Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 200
A989/08	OPINION OF LORD DOHERTY in the cause KIRKTON INVESTMENTS LTD Pursuer; against VMH LLP Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Currie QC et O'Brien; Warners, Solicitors.

Defenders: Ferguson QC et Duncan; Dundas & Wilson C.S. LLP.

8 December 2011

Introduction

[1] In this action the pursuers seek damages from the defenders, their former solicitors, for professional negligence.

[2] The case came before me for a proof before answer. In the course of the proof I heard evidence from Mr Berry, Mr Nicholas Watson MRICS of Rettie & Co, Mr Donald Reid, Solicitor, Mr James Thompson C.A., Mr Gordon Porter FRICS, Mr Russell Kennedy, and Mr John Dixon MRICS. In terms of the Joint Minute (No. 32 of Process) certain matters were agreed between the parties. In addition a number of written reports were tendered in evidence, and parts of these were relied upon by both parties.

Background and history of events

[3] The pursuers are a limited company which invests in and develops property. Kirkton Developments Limited ("KDL") is a related company which engages in similar activities, often in conjunction with the pursuers. At all material times the controlling shareholder in both companies was Alan Berry. Mr Berry had been involved in property development for several years. His previous projects had largely involved development of older properties, on occasion with partial new build. However, there was no evidence of him previously having funded and built a new build development on the scale of the development at 144 -148 Slateford Road. The defenders are a limited liability partnership of solicitors.

[4] During 2004 the pursuers and KDL were interested in acquiring and developing a site at 144 to 148 Slateford Road, Edinburgh ("the site") for housing. The defenders were instructed to act for the pursuers and KDL in relation to the acquisition of the site. The defenders were aware that the intention was that both the pursuers and KDL would be involved in the project with the pursuers owning the site and KDL carrying out the development. They were also aware that the project was being funded by means of bank borrowing.

[5] 134 -136 Slateford Road comprises a shop adjacent to the site. It was, and is, used for the sale of hot food (initially fish and chips, subsequently pizzas). In 2004 it was owned by Slateford Developments LLP ("SDL"). SDL wished to obtain planning consent to convert a garage adjacent to the shop into a house. SDL anticipated that in order to obtain such consent it would need to obtain a right of access over the site, and ensure that the part of the site immediately adjacent to the garage was left open.

[6] In April 2004 the owners of the site, HBJ 590 Ltd ("HBJ 590"), applied for planning permission to build houses and flats on it ("the development"). The development comprised nineteen terraced townhouses and eight apartments. On 2 July 2004 the Development Quality Sub-Committee of the planning authority adopted a report recommending that planning consent be granted subject to certain conditions. One of the recommended conditions was that prior to occupation there should be installed and be operational a ventilation duct to take odours from the shop into the development and to dispel them at ridge level. Another was that prior to planning consent being granted HBJ 590 should be required to enter into a suitable legal agreement with the owner of the shop to secure ongoing maintenance of the ventilation duct. The existing ventilation duct at the back of the shop was considered to be inadequate for dispersal of odours.

[7] HBJ 590 and SDL entered into an agreement in February and March 2005 whereby HBJ 590 would grant a servitude right of pedestrian access over part of the site in favour of SDL's property in return for SDL granting HBJ 590 the right at all necessary times and on all necessary occasions to carry out all necessary works in connection with the installation of a new ventilation system at the shop.

[8] Missives for the purchase of the site by KDL from HBJ 590 Ltd were concluded on 1 April 2005. The missives contained the following suspensive condition:

"Entry and actual occupation shall be given to the purchaser 14 days after the final letter from The City of Edinburgh Council granting Planning Consent for the Development following on the date of execution of a Section 50 or section 75 Agreement entered into between the seller and The City of Edinburgh Council or otherwise confirming resolution of the planning conditions and in particular the condition relating to the required ventilation works at the rear of the shop at 136 Slateford Road, Edinburgh, in terms entirely satisfactory to the purchaser. The seller shall take all reasonable steps to ensure that the section 50 or section 75 Agreement or confirmatory letter is entered into as soon as is reasonably practicable. The said ventilation works will be carried out subsequently by the purchaser and, upon completion, their reasonable and proper costs will be reimbursed by the seller within 14 days of presentation of the relevant receipts."

Title to the site was taken in the name of the pursuers.

[9] On the basis that there was an agreement in place between HBJ 590 and SDL the planning authority granted full planning permission for the site on 11 April 2005. The consent was subject to certain conditions. Condition 8 provided:

"Prior to occupation of the development the applicant shall install and have operational a ventilation duct which will take odours from the Codfather, 136 Slateford Road into the development hereby approved and dispel the odours at ridge level to the satisfaction of the Head of Planning and Strategy as shown in approved drawing number E1430L(--)013B."

[10] By missives concluded in July 2005 SDL sold the shop to Ian McDonald Enterprises Limited ("IME"). In terms of the missives IME undertook to SDL to adopt and implement the terms of the arrangement between SDL and HBJ590 as regards the flue connection.

[11] The defenders acted for both the pursuers/KDL and IME in relation to their respective purchases. Mr Hunter acted for the pursuers/KDL and Mr McCombie acted for IME. Mr Hunter advised Mr Berry that the pursuers/KDL would have a legal right to install the ventilation duct at the shop. The pursuers began construction of the development in the autumn of 2005.

[12] In late 2005 it became apparent that IME disputed the pursuers' entitlement to affix the ventilation duct to the shop. Around the same time the application for planning permission to convert the garage adjacent to the shop to a house was refused. At a meeting at the defenders' offices on 13 December 2005 IME offered to allow installation of the flue in return for a payment of £75,000. Mr Hunter advised the pursuers/KDL that they had a legally enforceable right to connect the flue. In view of that advice the pursuers did not accept IME's offer. As a result of the conflict of interest which had arisen the defenders ceased to act for the pursuers/KDL in February 2006.

[13] Mr Berry considered how best to deal with the difficulty which had emerged. His preferred course (rather than litigate with IME) was to seek a variation of the planning permission so as to remove the requirement which condition 8 imposed. IME proposed to let the shop for use as a pizza takeaway. Mr Berry and those advising him - planning consultants and solicitors - felt the ventilation arrangements to deal with smells from the fish and chip shop were no longer needed. The pursuers applied for a variation of the planning permission. In addition they explored the possibility of HBJ590 seeking to enforce its contractual rights anent installation of the flue against SDL, and SDL seeking to enforce its contractual rights thereanent against IME. In December 2006 the pursuers' solicitors wrote to the defenders intimating that the pursuers held them responsible for the predicament in which they found themselves, but indicating that they remained optimistic that the planning authority would agree to removal of the planning condition.

[14] In 2006 Mr Berry obtained marketing and pricing advice from Rettie & Co. The initial plan had been for the development to be completed and released in phases. Phase 1 was to be the eastmost townhouses, two of which were to be showhouses (one to be used as a showhome and the other as a sales office). Phase 2 was to be the mid-section of the townhouses, Phase 3 the western section, and Phase 4 the apartments. Marketing the development was to begin in the summer of 2006 with first sales from Phase 1 being achieved in July 2006. There was some slippage with the result that it became clear that the first phase could not be reached until the late autumn of 2006. In the circumstances Rettie & Co. advised that it would be preferable to postpone Phase 1 and the sales launch until spring 2007, because the early part of the year was usually the most favourable time for sales and for an uplift in prices. The pursuers agreed with that advice. In addition they considered the revised plan would have considerable operational advantages: major works could be completed without the constraints which the presence of occupiers would entail.

[15] To the rear of the site is a railway line (Edinburgh to Carstairs) and its embankment. The terrace of townhouses is next to it. They are smaller than normal townhouses and have no gardens. They are three storey with a garage, study and wc on ground level, an open plan lounge/dining room/kitchen on the first floor, and two bedrooms and a bathroom on the second floor. Behind each house there is a very small drying area (about 1.5 metres deep) which is accessed through a door from the study. At the back of each house's drying area is a high brick wall clad with timber which goes up the side of the railway embankment. The total floor area of each house is 90.4m². The study is 2.35 metres by 2.07 metres; the living/dining room 4.33 metres by 4.16 metres with the kitchen (2.86 metres by 1.52 metres) off it; bedroom 1 is 4.33 metres by 2.59 metres and bedroom 2 is 2.35 metres by 1.52 metres. Mr Berry considered the houses were more suitable for young professionals who wanted a garage than for families. It was not easy to decide whether to describe the subjects as mews or townhouses for marketing purposes. The apartments are located nearer the front of the site and Slateford Road, further from the railway line than the townhouses.

[16] From about late January 2007 the development was advertised in various ways including in the press, on its own website, on Rettie & Co's website, on Google advertisements, and by the Edinburgh Solicitors Property Centre ("ESPC"). In addition a "v - board" For Sale sign had been placed on the site next to Slateford Road. The intention was that the full launch would take place at the end of April 2007. Initial efforts were to focus on townhouse sales. The full launch was to be well publicised with significant expenditure on advertising, potential purchasers being identified and invited to the site, and the compilation of a database for the development based on enquiries which had been made and telephone and email follow up.

[17] On 11 April 2007 the planning authority refused the pursuers' application to remove condition 8. By the time of the refusal two townhouses had been reserved. Missives for their sale had not been concluded.

[18] The pursuers' responded to news of the refusal in a variety of ways. They appealed to the Scottish Ministers against the planning authority's decision. They raised an action against IME in the Court of Session seeking declarator that they were entitled to install the ventilation duct at the shop. They instructed the postponement of the full launch, and the cessation of active sales marketing in the press and by the ESPC. Between mid-April 2007 and December 2007 marketing was low key - by way of the development's website (to which there was a link on Rettie & Co's website), Google adwords, the site signage, and (until the end of July 2007) through the ESPC web button. Enquiries were dealt with. Potential purchasers were told reservations could be made but that missives could not be concluded.

[19] On August 2007 the pursuers' planning appeal was refused. A Procedure Roll Hearing in the action against IME was set down for 14 November 2007. Prior to the hearing the pursuers were advised by senior counsel that the action had poor prospects of success. On 14 November 2007 the pursuers agreed to pay IME £324,000 in exchange for the grant of a right to fix the ventilation duct to the shop. As a result, on 4 December 2007 the planning authority intimated that it was satisfied that condition 8 of the planning condition had been complied with.

[20] In Edinburgh the residential property market had experienced record sales volumes in 2006. The market remained strong for most of 2007. In September 2007 market confidence was hit by the American Sub Prime crisis, and the Northern Rock crisis. There were many ripple effects. A period of slowdown began. During Autumn 2007 banks worldwide reported large losses. By the second quarter of 2008 it was apparent that the property market had entered a period of slump. The position worsened during 2008.

[21] Active marketing of the development resumed in January 2008. The apartments were released for sale then. The full launch for townhouses and apartments took place on 23 February 2008.

[22] Two town houses were sold to private purchasers. The first had been reserved in March 2007 at the release price of £249,950. The second had been reserved in May 2007 at the release price of £239,950. A third townhouse had been reserved in June 2007 at the release price of £239,950, but the interested parties (Mr and Mrs Farquhar) had withdrawn within a few months. They had sold their own property and had not been prepared to wait to conclude missives. A further townhouse had been reserved in July 2007 but the interested parties (Mr and Mrs Howieson) withdrew in early 2008 because they were unable to sell their existing property. No townhouses were sold or reserved as a result of either the active marketing which recommenced in January 2008 or the full launch on 23 February 2008. The 17 remaining townhouses were ultimately purchased from the pursuers by Mr Berry - nine of them between October 2008 and March 2009 at a price of £174,500 per townhouse and the remaining eight for a total price of £1,200,000 in autumn 2009. All the apartments were sold to individual private purchasers. Four were reserved in January 2008. Three of them achieved prices recommended by Rettie & Co in December 2007. Those prices were at the lower end of the bracket of prices which Rettie & Co had recommended in May 2007. Flat 1, 182 Slateford Road was reserved by Russell Kennedy, a director of the pursuers and KDL, at a price of £140,000 (£15,000 below the release price of £155,000). A further three apartments were reserved in mid 2008, and one in late 2008, at prices below the ranges of the prices recommended by Rettie & Co in February 2007, May 2007, December 2007 and May 2008.

Breach of duty

[23] The pursuers sue on their own behalf and as assignees of KDL. They advance cases in contract and in delict, but the same duties are relied upon in each case. They maintain that it was the defenders' duty to take reasonable care that the pursuers/KDL obtained an effective and enforceable right to install the ventilation duct, and that had they done so such a right would have been constituted. They maintain that in any event it was the defenders' duty to advise the pursuers/ KDL that the terms of the missives they proposed to conclude would not give KDL a right to install the flue which would be enforceable against whoever might be the owner of the shop. Had they been so advised they would not have concluded missives in those terms, but would have instructed the defenders to take such steps as were necessary to constitute an enforceable right against the owners of the shop. Lastly, they maintain that in December 2005 it was the defenders' duty to advise the pursuers/KDL that KDL did not have an enforceable right to install the ventilation at the shop, or at the very least, that their claim to have such a right was a very weak one. In closing submissions Mr Currie made clear that in the event that I was satisfied that there was negligence at the time of conclusion of the missives, he did not seek to rely on the breach of duty in December 2005. However, if it was necessary to rely upon it, his position was that the case based upon that breach was also well founded.

[24] In June 2011 the defenders lodged a Minute of Admission (No. 30 of Process) in which they admitted that they were in breach of duty in respect of their failure prior to the conclusion of missives to advise the pursuers and KDL that the latter had no enforceable right against the owner of the shop to connect a ventilation duct into the shop's existing ventilation system.

[25] At the proof Mr Reid, an experienced conveyancer, gave evidence as to various methods which could have been employed by the defenders to enable KDL to obtain an enforceable right against the owners of the shop. Put shortly, these would have involved either the constitution of a real right affecting the shop (a servitude or a real burden), or the creation of a chain of enforceable personal rights. In Mr Reid's opinion either route could have been used and would have achieved the desired result. He would have expected any reasonably competent solicitor exercising ordinary care to have advised the pursuers/KDL that the arrangements which were in fact being put in place would not result in the creation of an enforceable right. He would have expected such a solicitor to have taken the necessary steps to obtain an enforceable right against the owners of the shop. If he failed to do so, such a solicitor ought to have advised the pursuers/KDL at the time of the meeting on 13 December 2005 that they did not have an enforceable right.

[26] The defenders' position prior to closing submissions was that it would not have been possible to create a real burden or servitude affecting the shop because there would be no praedial benefit to the site: the flue served only the shop. Mr Reid considered that to be too narrow a view. The purpose of the planning condition - and of the burden/servitude - would be to improve the residential amenity of the site. That was a sufficient praedial interest. Real burdens to restrict the carrying on of trades involving noxious fumes were common. The same principles applied to burdens designed to restrict and ameliorate the effects of the emission of odours as applied to burdens designed to prevent activities liable to cause such emissions.

[27] In the end it became unnecessary for me to adjudicate upon this matter because Mr Ferguson accepted (i) that Mr Reid was correct that an enforceable right against the shop owners could have been constituted in one or more of the ways he suggested; (ii) that in the circumstances it was the defenders' duty to advise KDL and the pursuers of that, and to take the required steps to constitute an appropriate right; (iii) that in failing to do so the defenders were in breach of their duties to KDL and the pursuers. I proceed on that basis. In view of the concession which was made the parties did not make any detailed submissions as to the law relating to servitudes or real burdens, and I was not referred to any authority. In the circumstances it is not appropriate that I proffer any further observations on the topic.

[28] Mr Ferguson did not dispute that the defenders had also been in breach of duty in failing to advise the pursuers/KDL of the weakness of their position when IME proposed settlement on 13 December 2005. He submitted that as it was accepted that the pursuers' primary case of breach of duty was well founded it was unnecessary to consider their secondary case.

Consequences of breach of duty

[29] The pursuers maintain that as a result of the defenders' breach of duty they incurred costs of £55,812.09 seeking to rectify the position. In addition, because they were not able to market and sell the townhouses and apartments until early 2008 - when the property market was in a downturn - they had to fund the development for longer than planned. But for the defenders' breach of duty they would have sold sufficient properties to have paid off bank indebtedness by, at latest, March 2008. They sought recovery of bank charges and associated professional charges of £83,891.25 incurred from March 2008, and of interest from March 2008 of £298,065.83. Further, they claim to have achieved lower selling prices because the market had fallen by the time they were able to sell: the sum sought under this head was £1,694,010.

[30] Mr Ferguson accepted that certain of the sums claimed by the pursuers were recoverable, being costs reasonably expended to seek to rectify their position viz. the £324,000 paid in settlement to IME, and £53,716.46 in fees and outlays paid to planning consultants, property consultants, solicitors, counsel and accountants. He took issue with a Warners' feenote for £950 (6/32), an account of £456.33 incurred to Johnston Newspapers (6/54), and an account of £60 incurred to the Stationary Office (6/55). He submitted that there had been inadequate explanation of why these expenses had been incurred: they were, he maintained, part of an attempt to mitigate loss which was misconceived and unreasonable. In relation to these relatively minor sums I accept Mr Berry's evidence that all three items of expenditure were incurred in connection with a proposal (later abandoned) to have HJB 590 restored to the Register of Companies in order to seek to enforce the chain of personal obligations. The individual items of expenditure were not challenged in cross-examination of Mr Berry, nor was it put to him that the proposed course was misconceived or unreasonable. In the circumstances I am not prepared to hold that the expenditure was an unreasonable response by the pursuers to the predicament in which the defenders' breach of duty had placed them.

[31] Mr Ferguson conceded that the arithmetic of the bank interest claim was correct. He indicated that the arithmetic of the bank and professional charges claim ought to be £83,283.40 once allowance was made for VAT on legal fees: I understood the pursuers to accept that was indeed the correct total.

[32] Mr Ferguson did not accept that the pursuers were entitled to recover any sums in respect of bank and associated charges, interest, or loss of sales revenue. He maintained that these losses were not within the scope of the duties owed by the defenders to the pursuers/KDL. The risk of a fall in the market was not a risk which the defenders ought to bear. In any event, I ought not to accept that the defenders' breach of duty prevented sales taking place earlier, before the fall in the market. He argued that on the evidence I should find that the real problem was that the properties, and in particular the townhouses, were unattractive to potential purchasers. He also contended that the prices paid by Mr Berry for the townhouses he purchased were below market value. He submitted that if the scope of the defenders' duties was wide enough to extend to the disputed claims - and if I was persuaded that breach of duty by the defenders may have had some effect on sales - the pursuers had lost, at best, the chance of obtaining earlier sales at better prices, and the chance of paying off their bank indebtedness by March 2008.

Scope of duty

The parties' contentions

[33] Mr Currie submitted that as a result of the defenders' failures marketing and sale of the houses and apartments were delayed. The consequences of the delay were within the scope of the defenders' duties. Additional bank borrowing costs were incurred, and lower sales prices were achieved. The defenders had not merely provided information to the pursuers/KDL. Rather, Mr Hunter had advised Mr Berry that he could proceed to conclude missives; and that Mr Hunter would properly protect the pursuers'/KDL's position in respect of the ventilation flue. At the time of the meeting on 13 December 2005, Mr Hunter had advised Mr Berry that there was a legal right to install a ventilation flue at the shop (and therefore, by clear inference, that the pursuers did not require to accept the settlement proposal made by IME). In each instance Mr Hunter had in effect been advising on whether a course of action should be taken; his duty had not merely been to supply information (South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 ("SAAMCO"), per Lord Hoffman at page 214 E-G). Mr Hunter had been policing each transaction: in the first instance by assuring Mr Berry that the pursuers'/KDL's position would be protected, and in the second instance by assuring him that there was an enforceable right to install the flue (Bristol and West Building Society v Rollo Steven & Bond 1998 SLT 9, per Lord Maclean at page 12G-E; Preferred Mortgages Ltd v Shanks [2008] CSOH 23, [2008] PNLR 20 per Lord Drummond Young at paragraphs 19-21). It was reasonably foreseeable (i) that the breaches of duty would result in delay to the project and the achievement of sales; (ii) that a consequence of the delay might be increased borrowing costs; (iii) that delay would result in additional exposure of the pursuers to the vagaries of the market. In SAAMCO one of the reasons why the loss caused by the drop in the market fell outwith the scope of the valuer's duty was that the loss would have been incurred even if the valuer's advice had been correct. That was not the case here. Here the defenders' breaches had the result that the pursuers were not free to sell the subjects when they wished to. They were deprived of the opportunity to market and sell the subjects for a period before the market fell. As a consequence they had sustained losses and incurred increased costs.

[34] Mr Ferguson submitted that the losses claimed in respect of additional bank charges and diminution in sales proceeds were not within the scope of the duties undertaken by the defenders to the pursuers and KDL. The defenders had not assumed the risk of such losses and it would not be fair and reasonable to impose it on them. Such losses had not been in contemplation and the defenders had not had an opportunity to provide for them (South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 ("SAAMCO") per Lord Hoffman at pages 211-213, Nycredit v Erdman [1987] 1 WLR 1627 per Lord Nicholls at page 1631; Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 A.C. 61 per Lord Hoffman at paragraphs [12], [14]-[17], [23]; Lord Hope at paragraph [32], [33]; Lord Rodger at paragraph [52], [61]). There had been no duty upon the defenders to avoid causing to the pursuers/KDL damage of this particular kind (Newcastle Building Society v Paterson Robertson and Graham 2001 SC 734 per Lord Reed at paragraph [8]). It was just and reasonable that the pursuers/KDL should bear the risk of the vagaries of the market. The defenders were not policing the transaction. The case was clearly distinguishable from cases such as Preferred Mortgages Ltd v Shanks. There the solicitors had provided incorrect advice about two aspects of the transaction critical to the value of the security. They were liable for the whole foreseeable losses caused by their breach of duty because there was a close relationship between the losses sustained and the duty breached.

Discussion

[35] In my opinion the scope of the defenders' duties to the pursuers/KDL was sufficiently wide to include the duty to avoid causing them each of the kinds of loss and damage they say were sustained. The defenders were not in a position analogous to that of the valuers in SAAMCO. They were not merely providing information to the pursuers/KDL. Their duties were more exacting. They were under a duty to take the necessary legal steps to protect the position of the pursuers/KDL in relation to the ventilation issue at the time they concluded missives; and they were under a duty to advise them correctly of their legal position at the time of the proposal by IME so that a properly informed decision could be made then as to what action to take. The defenders' position appears to me to have been much more akin to the position of the solicitors in the cases of Bristol and West Building Society v Rollo Steven & Bond, Newcastle Building Society v Paterson Robertson and Graham, Preferred Mortgages Ltd v Shanks, and McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 (to which I return below). Having regard to the nature and content of the defenders' duties to the pursuers/KDL, and to the whole circumstances in which they arose and were breached, it appears to me to be fair, just and reasonable that the scope of the defenders' duties should extend to the kinds of loss and damage claimed (Caparo Industries Plc v Dickman [1990] 2 A.C. 605). It was reasonably forseeable that the defenders' breach of duty might result in interruption to the planned progress of the development and sale of the properties, and might occasion delay and expense. The defenders were aware that the development was being financed by bank borrowing. It was reasonably foreseeable that delay would result in additional borrowing costs. It was reasonably foreseeable that delay in achieving sales might result in longer exposure to the vagaries of the property market. It would not be fair, just and reasonable to make the pursuers/KDL bear the risk of such losses. It is, however, entirely fair, just and reasonable that the defenders should be taken to have assumed the risk of such losses. They are reasonably foreseeable consequences of the predicament in which the defenders placed the pursuers/KDL (SAAMCO per Lord Hoffman at p. 218 H).

[36] I reach that view without much difficulty for the reasons already given. I also draw some comfort from the decision of the Court of Appeal of New Zealand in McElroy Milne v Commercial Electronics Ltd. In SAAMCO Lord Hoffman referred to McElroy with approval (at page 218H-219E) as an illustration of a case where the reasonably foreseeable consequences of a plaintiff's predicament were plainly within the scope of the defendant's duty, and which applied the principle that a plaintiff's reasonable attempt to cope with the consequences of a defendant's breach of duty did not negative the causal connection between that breach of duty and the ultimate loss. He continued:

"In McElroy Milne v Commercial Electronics Ltd [1993] 1 N.Z.L.R. 39, a solicitor negligently failed to ensure that a lease granted by his developer client contained a guarantee from the lessee's parent company. The result was that the developer, who had intended to sell the property with the lease soon after completion, found himself in dispute with the parent company and was unable to market the property for more than two years, during which time the market fell. The New Zealand Court of Appeal held that the developer was entitled to the difference between what the property would have fetched soon after its completion with a guaranteed lease and what it eventually fetched two years later. The solicitor's duty was to take reasonable care to ensure that his client got a properly guaranteed lease. He was therefore responsible for the consequences of his error, which was producing a situation in which the client had a lease which was not guaranteed. All the reasonably foreseeable consequences of that situation were therefore within the scope of the duty of care. The only issue was whether the client's delay in selling the property negatived the causal connection between that situation and the ultimate loss. The Court of Appeal answered this question on orthodox lines by asking whether the client had reacted reasonably to his predicament."

While McElroy pre-dates SAAMCO, and the analysis was in terms of foreseeability and causation, in my opinion it is likely that the same result would have followed had matters been analysed in terms of the scope of the defendants' duties.

Causation and damages

General

[37] The pursuers must show that on the balance of probabilities they have suffered loss as a result of the defenders' breach of duty.

[38] It was common ground that had the defenders duly performed the duties incumbent upon them the pursuers'/KDL's position would have been protected. Mr Ferguson did not argue that the need for co-operation from one or more of HBJ590, SDL and IME was a contingency of any substance. That was unsurprising. There was no reason to doubt that co-operation would have been forthcoming if the defenders had done what they should have. I also accept Mr Berry's unchallenged evidence that had he been properly advised of the weakness of his position at the meeting of 13 December 2005 he would have agreed to make the payment of £75,000 to IME. Mr Ferguson accepted that the settlement payment of £324,000 to IME and the extrication costs of £55,812.09 were caused by the defenders' breach of duty. It was the other elements of the claim which were contentious.

When would the pursuers have marketed the townhouses?

[39] The evidence of Mr Berry and Mr Watson was to similar effect. The full launch of the townhouses would have taken place at the end of April 2007. The plan was to generate interest and, if possible, create pent-up demand. To that end the strategy was to release the townhouses in phases. In March 2007 both had envisaged a period of about a year being required (until about March or April 2008) for sales of all the townhouses and apartments to be achieved

When would the pursuers have marketed the apartments?

[40] It was not intended that the apartments be released for sale at the full launch (end of April 2007). The plan - spoken to by both Mr Berry and Mr Watson and evident from several of the entries in the Rettie & Co. file 7/2 - had always been that the first properties to be released would be townhouses and that the release of the apartments would be some months later. Mr Berry envisaged them being released when they were completed in about August/September 2007.

[41] On the other hand, Mr Kennedy indicated that as at mid-March 2007 construction of the apartments was substantially complete and could have been completed in about three weeks if they had been flooded with workmen. If work had continued on them at a steady pace they would have been completed in about four to six weeks. He said that because of the delay caused by the ventilation issue men were taken off the site and sent to other jobs. The apartments were not in fact completed until about December 2007.

[42] No mention was made by Mr Berry in his evidence of men being taken off the site after mid-March 2007, or of there having been any intention or prospect of apartments being completed before August/September 2007. It was not suggested to Mr Watson that the plan was to market apartments before August/September 2007. I formed the clear impression Mr Kennedy's evidence on this point came as a surprise to the pursuers. It was very difficult to square it with the evidence of Mr Berry or Mr Watson, or with the documentary productions. I do not find Mr Kennedy's recollection on these matters to be reliable. I proceed on the basis that the apartments are not likely to have been completed and marketed before August/September 2007. Even if they had been completed earlier I am not persuaded that the pursuers would have departed from their sales plan to accelerate their marketing and release for sale.

What were the prices at which the houses and apartments would have been marketed?

[43] In his pricing report of March 2006 Mr Watson had recommended a pricing range for the townhouses of £219,950 "mid price" to £239,950 "high price". In his evidence he explained that if things were going extremely well sales at the high price were aimed for. If interest was not so good sales about mid price might be expected. In February 2007 he advised that nine townhouses be released at the launch with four being at a fixed price of £239,950. At that time he recommended that the other five be shown on the price list with no prices given, but with "under the counter" prices available based on discussions with Mr Berry following release: once demand was established he expected £249,950 to be achievable for them. In his evidence he accepted that, because of the market difficulties and discounting, £225,000 was probably a better representation of the market value of the townhouses at about the end of 2007 and the beginning of 2008.

[44] In February 2007 mid and high prices for the apartments had been recommended: £150,000-£160,000 for Flat 1; £190,000-£200,000 for Flat 2; £152,000-£162,000 for Flat 3;

£192,000-£202,000 for Flat 4; £195,000-£210,000 for Flat 5; £225,000-£250,000 for Flat 6; £265,000-£285,000 for Flat 7; £265,000-£285,000 for Flat 8. These were increased by a recommendation dated 23 May 2007 to: £155,000-£165,000 for Flat 1; £205,000-£215,000 for Flat 2; £157,500-£167,000 for Flat 3; £205,000-£215,000 for Flat 4; £215,000-£225,000 for Flat 5; £235,000-£250,000 for Flat 6; £270,000-£285,000 for each of Flats 7 and 8. In May 2007 the terminology used to describe the lower figure in each range was "launch" price rather than "mid" price, and the higher figure was described as "target" rather than "high" price. In December 2007 Mr Watson recommended that the "launch" prices for apartments recommended in May 2007 should still be used, but that potential initial discount prices of £150,000 for flat 1, £200,000 for flat 2, £150,000 for flat 3, £200,000 for flat 4, £205,000 for flat 5, £220,000 for flat 6, £250,000 for each of flats 7 and 8 might be appropriate because comparable sites were offering significant discounts.

The market fall and its effect on Slateford

[45] Mr Watson accepted that, with hindsight, the market began to fall in September 2007. He confirmed that market conditions became more difficult with reduced interest from purchasers and discounting by developers. He accepted that this affected new build properties harder than others; and that Slateford experienced a sharper downturn in sales between 2007 and 2008 than Edinburgh as a whole. However, both he and Mr Berry maintained that the development would have fared better than other new build developments, and better than Slateford generally, because it was what they described as a quality development. I found this aspect of their evidence to be unconvincing.

[46] First, in Rettie & Co.'s Pricing Report for the development dated May 2008 (7/2 pages 235-250) they reported:

"2.2.1 Q3 and Q4 2007

The market slowdown, which began in earnest in September, carried in to the traditional festive break and this further masked how severe and long lasting its impact was expected to be. It is clear ... that the instant impact of the Northern Rock affair was felt at new build sites across the central belt...Almost half (45%) of the 90+ development (sic) surveyed reporting a notable decline in enquiry level and footfall.

Across the Edinburgh market there was a noted slowdown in enquiry level and this was particularly felt in the New Build sector and duly affected reservation in September and October. Many sites reported few or no reservations in the final two months of 2007 despite increasing incentivisation and discounting. Buyer reticence was noted across the board and was reflected right through to the usually more robust top end of the new build market." (emphasis mine).

[47] Second, I found their evidence that the properties were a high specification, quality development difficult to reconcile with evidence which I accepted. The development's situation and proximity to the disamenity factors such as the railway line, the canal, commercial properties such as the 24 hour ASDA superstore and the hot food takeaway, and a very busy and noisy road (Slateford Road) appeared to me to fully justify Mr Dixon's description of the general location as being "slightly below average". The proximity to the railway appeared to me to be a very significant disamenity so far as the townhouses were concerned. The facts that floor areas of the rooms in the townhouses are, on any view, small, and that the townhouses have no garden ground to speak of, are further unattractive features detracting from overall quality. Mr Porter compared the specification and finish of the properties at the development unfavourably with that of the nearby comparisons at Archways: he described the finish and specification at the development as being "more utilitarian", and with "more painted finishes". On the other hand, while Mr Watson himself accepted that general amenity at Archways was better, he considered that the overall quality of the development was better than Archways and other developments in the area. Both Mr Dixon and Mr Porter are very experienced chartered surveyors - a good deal more experienced than Mr Watson. Both impressed me as careful witnesses. Their evidence on these matters was more measured and more objective than Mr Watson's and Mr Berry's evidence. I accept it. I do not accept that the development was superior to Archways and the other developments in the area.

[48] I conclude that the market fall is likely to have affected the development in the same way as it affected other new build developments, and other properties, within the Slateford area. At other new build developments, including those in Slateford, discounts and incentives to achieve sales were offered from late 2007 into 2008. The downturn worsened further from the second quarter of 2008.

Evidence relating to what third parties are likely to have done

[49] The pursuers led evidence from Mr Watson and Mr Berry as to what they believed would have occurred had the full launch of the development taken place at the end of April 2007.

[50] Mr Watson's evidence was that market conditions were good. He would have hoped to have had reservations on up to nine of the townhouses within about two weeks of the launch. (In February 2007 he had written to a colleague, Mr McMullan, indicating that "an aim" would be for the first nine townhouses to be reserved within the first one to two weeks of the proposed full launch). He thought that "perhaps" between twelve and fifteen townhouses and five flats could have been sold by the downturn in September 2007. There would have been an "opportunity" to sell the remainder between September 2007 and March 2008 because the "quality end" of the market was performing better. Properties sold in that latter period were likely to have had to be discounted. It was "very, very difficult" to say how much of a discount would have been required - perhaps £10,000 to £15,000 per property.

[51] Mr Berry's view was that thirteen townhouses and five flats could have been sold by September 2007. The balance could have been sold by March/April 2008. In re-examination he added that had been his view in March 2007; but that looking back now he might see things differently.

Evidence of sales revenue required to clear the pursuers' borrowings

[52] Mr Berry spoke to sales of thirteen townhouses and five apartments being required to clear the development's bank borrowings. In fact, the spreadsheet 6/76 showed that the correct figure was fourteen townhouses and five apartments. The spreadsheet forecast that such sales proceeds would be generated by September 2007. Its author, Mr Thompson, identified it as being the financial forecasts spreadsheet which was prepared in conjunction with his Cash Flow Forecast dated 15 March 2007 (7/2 pages 102-4).

[53] 6/76 had not been included in the documents which had been recovered by way of commission and diligence from Mr Thompson, and it had not been lodged prior to the proof. The omission only came to light shortly before Mr Thompson gave evidence. In the circumstances the defenders were sceptical as to whether 6/76 was in fact the spreadsheet which was referred to in the forecast of 15 March 2007. They asked me to reject Mr Thompson's evidence that it was.

[54] Despite the unsatisfactory history relating to its production, I accept Mr Thompson's evidence that 6/76 is indeed the spreadsheet referred to in the Forecast of 15 March 2007, and that it was accidentally omitted from the documents provided to the defenders' solicitors. I am not satisfied there is any good reason to doubt his credibility and reliability on these matters. I find support for his evidence that the spreadsheet is indeed the relevant one in the clear correspondence between figures used in the spreadsheet and figures in the Forecast.

Contentions of the parties

[55] In relation to the additional borrowing costs and the loss of sales revenue Mr Currie contended that I should hold it established, on the balance of probabilities, that the pursuers would have sold all the townhouses and flats at the prices Mr Watson suggested and would have cleared bank indebtedness by March 2008. He recognised, however, that it would be open to the court to decide that a more appropriate course would be to assess damages on the basis that the pursuers had lost the chance of obtaining sales when market conditions were more favourable. He submitted that if so the chance should be a fairly high one, and any discounting of the relevant claims should be modest.

[56] Mr Ferguson submitted that the proper approach to these heads of claim was that outlined in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 per Stuart-Smith LJ at pages 1609H-1614E and in Clerk & Lindsell on Torts (20^th ed. 2010) at paragraphs 2-69 to 2-73. Whether the pursuers would have taken the necessary steps to obtain these benefits requires to be proved on the balance of probabilities; but in so far as obtaining them depended upon the actions of third parties (such as potential purchasers, lenders, and valuers instructed by purchasers/lenders) the pursuers need prove only that there was a real or substantial chance that the third parties would have acted in the way required. He argued there was not a real and substantial chance that sales of townhouses at the price ranges indicated by the pursuers would have been achieved within the time periods suggested by them. He suggested that those who did in fact visit the development from January 2007 were put off by unattractive features of the location, by the small sizes of the townhouse rooms and the lack of garden, and by the prices being asked; and that there would only have been a short window up to September 2007 before the market downturn began. If, contrary to his submission, the court was to hold that there was a real and substantial chance of the pursuers having obtained the benefits they claim they would have, the chance would be one that only just qualified as real and substantial. The evaluation of the chance should be in the range 10%-15%.

Discussion

[57] In my opinion, the more extreme propositions advanced by both parties fall to be rejected. This is not a case where I am satisfied on the balance of probabilities that third parties would have purchased all the properties at the times and at the prices spoken to by Mr Watson and Mr Berry; or that third parties would have bought sufficient properties by March 2008 to enable the pursuers to clear their bank borrowing. The contingencies and uncertainties are such that the pursuers' primary position is untenable. Nor, on the other hand, would it be right on the evidence to hold that the defenders' breach made no difference to the sales that could have been achieved. I agree with Mr Ferguson that the approach I should follow is that outlined in Allied Maples

Group Ltd v Simmons & Simmons.

[58] I find it proved on the balance of probabilities that the pursuers would have taken the steps required on their part to obtain the benefits which they claim. I accept that they would have had the launch for the first nine townhouses at the end of April 2007; that further townhouses are likely to have been released over the months that followed (the precise timing being, at least in part, responsive to demand); that the apartments are likely to have been released in about August/September 2007; that prices sought are likely to have depended upon the strength of the market generally and demand at the development - prices near the high end of the recommended range if the market and demand were strong, and near the mid-end if the market and demand were not strong; and that in the period after September 2007 up to and including March 2008 some discounting would have been likely.

[59] Next I consider whether the pursuers had a real and substantial chance of achieving more sales revenue had the defenders not been in breach of their duties.

[60] I deal first with the evidence of Mr Watson and Mr Berry anent likely sales. It is important to keep in mind the nature of their testimony. They were being asked to give evidence on the basis of hypothetical facts which had not in fact occurred. They were being invited to speculate - in effect to divine what the behaviour of potential purchasers, valuers, lenders and others would have been. They were being asked to answer the very questions which the court has to answer.

[61] I do not doubt that each was genuinely seeking to assist the court: but neither was an impartial and independent witness. Mr Berry has a clear interest in the outcome of the litigation. Mr Watson and Rettie & Co. have been involved in providing advice to Mr Berry and the pursuers in relation to the pricing and marketing of the development since at least early 2006. He has an interest in defending the correctness of the forecasts and advice Rettie & Co. gave to Mr Berry and the pursuers as to pricing, marketing and market demand. Aspects of the evidence of both witnesses appeared to me to be affected to some extent by their interests. Both tended to minimise unattractive features of the development. Each seemed very reluctant to even countenance the scenario that his judgement as to likely demand for the properties - in particular the townhouses - might not have proved to be correct. The views on prices and likely sales levels which Mr Watson had expressed in 2006 and early 2007 had been reached in the context of what was then seen to be a strong and rising Edinburgh market. Hindsight of the unexpected change in market conditions and of the actual difficulties experienced selling the townhouses seemed to have very limited impact on his prognostications: they continued to be relatively upbeat. Before the planned launch of April 2007 both Mr Watson and Mr Berry had anticipated a period of about a year being needed - until about March 2008 - for all the properties to be sold. It seemed to me to be sanguine - given the downturn - to continue to maintain that all the properties would be likely to be sold by that date: but that was Mr Watson's evidence. It was also Mr Berry's: but in re-examination he at least was prepared to recognise that with the benefit of hindsight his pre-April 2007 estimate of sales being completed by about March 2008 might have to be reconsidered (see paragraph [51] above).

[62] Mr Berry's and Mr Watson's predictions as to likely sales levels appeared to me to be somewhat optimistic. The window during which market conditions would have been most favourable was relatively short - the five months or so between the launch and the beginning of the downturn in September 2007. Within that period there were two months - July and August - which due to seasonal factors may have been expected to have been relatively quiet. The plan was for phased release of the townhouses: there would have been a significant risk that not all of them would have been released before the beginning of the downturn in September 2007. The apartments were likely to have been released, at best, shortly before beginning of the downturn. The view that had the townhouses been marketed at the right time there would have been a very high level of demand does not appear to me to sit comfortably with the evidence as a whole. Only two townhouses were in fact sold to individual purchasers other than Mr Berry. The comparison with the fate of the apartments is striking and instructive. There was much more interest in them. All were sold to individual purchasers. The timescale involved was not a prolonged one - particularly having regard to the state of the market at the time of sale. There was significantly less demand for the townhouses than for the apartments. I do not accept that the relative lack of interest in, and poor sales of, the townhouses were solely attributable to their being brought to market late. In my opinion the unattractive features already discussed are likely to have reduced the level of demand more than either Mr Berry or Mr Watson were prepared to accept.

[63] Between the beginning of the downturn in September 2007 and March 2008 the market was slower. There was a significant drop in purchaser confidence. More potential purchasers were trying to sell their own property before they bought. Loans were becoming more difficult to obtain. There was an oversupply of properties on the market, leading to discounting. These problems affected properties across the board, and Slateford was one of the more badly affected areas in Edinburgh. Mr Watson's and Mr Berry's optimism in relation to this period was based in part on their view that the quality of the development equipped it better to buck the trend: I do not accept that for the reasons already given.

[64] Although I find Mr Berry's and Mr Watson's sales predictions to be optimistic, I am satisfied on the evidence as a whole that significantly more townhouses would have been likely to have been sold had the pursuers been free to proceed as they had wished to in the spring of 2007. The Farquhars' sale is likely to have proceeded. The Howiesons' sale would have had a much better chance of completing because the Howiesons would have been likely to have been selling their existing home earlier and at a more favourable time. More generally, I accept that the combination of (i) being able to sell for some months when the market was good, followed by a period when the market was poorer (but better than after spring 2008), and (ii) having the full launch at a favourable time, is likely to have generated more sales and higher sales revenue than in fact were achieved.

[65] It follows that I have no real difficulty in concluding, on the balance of probabilities, that the pursuers had a real and substantial chance of achieving more sales revenue had the defenders not been in breach of their duties. Had it not been for the pursuers' inability to conclude missives with potential purchasers, and to launch the development when they wished to, they would have had between the end of April 2007 and the beginning of the downturn in September 2007 in which to achieve sales. Market conditions were favourable then. Between September 2007 and March 2008 conditions were considerably less favourable, but they were still better than those that developed in the second quarter of 2008. I consider the pursuers had a real and substantial chance, and significantly more than a mere speculative chance, of (i) selling all the townhouses by March 2008; (ii) selling all the apartments by March 2008; (iii) selling enough properties by March 2008 to clear bank indebtedness.

[66] In relation to the townhouses I begin, based largely on Mr Watson's evidence, using a best outcome hypothesis that the pursuers would have sold fourteen townhouses before the downturn in September 2007 at an average price of £239,950 with the remaining five sold by March 2008 at an average price of £225,000. That would have given total townhouse sales of £4,484,300.

[67] Actual sales receipts were £3,260,455. The sales by the pursuers to Mr Berry were not arms length transactions because both buyer and seller were controlled by Mr Berry. Nevertheless, on the evidence I accept that Mr Berry paid market value for the townhouses at the time of each sale. The context was that the sales were made when the market was in the doldrums, and the pursuers' bank (who were secured creditors) were pressing for repayment of their loan. There was support from Mr Dixon that Mr Berry paid market value for the first nine of the townhouses he purchased, and from Mr Porter (and from the report prepared by J & E Shepherd 7/2 pages 352-4) that the price he paid for the portfolio of eight also represented market value. Mr Ferguson initially invited me to hold that the sales of 17 townhouses to Mr Berry were at an undervalue: but ultimately he accepted that there was no proper evidential basis for concluding that the subjects were worth more than Mr Berry paid for them.

[68] I take £1,223,845 (£4,484,300 - £3,260,455) as the starting point in relation to diminution in townhouse sales proceeds. Having regard to the whole circumstances, including all of the matters already discussed, I assess the chance of all the townhouses having been sold by March 2008 - and of that additional revenue having been achieved - at 40%.

[69] I do not accept that the defenders' breach of duty caused any loss of sales proceeds in respect of the apartment sold to Mr Kennedy (Flat 1). It was not an arms' length sale. Mr Kennedy was a director of the pursuers and of KDL. I accept his evidence that the price he paid - £140,000 - had been agreed at the outset. In the Rettie & Co file (7/2 pages 292-4, 363) the actual sale price is recorded as being £135,000 and the purchaser is recorded as being "Developer" (7/2 page 363). Mr Berry's evidence was that there was a "cash back" on this transaction which may explain the £5,000 difference. Both prices were within the sales range (£135,000 - £145,000) for the flat recommended by Rettie & Co in the Pricing Report which they prepared in April 2006 (7/2 page34).

[70] So far as the other seven apartments are concerned, on the evidence a reasonable assessment of the best outcome would have been four sold before the beginning of the downturn in September 2007 and the remainder by March 2008. Using an average of the mid prices recommended in February 2007 (7/2 page 121) and the high ("launch) prices recommended in May 2007 (7/2 page 128) gives a fair indication of the best possible outcome for the pursuers for those seven apartments: total sales proceeds of £1,563,250. Actual sales receipts for them was £1,469,450 (using the prices recorded in 7/18). I take the difference, £93,800, as the starting point for diminution in apartment sales proceeds. Apartment sales would have begun later than townhouse sales, and the window for selling before the beginning of the downturn would have been short; but the apartments were a more attractive proposition to prospective purchasers. They did in fact eventually all sell in the open market to individual purchasers, albeit some sales were at prices which were significantly discounted. In the whole circumstances, including the matters already discussed, I assess the chance of all the apartments having been sold by March 2008 - and of that additional revenue having been achieved - at 60%.

[71] That leaves the claim for additional borrowing costs. In order to have raised enough by way of sales proceeds to pay off the bank borrowing by March 2008 fourteen townhouses and five apartments would require to have been sold by then. There was a greater chance of that happening than there was a chance that all the townhouses would be sold by that date. In the whole circumstances, including the matters already discussed, I assess the chance of sales of that order having been made by March 2008 - and of that additional revenue having been achieved - at 55%.

[72] It follows that the damages recoverable for diminution in sales proceeds are

£489,538 plus £56,280, a total of £545,818. I assess the damages recoverable in respect of additional borrowing costs as £209,742.08 (55% of £381,349.23).

[73] I would have followed the same approach had I been assessing damages caused by the defenders' breach of duty in connection with the meeting on 13 December 2005: but in that case the payment of £75,000 which the pursuers would have required to make to IME would have fallen to be deducted in arriving at the damages award.

[74] In conclusion, I propose to sustain the first and second pleas-in-law for the pursuers and award the following sums by way of damages:

the settlement payment paid to IME	£324,000
the other extrication costs	£ 55,812.09
diminution in sales proceeds	£545,818
additional bank borrowing costs	£209,742.08

[75] Parties requested the opportunity to make submissions as to appropriate awards of interest once this Opinion had been issued. It may also be appropriate to deal at the same time with the question of expenses. Accordingly the only interlocutor I shall pronounce meantime is to put the case out By Order.