009, by which time all the previous board members had been replaced, SAPRO published its results for the year to 30 June 2009. It asserted that the NAV was £83.3m, a calculation which the claimants say is effectively Triple Net NAV not EPRA NAV or its equivalent.

This figure of £83.3m is very close to the figure of £83.27m which SAPRO pleaded in its defence on 12 April 2010 as the Net Asset Value of SAPRO as at 30 June 2009 "taking the necessary allowance for deferred tax into account." Further information was sought and given with a spreadsheet attached showing how that calculation had been made, namely by re-valuing the properties and deducting deferred tax at 28% on a non-discounted basis. This calculation I was told in evidence was carried out (at a cost of some £76,000 odd) by Mr MacGregor, a partner in the firm BDO and therefore a partner of Mr Solly Benaim who was the forensic expert accountant called by the defendant in this case, and who was to take a very different approach

H: Legal Principles

The obvious starting point is Lord Hoffmann's restatement of the modern approach to the construction of contractual documents in ICS Ltd v West Bromwich BS [1998] 1WLR 896 at 912F where he said -

"The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce [in Prenn v Simmonds [1971]1WLR 1381 at 1384-6] as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear…

(4) The meaning which a document …would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax..."

In Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 WLR 989 Lord Wilberforce had said at 995H:-

"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as "the surrounding circumstances" but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn pre-supposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating"

Later at 996E he added -

"When one speaks of the intentions of the parties to the contract one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim or object or commercial purpose one is speaking objectively of what reasonable persons would have in mind in the situation of the parties".

A case highlighting the difficulties in the application of these well known principles, and the boundaries of the exception to which Lord Hoffmann referred in his third principle, is the House of Lords' decision in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 in which the defendant was seeking to argue that when a pre-contractual negotiation did not demonstrate divergent positions but established a consensus on the point at issue that should be admissible in construing the written contract. Lord Hoffman, supported by the other members of the Committee, hardened his heart to the argument and said that this was not a justification for a departure from the exclusionary rule. He said at 1120H:

"The [exclusionary] rule may well mean… that parties are sometimes held bound by the contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes…..The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it".

Lord Hoffmann went on to consider the exception to the exclusionary rule suggested in The Karen Oltmann [1976] 2 Lloyds Rep 708, sometimes called the "private dictionary" principle, and said at 1122B:

"It is true that evidence may always be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning. This is the "private dictionary" principle which is akin to the principle by which a linguistic usage in a trade or among a religious sect may be proved…"

This is not in my view such a case. The language used is conventional, albeit not expressed with complete clarity. The parties were not using slang or code or some vocabulary peculiar to themselves, such as for example might be used to meet a legitimate desire for privacy.

Finally as to post contractual behaviour of the parties L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 is authority for the proposition that subsequent actions of a party to the contract should not be used as throwing light on the contract's meaning. This seems to me to make all of SAPRO's post contractual conduct inadmissible in construing the contract itself.

I: The Expert Evidence

Expert forensic accountants were instructed in this case and the questions they were directed to address were these:-

a) Do customary accountancy or industry practices relating to SAPRO required deferred taxation to be taken into account when calculating the Net Asset Value of SAPRO's group (the "group")?

b) If so, how should "Net Asset Value" as defined in the Letter Agreement be calculated in practice?

The following figures have been agreed with the help of the accountants, and illustrate the effect of the division of views in this case.

Measure	£ '000s
Claimant's case ("EPRA NAV Calculation")	£87,307
EPRA Triple Net NAV – Claimant's calculation (Tax only deducted; and on a discounted basis)	£84,568
Agreed level of the hurdle as at 30.6.09	£84,217
Defendant's pleaded case (on "EPRA Net basis"; tax deducted, no discounting)	£83,270
Mr Benaim's adjusted NAV	£80,494 to £81,078

As to "industry practice relating to SAPRO" Mr Brice instructed by the claimants identified 27 companies similar to SAPRO and sought to show that a majority of them measured the remuneration of managing agents' performance by reference to NAV. Taken at its highest this was something less than a universal practice. Mr Benaim disputed his findings and Mr Kinsky began to embark on a detailed deconstruction and analysis of the circumstances and remuneration basis of each of these 27 companies.

As an issue this seemed to me to be on the point of taking the case over in a disproportionate way, and counsel agreed. They sensibly suggested putting the differences between the experts on this topic in writing which was done in the form of a Scott Schedule. Both experts in any event volunteered in evidence that such arrangements for remuneration varied according to the circumstances of the company concerned and were, as Mr Brice described it "party-defined", not the result of some prescribed guidance. By the end of the case neither counsel, acting entirely realistically, placed any significant reliance on this aspect of their reports.

As to customary accountancy practices relating to SAPRO, Mr Brice's approach was to proceed from the wording in the Letter Agreement. In the joint memorandum of agreement both experts agreed that any calculation should start with the IFRS NAV as derived from the group accounts. Mr Brice interpreted this, in my view convincingly, as meaning that the IFRS number should not be rebuilt from the ground up, it having been considered and approved by the board and auditors of SAPRO. He then added the revaluation uplift to that NAV which as he put it "takes you out of IFRS" because IFRS does not allow such a thing to be done. His opinion therefore was that the nearest and most appropriate guidance was EPRA NAV which was appropriate because these properties were predominantly trading or development properties and EPRA NAV was the appropriate measure for properties which were to be held long term. Neither EPRA Triple Net nor Mr Benaim's method of calculation was appropriate in his view for such property, but was more appropriate to a valuation on a liquidation basis. He was also critical of the complexity and uncertainty in Mr Benaim's approach.

Mr Benaim for his part agreed that the starting point was IFRS NAV (he had stated as much in his written report) but said that was a starting point "for convenience only". He agreed that once you added a revaluation you were no longer looking at an IFRS NAV. He therefore said that the properties should all be treated as investment properties and for that reason all appropriate adjustments should be made. This would include such matters as goodwill, priority profit sharing and any available brought forward tax losses in the associate and subsidiary companies. I do not propose to deal with the details of these adjustments as it is not necessary to my task if I do not agree with the principles underlying his approach. In an appendix to his report he presented two spreadsheets one of which assumed there was no such tax losses brought forward and the other that there were. He conceded that EPRA Triple Net did not specifically recommend any of these adjustments, merely deferred tax but he considered that good practice "implied" them, given what he called his "pretence" that what had been treated by the company and its auditors as development properties should now be treated as investment properties; therefore all prudent adjustments should be made as if he were starting from scratch and endeavouring to construct an NAV for properties of that type.

I found his evidence unpersuasive on this issue. When the new directors of SAPRO retained his firm and his partner Mr MacGregor calculated the appropriate NAV figure these deductions did not occur to him or his team as being required by good accountancy practice. It is agreed that Mr Benaim's is a unique method and he could not point to other instances of companies using it. It ignores the agreed starting point and goes behind the audited accounts. It is designed to give what he considers to be "a true Net Asset Value of the group" almost as if, as Mr Brice said, one was considering the position on a sale and purchase. That ignores what I consider to be the quite evident purpose, that it is being used to form a measure for the remuneration of the managing agents and the rewarding of their performance.

Mr Kinsky meets the complexity point by saying that the only real complexity lies in the setting up of the spreadsheet in the first place; thereafter only the relevant figures need to be entered to reach the required answer. The fact remains that Mr Benaim with his great experience, the considerable resources of his firm and of the firm of city solicitors instructing him, the board of SAPRO and the resources of Galileo its administrator, was unable to lay hands on some 17 different sets of tax computations relating to associate or subsidiary companies which were necessary to complete his calculation. If he could not do that in 2010 there is no reason to believe that task would have been easier rather than more difficult a year before. The result is a gap of about half a million pounds between the top and bottom of his range, a singularly inappropriate result where as here the hurdle is critical and £1 either way makes the difference between the entitlement to several million pounds and nothing.

I cannot believe that the parties can have had in contemplation an arrangement such as that which he proposes.

J: The Construction of Paragraph 2 of the Letter Agreement

None of the exchanges between the parties up to the end of 2008 in sections A and B above is admissible, as all agree. But Mr Chapman in an attractively presented argument submits that later exchanges starting with Mr Peggie's email of 28 January 2009 and going through to the meetings of the audit committee and board on 13 February, the publication of the interim accounts to 31 December 2008 signed by the board on that day, and the agreement to accrue for a performance fee of £4.1m based on EPRA NAV without deduction of tax are admissible, not as part of the negotiations but as "relevant background facts" mutually known to the parties. He is advancing the same argument as that relied on by the unsuccessful defendant in Chartbrook, albeit on facts which are more favourable to the argument than were available in that case. What he argues would be highly persuasive to most intelligent laymen, who might consider it strange to close their eyes to such exchanges and expressions of the company's understanding, which might well seem obviously relevant to them.

But where the consensus that these documents show is not itself relied on as embodying the contract, but the parties later express their agreement in a written document, I am bound by Lord Hoffmann's demolition of this argument in Chartbrook between paragraphs 38-42. Apparent or actual pre-contractual consensus is not an exception to the exclusionary rule prohibiting evidence of negotiations or statement of a party's subjective intent. Powerful as it might seem at first sight this evidence has, I find, no role to play in the construction of the contract any more than the antecedent negotiations do. It is however highly relevant to the alternative claim based on estoppel.

The exercise therefore is an objective one, to decide what "reasonable persons would have in mind in the situation of the parties" (Lord Wilberforce in Reardon Smith 996F) or "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man" (Lord Hoffmann in ICS at 913A) but scrupulously ignoring anything that amounted to negotiations or declarations of subjective intent. The hypothetical reasonable man would be charged with considering objectively the commercial purpose of the contract, its "genesis", and the "aim of the transaction".

This reasonable man, who must be treated as having taken the time and trouble to familiarise himself with this issue before reaching his decision, would have known that the following relevant facts were known to both parties at the time. These are :-

i) Everything set out at sections A, B and C of this judgment, and he would have had access to the company's published financial statements.

ii) That the company had acquired 15 properties by the end of 2008, from his reading of the report of the investment manager (page 6 interim report to 31 December 2008).

iii) All those properties were carried in the balance sheet of the company at cost. All but one were development properties.

iv) As at 31 December 2008 the value of the 15 properties to SAPRO had increased by 38% over cost (the interim report page 7).

v) From the IFRS recommendations and standards, this increase could not have been and was not reflected in the NAV of the company which formed the basis of the calculation of the management and performance fees.

vi) This increase was solely attributable to the performance of the investment manager's agents Wolstenholme and Currie.

vii) From the evidence of Mr Wolstenholme (which was not challenged on these points) and from Mr Tice's report to his co-directors of 11 February 2009, that the investors were pleased with the performance of the two men, which was achieved at a time when other property funds were "tanking" to use Mr Wolstenholme's word.

viii) The hurdle was recognised, prior to the signature of the management agreement, as a high one. The terms of the management agreement were such that it would be impossible for the performance hurdle to be surpassed unless its definition of NAV was amended.

ix) As a matter of inference from these facts, that was in the company's interests, viewing these objective facts in isolation from any statements of intention on its part, to ensure the continued services and good performance of the agents.

x) Both parties regarded the terms of the management agreement relating to the definition of Net Asset Value as unacceptable and therefore it required amendment. This would have been clear from the wording on the face of paragraph 2 which expressed itself as a measure to amend so as to clarify the definitions in the management agreement, as well as the defendant's stance in this action, which does not say that it did not need to be changed.

xi) That the amendment adopted the previous definition of NAV as found in the 2006 agreement but with one change, and one change only, namely the re-valuation of the acquired properties from book value to market value.